New Delhi: India should take up the European Union’s proposed carbon tax with the bloc as it could attract a 20-35% duty on key Indian shipments, potentially clouding free trade talks between the two sides, trade experts said.
The EU’s Carbon Border Adjustment Mechanism (CBAM)—a tax on the bloc’s imports of iron and steel, cement, fertilisers, aluminium and electricity—comes into force on 1 October.
The measure is aimed at protecting domestic businesses from being undercut by cheap imports of polluting goods from countries whose carbon regulations are not as strict as those of the 27-nation bloc.
But Indian experts said the proposed tax is discriminatory and could violate rules set by the World Trade Organization. In addition, it means tariff cuts being negotiated under the India-EU FTA are now up in the air.
The EU is India’s third largest trading partner and accounts for over 10% of total Indian trade in 2022. The two sides concluded the fourth round of FTA negotiations on 17 March.
Prof Sunitha Raju of the Indian Institute of Foreign Trade said the border tax on ‘embedded’ carbon dioxide emissions has provisions that are discriminatory as per WTO rules and India should focus on those provisions.
“EU companies are given carbon credits or allowances beyond which they have to pay for the emissions through carbon credits purchased from trading. This provision is not available for exporting countries and therefore translates to subsidy to local firms,” Raju said.
Even if countries have a carbon pricing mechanism, the tax imposes the differential price between the EU emissions trading system (ETS) and other countries.This, she said, means “not recognizing other countries‘ pricing mechanisms or protecting European firms through CBAM.”
The measure is also aimed at plugging ‘carbon leakage’, which takes place when EU firms circumvent stringent regulation and source goods from less-regulated countries.
“If all countries agree to have strict regulation then this problem will not arise. Any effort to discriminate can then be effectively addressed. Recent UNCTAD study