Opinion CBAM is a trade barrier. Government must lend exporters a hand
On the face of it, the move is designed to push the world towards cleaner production systems that cut down emissions and slow down climate change. While that is a worthy goal, penalties like the CBAM put an inordinate and unfair onus on developing countries such as India to reduce emissions
The CBAM is a tax on companies, based on the level of carbon emissions generated during production. The year has started on a negative note for exporters in India as the European Union has extended its Carbon Border Adjustment Mechanism (CBAM) to imports into the EU. The CBAM is a tax on companies, based on the level of carbon emissions generated during production. Companies that use cleaner and more efficient methods find themselves more favourably placed while those that don’t do so get penalised. Starting 2026, Indian exporters selling steel and aluminium to the EU will come under the scope of the CBAM, and experts suggest that this will result in a hefty tax liability — between 16 per cent and 22 per cent — because Indian firms use processes that emit more carbon. For Indian exporters of steel and aluminium, the EU accounts for 22 per cent of overall exports. The net result will be that either firms take a hit on their profit margins matching the tax liability or risk losing out to exporters from other countries.
On the face of it, the move is designed to push the world towards cleaner production systems that cut down emissions and slow down climate change. While that is a worthy goal, penalties like the CBAM put an inordinate and unfair onus on developing countries such as India to reduce emissions. The CBAM essentially applies developed (read rich) country levels of carbon taxation on poorer countries. In fact, many have argued that the main purpose of the CBAM is not to achieve a reduction in carbon emissions but to work as a trade barrier. Studies by independent organisations such as the United Nations Conference on Trade and Development estimate that the EU’s carbon tax would reduce global carbon emissions by merely 0.1 per cent even as it substantially impedes the exports of developing countries. Notably, when it comes to trade, steel and aluminium have become two of the most protected sectors across countries.
This is not a story about two specific sectors or just one trading partner. The CBAM rules cover other commodities as well, such as cement, fertilisers, electricity, hydrogen etc, with the provision to add other sectors in the future. The UK also plans to introduce a similar system of carbon taxation. Given that both carbon taxation (for addressing climate change) and trade protectionism (for boosting domestic industries) are global realities, the Indian government can ill afford to ignore this issue. It should provide help, be it in the form of seeking carve-outs in the ongoing negotiations for a free trade agreement with the EU, or in the shape of domestic policies that help Indian firms transition to cleaner technologies.
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