The government should devise a retaliatory mechanism, compatible with the World Trade Organization (WTO) norms, to deal with the challenges of the European Union‘s carbon tax, economic think tank GTRI said on Sunday. It also suggested the government not to pursue any free trade agreements (FTAs) without resolving the carbon tax issue.
These recommendations are part of the 13 action points suggested by the Global Trade Research Initiative (GTRI) to the Indian industry and government to counter the impact of such taxes. “When the US imposed import duties on steel and aluminium exported from India, India retaliated by imposing import duty on the equal weightage of imports from the US. India must think about designing a similar scheme to counter the carbon border tax (CBT),” GTRI co-founder Ajay Srivastava said.
The EU is introducing the carbon border adjustment mechanism (CBAM) from October 1 this year. CBAM will translate into a 20-35 per cent tax on select imports into the EU, starting January 1, 2026.From January 1, 2026, the EU will start collecting the carbon tax on each consignment of steel, aluminium, cement, fertiliser, hydrogen and electricity.
In 2022, India’s 27 per cent exports of iron, steel, and aluminium products worth USD 8.2 billion went to the EU. Srivastava suggested the domestic industry to calculate the monetary impact of the tax; check if CBT will enhance competitiveness against competitors; hire an auditor to prepare documents for submission to the EU; increase the usage of green power; and explore the feasibility to switch to low carbon technology.
The think tank recommended to the government to set up a carbon trading mechanism; re-designate taxes on essential products as carbon tax; sign a new trade pact after resolving the CBT issue; create a cadre of energy auditors; start industry awareness programme; use global platforms to expose the hypocrisy of developed nations related to carbon issues.
It said high CBT will make free trade agreements-led zero duties meaningless. Citing examples, Srivastava said that 85 per cent of India-Japan trade takes place at zero import duties. When Japan implements CBT, Japanese products enter India at zero duty, but Indian products will pay high CBTs.
“As India is at an advanced stage of finalising its FTA with the UK, it must seek clarification on this issue. CBT should be the top agenda for any FTA discussions of India,” he added. The GTRI report also said that India does not levy an explicit carbon tax, however, it levies import and excise duty on petroleum products and natural gas; and GST on coal, Steel and aluminium.
“We may consider notifying all such taxes as carbon taxes for steel and aluminium and a few other sectors. Setting up a Carbon Trading Mechanism is a pre-condition. If we can do so, the net impact of CBT may become lower and zero in a few cases,” Srivastava said.
The report also suggested to form a global coalition to discuss the standard response and use research papers and social media to expose the hypocrisy as none of the developed countries aims to cut consumption. Energy auditors will help the industry calculate the carbon intensity of products, help choose cleaner technologies and they would also prepare emission-related documents for sharing with importing countries.
The EU’s initial list covers steel, aluminium, cement, fertiliser, hydrogen and electricity.The UK proposes levying CBT on cement, chemicals, glass, iron and steel, non-ferrous metals, non-metallic minerals, paper and pulp, fertiliser, and power generation.
“The list will gradually expand to cover all products by 2034. Check if you export these products to the EU or UK, respectively. Watch out for coverage of more products,” the report suggested to the domestic industry.
Starting October 1, 2023, Indian exporters of steel, aluminium, cement, fertiliser, hydrogen and electricity will need to share precise emission data with the counterpart EU importers, who in turn will share the data with the CBT authorities.
The CBT requires EU importers to purchase emission certificates to pay the differential between the country of production’s carbon price (or lack thereof) and the cost of carbon emissions in the EU emission trading system, the report said, adding the industry should hire an auditor to prepare documents for submission to the EU.