The upcoming round of talks on the free trade agreement between India and the European Union will focus on the controversial carbon tax imposed on Indian products. Indian negotiators will engage with their EU counterparts to address the potential impact of this tax, which could significantly affect exports worth $8 billion. The carbon border adjustment mechanism, also known as the carbon tax, is viewed by Europe as a protectionist measure, particularly impacting Indian steel and aluminum manufacturers.

The trade negotiators from India and the EU are scheduled to meet from June 19 to 23. Indian officials have expressed concerns about the tax, as it could result in an additional 20-35 percent tax on specific Indian goods. They emphasized that the implementation of the carbon border adjustment mechanism (CBAM) could undermine the market access benefits India is seeking through the FTA negotiations with the EU. Furthermore, if the CBAM’s product list expands in the future, it may affect more items from India. Thus, India aims to discuss with the EU how to avoid such a situation, according to officials from the commerce ministry.

Indian officials also highlighted that the reporting obligations associated with the CBAM would particularly burden micro, small, and medium-sized enterprises (MSMEs). They suggested the need for exempting such units to alleviate their challenges. The European Union has announced its intention to collect firm-wise data starting from October 1, with the tax set to be implemented on January 1, 2026.

The carbon tax is expected to have a severe impact on the steel industry, which contributes approximately 7-8 percent of global CO2 emissions and around 12 percent in India. With each tonne of steel producing nearly 2.5-2.8 tonnes of CO2, the industry will face significant challenges due to the tax. The EU’s CBAM applies a carbon tax to imports from countries with higher carbon dioxide emissions per tonne of crude steel. In comparison to India’s emissions of around 2.5 tonnes of carbon dioxide per tonne of crude steel, the EU stands at 1.8 tonnes, with the US even lower, according to a report by FICCI-Deloitte on the steel sector.

Under the CBAM, the EU will initially impose the tax on steel, aluminum, cement, fertilizer, hydrogen, and electricity, subjecting them to extra scrutiny. The Indian steel industry, while working towards transitioning to net zero and decarbonization, will need to navigate the CBAM legislation carefully and align its practices with green steel production.

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