The EU Parliament passed the Carbon Border Adjustment Mechanism Bill on April 18. It may become law next month after the approval of the EU Council. The law will authorise the EU to charge Carbon Border Tax (CBT) on imports of steel, aluminium, fertiliser, electricity, cement, and hydrogen from January 2026.

However, the regulatory process will start in October this year when the firms exporting to the EU must share product-level carbon emissions data. Soon CBT will include other products. And by 2034, it will cover all goods exported to the EU. But the EU is not alone in this. The UK, Canada, Japan, the US and others are also bracing up to levy CBT on imports. Forty per cent of India’s merchandise exports go to these countries.

The CBT is estimated to be 20-35 per cent tariff equivalent for most Indian products. This is far higher than the EU’s average import tariff of 2.2 per cent for manufactured products. This will render WTO and FTA (free trade agreement) commitments meaningless. CBT will significantly hurt the global trade of developing countries, including India.

The Table captures India’s global exports and exports to the EU for calendar year (CY) 2022.

Action for government

Here are seven suggestions to minimise the impact of CBT.

Set up carbon trading mechanism: The price of carbon reflects the level of development. For example, the current carbon price per tonne is $107 in the EU, $34 in Australia, and $7 in China. Forty-five countries have a functioning emission trading system (ETS) like the EU, making firms pay for each tonne of carbon emitted. The carbon tax paid by a firm in the home country is adjusted while paying CBT in the EU. Under CBT, the EU will charge tax at $73 from Australia and $100 from China. India has no ETS so the EU will charge $107/tonne.

Re-designate taxes on essential products as carbon tax: India does not have an explicit carbon tax system. However, it charges import and excise duty on petroleum products, natural gas, and GST on coal, steel, aluminium, etc. Notifying all such taxes as carbon taxes for steel and aluminium and a few other sectors may be considered. Setting up a carbon trading mechanism is a pre-condition for this. If this can be done, the net impact of CBT may become lower or even zero in a few cases.

Create a cadre of energy auditors: Energy auditors will play a crucial role in fair CBT payments. Implementing the new tax will require the EU to assess carbon emissions for a given product precisely. This has to be done for thousands of producers spread across the world. The EU intends to use auditors for this purpose, but the task of fair assessment remains complex.

Energy auditors will help the industry calculate the carbon intensity of products, help choose cleaner technologies, etc. They will also prepare emission-related documents for sharing with importing countries.

Start an industry awareness programme: Create a dedicated group representing government, industry associations, and researchers to conduct such programmes. A beginning may be made with products immediately affected: steel, aluminium, fertiliser, electricity, cement, and hydrogen. But as CBT will cover all sectors by 2034, all sectors must be aware of the new tax and its implications.

Devise a WTO-compatible retaliation mechanism: 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 CBT. Since all developing countries exporting to developed countries will suffer CBT, a common response would be effective.

Sign new FTAs after resolving the CBT issue: High CBT will make FTAs-led zero duties meaningless. For example, 85 per cent of India-Japan trade occurs 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 with the EU, UK, Canada, and the US.

Use global platforms to expose the hypocrisy: The way the EU defines net zero is inappropriate. It merely counts what is produced in the EU and not what is consumed. The developed countries have already offshored their pollution, causing low-end manufacturing in China and other countries decades back.

But they import these products and now propose to tax such imports. None of the developed countries aims to cut consumption. India should form an international coalition to discuss the standard response to CBT. Use research papers and social media to expose the hypocrisy.

The UNCTAD, in 2021, observed that carbon taxes are an attempt “to impose on developing countries the environmental standards that developed countries are choosing.”

The writer is founder, Global Trade Research Initiative