India-EU Trade Talks

Context: India is set to raise concerns over the European Union’s controversial carbon tax, which seeks to impose tariffs as high as 30% on imports of carbon-intensive products such as Steel and Aluminium from January 2026.  

About EU Carbon Border Adjustment Mechanism (CBAM)

• The EU Carbon Border Adjustment Mechanism is a carbon tariff on carbon intensive products, such as steel, cement and some electricity, imported to the European Union. 
• Legislated as part of the European Green Deal, it takes effect in 2026, while the current transitional phase lasts between 2023 and 2025.
• Purpose: 
  • To put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU.
  • To prevent carbon leakage, i.e., shifting of the production of goods to non-EU countries, where there is a lower or no carbon cost associated with their production. 
  • To encourage cleaner industrial production in non-EU countries.
  • To ensure that the EU's climate objectives are not undermined.
• CBAM is designed to be compatible with the rules of the World Trade Organisation (WTO). 

Key Features

• Carbon Certificates:
  • EU importers will have to buy carbon certificates corresponding to the carbon price that would have been paid in the EU if the goods had been produced locally.
  • The price of the certificates would be calculated according to the auction prices in the EU carbon credit market.
  • The number of certificates required would be defined yearly by the quantity of goods and the embedded emissions in those goods imported into the EU.
  • EU importers will declare the emissions embedded in their imports and surrender the corresponding number of certificates each year.
  • If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.
  • Companies in countries with a domestic carbon pricing regime equivalent to the EU’s will be able to export to the EU without buying CBAM certificates.
• Coverage: CBAM will initially cover several specific products in some of the most carbon-intensive sectors at risk of carbon leakage: iron and steel (including some downstream products such as nuts and bolts), cement, fertilizers, aluminium, electricity, and hydrogen.

India’s concerns regarding CBAM

• Violation of climate equity principles:
  • CBAM contradicts the Common but Differentiated Responsibilities (CBDR) principle under multilateral climate agreements.
  • India argues that CBAM disproportionately affects developing economies like India.
• Negative impact on Indian exports:
  • The EU accounts for 15% of India’s total exports ($75 billion in 2022-23).
  • CBAM could increase costs for Indian exporters, especially in the steel and aluminium sectors. Global Trade and Research Institute (GTRI) estimates a 20-35% tax on select Indian metal exports to the EU.
  • CEEW Report (2024) highlights that 43% of India’s exports to the EU could be at risk due to sustainability-focused regulations.
    • The product categories at risk include textiles, chemicals, selected consumer electronics products, plastics, and vehicles.
    • These items accounted for 32% of India’s exports to the EU in 2022, valued at approximately $27 billion. 
    • If CBAM sectors are added to the list, then the exports of at-risk sectors amount to $37 billion.

• Negotiations at Risk: 
  • India is negotiating a free trade agreement (FTA), investment pact, and geographical indication (GI) treaty with the EU.
  • CBAM may nullify trade concessions under FTA if additional products are brought under its ambit.
• Data compliance burden: 
  • CBAM demands over 1,000 data points for compliance, affecting small manufacturers who lack such records.

Response to EU’s CBAM

• The Government of India termed CBAM an unfair measure.
• Multilateral resistance: Countries like China, Russia, Brazil, South Africa have taken the EU to the WTO, but India is yet to formally file a case.
• Negotiations through Trade and Technology Council (TTC): India and the EU have agreed to discuss CBAM-related concerns separately.