European Union’s Carbon Border Adjustment Mechanisms require importers of carbon-intensive products, consisting of iron and steel, aluminium, cement, fertilisers, hydrogen and electricity, to account for the carbon emissions associated with their production. 
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Image for representational purposes only,
| Photo Credit: Getty Images

Image for representational purposes only.
| Photo Credit: Getty Images

Echoing the Centre’s concerns on “protectionism”, the Economic Survey has noted that the forthcoming Carbon Border Adjustment Tax (CBAT) mooted by the European Union “went against the spirit of the Paris Agreement.”

The Carbon Border Adjustment Mechanism (CBAM), as it is called, are tariffs that will apply on energy-intensive goods imported into the European Union. This is to ensure that local manufacturers of iron, steel and aluminium, which consume enormous fossil fuel, aren’t at a competitive disadvantage from similar goods produced in developing countries whose industries have more permissive fossil fuel emission norms.

“India not only has to deal with climate change and undertake energy transition but also deal with the protectionism of the developed countries. Europe is on course to implement its Carbon Border Adjustment Tax and both the United Kingdom and the United States are in different stages of imposing their versions of it in due course. These taxes are in contravention to the spirit of the Paris Agreement that recognised ‘Common but Differentiated Responsibilities’,” according to the Survey document.

The CBAM system is expected to come into force on January 1, 2026. India is among the top eight countries that will be adversely affected by CBAM, as per the Global Trade Research Initiative report. In 2022, 27% of India’s exports of iron, steel and aluminum products worth $8.2 billion went to the EU. It is estimated that a few of its core sectors, such as steel, will be “greatly affected” by CBAM.

Raising financial resources for climate change adaptation, the Survey document notes, is an “unprecedented challenge” as India’s climate action has been largely financed through domestic resources and the flow of international finance has been very limited. To achieve net zero by 2070, India needs $28 billion annually until that year. Domestic sources accounted for the majority of green finance in India, at 87% and 83% in fiscal years 2019 and 2020, respectively, the document added.

A European Union plan to impose tariffs on high-carbon imports could hurt developing countries in Asia but is unlikely to lead to big reductions in greenhouse gas emissions, the Asian Development Bank (ADB) said in a report published on Monday, February 26.
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A European Union plan to impose tariffs on high-carbon imports could hurt developing countries in Asia but is unlikely to lead to big reductions in greenhouse gas emissions, the Asian Development Bank (ADB) said in a report published on Monday.

The Carbon Border Adjustment Mechanism (CBAM) was introduced to address concerns that the outsourcing of manufacturing had put large parts of the EU’s supply chain beyond the reach of its emissions trading scheme (ETS), a situation described as “carbon leakage”.

Also Read | CBAM will kill EU manufacturing, India will have its own carbon taxes: Goyal

It was designed to level the playing field and make foreign suppliers pay the same carbon price as domestic ones, even if they are not subject to an ETS or carbon tax at home.

ADB said CBAM was expected to cut Asian exports to the EU, particularly from western and southwestern Asia, with steel from India also likely to take a hit.

But any small reduction in emissions would quickly be offset by the continuing increase in carbon-intensive production throughout Asia, and mechanisms to share emission reduction technology would be more effective, it said.

“It’s actually a relatively limited policy at the moment,” said Neil Foster-McGregor, ADB’s senior economist. “It only imports into the EU (and) only covers six sectors.

“The way the scale of production is increasing, even if we do this carbon pricing more broadly across the globe, you’re still going to see rising emissions unless we see a fundamental change in production techniques,” he added.

CBAM could raise around 14 billion euros ($15.2 billion) in revenue by 2030, and the proceeds should be used to provide climate finance for developing countries to decarbonise manufacturing, Mr. Foster-McGregor said.

One of the aims of CBAM was to incentivise non-EU economies to impose stricter climate policies of their own: if exporting nations can demonstrate that a carbon price has already been paid, the CBAM levy will be reduced.

India has already discussed the possibility of imposing export taxes on CBAM-covered products sold to Europe, and China is expanding its ETS to cover exporting sectors like steel.

Both countries have been critical of CBAM, with China warning Europe not to use climate as an excuse to engage in trade protectionism.

Also Read | Parliament panel suggests govt to seek 3 years deferment on EU’s carbon tax for MSMEs

While CBAM serves as a tariff on foreign producers, it will also raise the cost of raw materials such as steel and fertiliser for downstream EU manufacturers, and could even give them an incentive to relocate more production capacity overseas, including Asia, the ADB report warned.

“While there is a partial offsetting of the carbon leakage in the upstream, there could be new carbon leakage downstream in the EU … They are shooting themselves in the foot,” said Jong Woo Kang, another senior ADB economist, speaking at a briefing on Monday. )

The EU has decided to impose carbon tax — CBAM — from January 1, 2026 on seven carbon-intensive sectors, including steel, cement, and fertiliser.
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India should seek deferment on imposition of carbon tax by the European Union (EU) on engineering sector’s MSMEs by three years as domestic manufacturers may not have the financial resources to counter the duty, according to a parliamentary panel’s report.

The report recommended that developing a robust mechanism to support and equip MSMEs to counter the adverse effects of CBAM (carbon border adjustment mechanism) must be implemented on a priority basis.

Also Read | India plans to protest EU’s carbon tax at WTO meeting: sources

The EU has decided to impose carbon tax — CBAM — from January 1, 2026 on seven carbon-intensive sectors, including steel, cement, and fertiliser.

Engineering goods would come under the purview of this import duty.

The department related parliamentary standing committee on commerce’s report — Comprehensive Strategy to Map Major Products and Countries to Maximize Exports and Minimise Imports — said that to protect the domestic industry from the imposition of additional tariffs by the U.S. and non-tariff barriers in the form of CBAM, the government should engage at the highest level with the U.S. and EU to resolve the matter.

“The Committee exhorts the government to seek the deferment on application of CBAM on MSME sector by at least three years,” it said.

It also asked India to engage with the EU on their deforestation regulations as domestic coffee players are apprehensive that the norm may impact their exports.

The EU is a major market of Indian coffee, constituting about 55% of the total coffee exports from India.

Also Read | India will address EU’s carbon tax issue; will retaliate if required: Goyal

“Recognizing the apprehensions among coffee exporters due to the enforcement of EU Deforestation Regulations, the Committee suggests that the government actively engage with the EU on this matter to ensure that the implementation of these regulations does not negatively impact the country’s coffee exports,” the report said.

For the gems and jewellery sector, it said that the government needs to take proactive steps to diversify diamond sourcing to countries such as Canada, Botswana, Israel to reduce dependency upon any particular country.

Around 30% of the total diamond supply of the country is imported from Russia and the industry is wary of the effects of the imposition of G7 sanctions on Russia.

Further, it suggested to include iron and steel sectors under the duty refund scheme Remission of Duties and Taxes on Exported Products (RoDTEP).

The committee noted that the interest rates have been hiked in recent times thereby increasing the cost of credit.

The reduction in the subvention rates under the Interest Equalisation Scheme has also caused an additional burden on the exporters.

Also Read | CBAM will kill EU manufacturing, India will have its own carbon taxes: Goyal

“The committee, therefore, recommends that the Department (of Commerce) must consider increasing the rates under the scheme from 3% to 5% for MSME exporters of all tariff lines (or product categories)…,” it added.

It said that there is a need to promote exports through policy interventions, export promotion schemes compliant with international trade policies and a robust logistics infrastructure.

“The Committee suggests that a focused strategy of trade creation and trade diversification should be prepared, which could be instrumental for India to increase its global trade share,” it said.