EU's Carbon Tax to Cost India 0.05% of GDP, Says New Report

The European Union's Carbon Border Adjustment Mechanism (CBAM) will introduce a 25 per cent tax on energy-intensive goods exported from India to the EU, according to a recent report. This tax is expected to impact 0.05 per cent of India's GDP, as per the findings by the Centre for Science and Environment (CSE). The report titled "The Global South's response to a changing trade regime in the era of climate change" bases its conclusions on data from 2021-22, 2022-23, and 2023-24.

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CBAM targets products like iron, steel, cement, fertilisers, and aluminium imported from countries such as India and China. The tax is calculated based on the carbon emissions produced during the manufacturing of these goods. The EU claims this mechanism ensures fair competition for locally made products that must comply with stricter environmental regulations and aims to cut down emissions from imports.

Impact on Indian Exports

Avantika Goswami, who heads CSE's climate change programme, highlighted that India's CBAM-covered goods exports to the EU made up 9.91 per cent of its total goods exports to the bloc in 2022-23. She noted that 26 per cent of India's aluminium and 28 per cent of its iron and steel exports were directed to the EU during this period. These sectors are significant contributors to the CBAM-covered goods shipped from India to the EU.

In 2022-23, CBAM-covered goods exports to the EU represented about one-fourth (25.7 per cent) of India's total such goods exported globally. This is crucial for industries operating within these sectors. However, hydrogen and electricity are not currently exported from India to the EU.

Global Trade Concerns

The introduction of CBAM has sparked debates at various multilateral forums, including UN climate conferences. Developing countries argue that under UN climate change rules, no country should dictate how others reduce emissions. They fear that this mechanism could harm their economies by making trade with the EU too costly.

Of India's total goods exported worldwide, CBAM-covered goods exports to the EU account for only about 1.64 per cent. Despite this seemingly small percentage, the impact on specific sectors like aluminium and steel is significant due to their high export volumes to the EU.

The EU maintains that CBAM will create a level playing field for domestically produced goods while encouraging lower emissions from imported products. However, developing nations remain concerned about the economic implications and fairness of this new tax regime.

The report by CSE underscores that while CBAM aims to address environmental concerns, it also poses challenges for developing countries like India. The additional tax burden could affect their competitiveness in the global market.

The findings suggest that policymakers need to consider both environmental goals and economic impacts when implementing such mechanisms. Balancing these aspects is crucial for sustainable development and fair trade practices.