India is actively seeking alternative strategies to mitigate the impact of CBAM on its exports

11/19/20232 min read

Ahead of the imminent implementation of the second phase of regulations pertaining to the EU's Carbon Border Adjustment Mechanism (CBAM), Indian authorities are reportedly exploring two potential alternatives. These options aim to incorporate the carbon tax, ensuring that exports are not adversely affected. The first proposed option involves negotiating and incorporating an amount equivalent to the imposed carbon tax on Indian exports into the final price of finished products imported from EU nations. For instance, if steel is exported to the EU with a $100 per tonne carbon tax, negotiations would be conducted to add another $100 per tonne to a different item imported from the EU.

Officials clarify that this is not a countervailing tax on the EU but rather a negotiation strategy to ensure that the tax collected from Indian companies returns to the country. The second option under consideration involves repatriating the collected carbon tax amount to address India's climate mitigation goals. Sectors expected to be significantly impacted by the upcoming carbon tax include iron and steel, as well as aluminum exports, with CBAM reporting mandated for sectors like cement, hydrogen, electricity, and fertilizers.

The CBAM entered its transitional phase on October 1, and steel and aluminum exports are anticipated to be the most affected categories when the carbon tax is implemented. Currently, exporters must declare the carbon content in their products, and shipments will be assessed against the default value range outlined in the EU's charter or export list to determine compliance with specific carbon emission thresholds. The CBAM will transition into a taxation phase starting January 2026.

Recent discussions with industry stakeholders and relevant ministries indicate a desire for a competitive advantage, wherein the carbon tax paid during the export of commodities is considered. The aluminum sector, in particular, expects a two-five percent impact on prices at existing LME, which is deemed substantial. Some companies and associations are advocating for price negotiations to factor in the carbon tax paid, while others propose a company-specific repatriation, whereby the carbon tax paid during export is returned at the time of imports from the EU. Officials across ministries lean towards the EU repatriating any collected carbon tax from Indian exporters, considering price renegotiations on imports could potentially be viewed as a countervailing tax within the WTO's legal framework.