India Faces EU Pressure for Carbon Tax as CBAM Threatens Exporters

New Delhi, Aug 1 (KNN) The European Union has proposed that India implement a domestic carbon tax system to potentially mitigate the impact of the forthcoming Carbon Border Adjustment Mechanism (CBAM).

However, a new report suggests that this solution may not be the panacea it appears to be at first glance.

The CBAM, set to take effect from January 2026, aims to level the playing field between EU producers subject to stringent environmental regulations and their foreign competitors.

The mechanism allows for a reduction in EU carbon taxes if a product has already been taxed for its emissions in its country of origin.

This proposal was recently presented by an EU delegation led by Gerasimos Thomas, director general for taxation and customs union of the European Commission.

However, the Global Trade Research Initiative (GTRI) has released a report highlighting the potential pitfalls of this approach. According to their analysis, even if India were to implement an Emissions Trading System (ETS) or set a carbon price, it would likely be significantly lower than the global average.

With the current global average carbon price hovering around USD 69 per ton of CO2, and India's potential price estimated at less than USD 10 per ton, Indian exporters would still face a substantial CBAM levy of approximately USD 59 per ton.

The report goes on to outline the challenges of raising India's carbon prices to match global standards. Such a move could have far-reaching consequences for the Indian economy, potentially increasing production costs in key industries like steel and aluminum, reducing competitiveness, and even leading to job losses in carbon-intensive sectors.

Moreover, higher energy costs could disproportionately affect low-income households, potentially exacerbating energy poverty.

The CBAM's impact on Indian industry is expected to be significant, with estimates suggesting a 20-35 per cent import tax on firms in carbon-intensive sectors.

This could necessitate substantial changes in production methods and reporting practices for Indian companies exporting to the EU.

While the EU's suggestion appears to offer a path forward, it's clear that the reality is far more complex. As India navigates these choppy waters, it must balance its economic interests with environmental responsibilities and international trade obligations.

The coming months will likely see intense negotiations and policy discussions as both sides seek a solution that addresses environmental concerns without unduly burdening developing economies.

(KNN Bureau)