How will EU's 25% tax on India impact energy-intensive goods exports?

The European Union's Carbon Border Adjustment Mechanism (CBAM) is set to impose a 25% tax on energy-intensive goods exported from India to the EU, representing 0.05% of India's GDP. This new tax aims to create a level playing field for EU-manufactured goods, which comply with stricter environmental standards, and to reduce emissions from imports. However, it poses significant economic challenges for developing countries like India.

Impact on India

A recent report by the Centre for Science and Environment (CSE) highlights that CBAM will impose a 25% tax on energy-intensive goods exported from India to the EU. This tax burden is estimated to represent 0.05% of India's GDP.

Export composition:

• In 2022-23, 26% of India's aluminum and 28% of its iron and steel exports were destined for the EU.
  
  
• India's CBAM-covered goods exports to the EU accounted for 9.91% of its total goods exports to the bloc in 2022-23.
  
  
• CBAM-covered goods made up about one-fourth (25.7%) of India's total exports of such goods globally in 2022-23.
  
  
• However, CBAM-covered goods constitute only about 1.64% of India's total goods exported worldwide.
  
  

Economic concerns:

• Developing countries, including India, argue that CBAM could harm their economies by making it more expensive to trade with the EU.
  
  
• At multilateral forums like UN climate conferences, developing countries have expressed concerns that CBAM unfairly burdens them with decarbonization costs, while developed nations have historically contributed more to emissions and have often failed to provide sufficient green financing and technology.
  
  

Administrative and financial implications:

• Importers will need to purchase CBAM certificates, tied to the weekly average auction price of EU ETS allowances, and declare the emissions of imported products annually.
  
  
• By 2028, CBAM is expected to generate around Euro 1.5 billion per year, with 75% of the revenue allocated to the EU budget and 25% to national budgets.
  
  

Global trade impact

Countries with high export dependence on the EU and carbon-intensive production processes are expected to be significantly affected by CBAM. This mechanism could shift trade dynamics, influencing exporters to adopt greener production methods to mitigate the tax impact.

Conclusion

The EU's CBAM represents a significant shift in global trade dynamics,emphasising the importance of integrating climate policies with trade regulations. While it aims to reduce carbon emissions and create a fair competitive environment, it also raises substantial economic and administrative challenges for developing countries like India. The long-term effects on global trade and climate cooperation remain to be fully seen, necessitating continued dialogue and policy adjustments.