Greenvissage Explains: Why is EU’s Carbon Border Tax a concern for India?

As the European Union (EU) gears up to implement the Carbon Border Tax (CBAM) from January 1, 2026, concerns are mounting in India about the potential ramifications on its exports. The CBAM, part of the “Fit for 55 in 2030 package,” seeks to price carbon emissions associated with the production of specific imported goods. This move aligns with the EU’s ambitious plan to reduce greenhouse gas emissions by at least 55% by 2030. However, experts warn that this tax could significantly impact India’s exports, particularly in sectors such as steel and aluminium, which constitute a substantial portion of trade with the EU.

The CBAM may elevate the costs and diminish the competitiveness of Indian exports, with projections suggesting a 20-35% tax on select imports into the EU from January 1, 2026. Sectors like steel and aluminium, accounting for a substantial share of India’s trade with the EU, are expected to bear the brunt of this tax. The CBAM also introduces significant compliance challenges, necessitating Indian producers and importers to navigate complex administrative and technical processes. Monitoring, calculating, reporting, and verifying emissions according to EU standards present a substantial burden, especially for smaller firms. Further, CBAM is viewed as a non-tariff barrier that contradicts zero-duty Free Trade Agreements (FTAs). This potential clash could pose challenges for India’s exports, as it raises questions about the compatibility of the CBAM with existing trade agreements. Meanwhile, the imposition of a carbon tax on imports, based on documented carbon emissions, contradicts the EU and developed nations’ commitment to supporting the green transition in other countries. This could result in a flow of funds away from the intended direction, undermining global efforts toward sustainability.

India is urged to take a stand against the CBAM in international forums, emphasizing that such mechanisms undermine the principle of ‘common but differentiated responsibility.’ This principle acknowledges the varying capacities and responsibilities of developed and developing nations in addressing global challenges. India is also considering the possibility of implementing a similar tax on its exports to the EU. While this approach could potentially balance the tax burden for producers, the challenge lies in whether the EU would accept such a move and if it could be implemented without raising legal questions domestically and internationally. To reduce dependence on the EU market, India is encouraged to explore new opportunities in regions like Asia, Africa, and Latin America. Diversifying export markets strategically can help mitigate vulnerability to the impacts of CBAM and other economic changes. Meanwhile, India also has an opportunity to make its production processes greener and more sustainable. By incentivizing cleaner production, the country can not only remain competitive in a more carbon-conscious future but also contribute to international efforts toward a greener global economy.

References:

1. India must strategise against the EU carbon tax
2. India to flag concerns over EU’s carbon tax, deforestation regulation in WTO meet next year
3. India weighs local tax options to avoid EU carbon levy
4. Image by storyset on Freepik

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