EU’s Carbon Border Tax will have negligible effect on climate: GTRI report

The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) will not only disrupt global trade but also have a negligible impact on climate, according to a report released by Global Trade Research Initiative (GTRI).

The carbon tax is also expected to pose a significant challenge to India’s metal industry. As much as 27 per cent of India’s iron, steel, and aluminium exports worth $8.2 billion went to the EU in 2022, the think tank said.

Electricity, fertiliser, hydrogen, and cement will also attract carbon tax, but in this case, India will not be affected as it does not export these products to the EU. The CBAM will be implemented in four phases.

Starting October 1, there will be a 27-month transition period. Exporters will not have to pay tax, but will have to share details of the carbon content of aluminium and steel, and other covered products with the respective EU-based importers. This data will be shared with the European Commission.

From January 1, 2026, the EU will start collecting carbon tax on each consignment of steel and aluminium. By 2034, all goods and materials imported into the EU will be taxed under the mechanism.

This will push up tariffs for iron and steel as well, as aluminium products to 20-35 per cent, up from the average 2.2 per cent bound tariff rate agreed upon by the EU for its manufacturers at the World Trade Organisation (WTO).

“High tariff walls will disrupt world trade,” the think tank said.

According to the EU, the CBAM is a tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU. The trade bloc also wants to encourage cleaner industrial production in non-EU countries. Carbon tax is not India-specific.

The think tank has suggested the government set up a task force to prepare administrative ministries and industry to meet the challenge pertaining to the carbon tax. The ministry of steel and mines can educate firms to meet the October 1 deadline.

“(The government should) factor in the impact of the CBAM in FTA negotiations with the UK and EU. Even if both agree to zero tariffs under the FTAs, the CBAM will ensure that while EU goods enter India at zero tariffs, Indian goods will pay very high CBAM tariffs.”