Carbon Tax and the challenge to Exports

The European Union (EU) has initiated a Carbon Border Adjustment Mechanism (CBAM) to address carbon emissions related to imports. The first phase of CBAM requires importers in the EU to disclose the greenhouse gas emissions linked to the production of goods in sectors like iron and steel, aluminium, cement, electricity, fertiliser, and hydrogen.

During the initial phase, reporting these emissions is voluntary until December 31, 2025, after which penalties will be imposed for non-compliance. It’s crucial for Indian exporters to provide the necessary emission information to their EU importers to prevent potential trade disruptions.

The CBAM has the potential to significantly impact India’s exports to the EU, constituting about 11% of India’s merchandise trade. India exports goods worth approximately $64 billion to the EU annually.

However, Indian exporters are grappling with challenges in complying with CBAM due to a lack of understanding of the regulations and the absence of a domestic carbon pricing policy. Sectors covered under CBAM include iron ore and concentrates (19.9%), steel products (20%), iron and steel (31.4%), aluminium products (27.7%), cement (6.1%), and fertiliser (0.7%).

Among these, 25% of engineering exports, the largest contributor to India’s exports at around $1.51 billion, could be significantly affected by CBAM. The implementation of the CBAM underscores the increasing global focus on environmental sustainability and the need for businesses to adapt to evolving regulatory frameworks.