In the global push to combat climate change, countries are taking various measures to reduce their carbon footprint and promote the use of renewable energy sources. These initiatives often lead to regulatory changes and market mechanisms that can significantly impact trade and economic relations.

One such development is the European Union’s Carbon Border Adjustment Mechanism (CBAM), a new policy that aims to address the risk of carbon leakage, a situation where companies relocate their production to countries with less stringent climate policies to avoid carbon pricing costs. CBAM will impose a carbon price on certain imported goods, including iron and steel, cement, aluminium, fertilisers, and electricity, starting in 2026.

While the EU has justified CBAM as a necessary step to protect its climate ambitions, the policy has raised concerns among developing countries, including India. India is a major exporter of some of the goods covered by CBAM, and the imposition of a carbon price could significantly impact its trade with the EU.

India’s Concerns

India has expressed several concerns about CBAM, including:—

Trade Flow Disruptions: CBAM could disrupt trade flows between India and the EU. Indian exporters may face increased costs, making their products less competitive in the European market. This may lead to reduced exports of carbon-intensive goods, including steel, cement, and chemicals, which could impact India’s economic growth.

Pressure to Reduce Emissions: To mitigate the adverse effects of CBAM, Indian industries may come under pressure to reduce their carbon emissions. This could be seen as a positive development in the fight against climate change, as it incentivises Indian companies to adopt cleaner technologies and practices.

Potential for Conflict: The imposition of carbon taxes on Indian exports to the EU could lead to trade disputes. India may argue that the EU’s CBAM unfairly discriminates against its products or that it violates international trade agreements. These disputes could strain diplomatic relations.

The Role of Renewable Energy Certificates (RECs): The circular related to Goods and service Tax (GST) on Renewable Energy Certificates (RECs) underscores the importance of renewable energy in India’s efforts to address CBAM. RECs are a means of promoting and tracking renewable energy production. Indian producers could benefit from the use of RECs to demonstrate the carbon intensity of their products, potentially reducing the CBAM-related costs.

India has also argued that CBAM should be based on the principle of common but differentiated responsibilities (CBDR), which recognises that developed countries have a greater responsibility to address climate change due to their historical emissions.

Potential Impact on India

The impact of CBAM on India will depend on several factors, including the final design of the policy, the carbon intensity of India’s exports, and the ability of Indian industries to adapt to the new carbon pricing regime. According to estimates, CBAM could cost India up to US$ 8 billion in exports to the EU. This could have a significant impact on India’s economy, particularly in sectors such as steel and cement.

Also Read: EU terms proposed CBAM as non-discriminatory between domestic and imported goods

However, CBAM could also have some positive impacts on India. It could incentivise Indian industries to adopt cleaner technologies and reduce their carbon emissions. It could also encourage India to develop its own domestic carbon pricing system.

India’s Response

In anticipation of CBAM’s impact, India has taken several measures:

Strengthening Renewable Energy — India continues to invest in renewable energy sources like wind and solar power. This shift towards clean energy can help reduce the carbon footprint of Indian industries.

Policy and Regulatory Changes — The amendments to the Energy Conservation Act and the introduction of the Energy Conservation (Amendment) Act, 2022, demonstrate India’s commitment to energy efficiency and sustainability, aligning with global climate goals.

Promotion of Carbon Credits — The establishment of carbon credit trading schemes and activities, along with the Energy Conservation (Amendment) Bill, 2022, highlights India’s efforts to create a regulatory framework for carbon trading and reduce emissions.

Diplomatic Engagement — India is likely to engage in diplomatic discussions with the EU to negotiate favourable terms and address concerns related to CBAM Balancing Trade and Climate Goals The challenge for India and other developing countries is to balance their trade and climate goals. On the one hand, they need to protect their export industries and economic growth. On the other hand, they also need to take action to address climate change.

India has already taken several steps to reduce its carbon emissions, including setting ambitious renewable energy targets and promoting energy efficiency measures. However, more needs to be done to decarbonise its economy.

In the context of CBAM, India should continue to engage with the EU and other stakeholders to ensure that the policy is fair and equitable. India should also focus on accelerating its domestic efforts to reduce carbon emissions and transition to a low-carbon economy.

Conclusion

The EU’s Carbon Border Adjustment Mechanism is a significant development in the global effort to combat climate change. It has the potential to impact India’s trade dynamics and industries, with the aim of levelling the playing field in terms of carbon costs. India, in response, is working to strengthen its renewable energy infrastructure, enact regulatory changes, and engage in diplomatic discussions to mitigate the potential adverse effects of CBAM.

As the world grapples with climate change, the balancing act between trade interests and environmental goals remains a complex challenge that countries like India are navigating with diligence and strategic planning.

—The authors, Ankur Gupta and Samyak Jain are Practice Leader-Indirect Tax and Article Assistant-Indirect Tax respectively at SW India. The views expressed are their own.

(Edited by : C H Unnikrishnan)

First Published:Nov 30, 2023 10:56 AM IST