As the global economy grapples with the challenges of climate change, carbon emissions, and sustainable development, international trade is becoming increasingly entangled with environmental considerations. The European Union (EU) has been at the forefront of this shift, introducing the Carbon Border Adjustment Mechanism (CBAM) as a pioneering effort to address carbon emissions associated with imported goods. While the EU's ambition to promote sustainability is commendable, its approach is not without controversy, and its implications for trading partners, particularly India, are significant.
The Impact on Indian Steel Exports
India, a major player in global steel production, is poised to feel the impact of the CBAM. The CBAM is set to be fully effective in January 2026, and it covers carbon-intensive goods, including steel. According to rating agency Icra Ltd., between 15% and 40% of India's annual steel exports to Europe may be affected by the CBAM. The mechanism's objective is to ensure that imported goods meet the EU's domestic emission standards, thereby protecting European industries from foreign competitors without similar carbon levies.
While the EU's intentions are noble, the practical implications for Indian steel exporters are concerning. The carbon footprint of Indian steel production is notably higher than that of competing suppliers to the EU. This disparity in emissions intensity puts Indian exporters at a disadvantage. Icra Ltd. estimates that CBAM compliance requirements could lead to a decrease in profits of Indian steel exports to the EU by $60-165 per metric ton between 2026 and 2034.
The Fairness of CBAM
One of the primary issues with CBAM is the question of fairness. Both India and the EU are transitioning towards greener industries and investing in sustainable assets. Penalizing Indian exports with the CBAM, especially when India is actively working on reducing its carbon footprint, appears inequitable. Finance Minister Nirmala Sitharaman has expressed India's disapproval of the CBAM, highlighting the need for fairness in the transition process. She argues that if both Indian and European steel are in transition toward greener production, penalizing India twice through CBAM is unjust.
UNFCCC and Equivalence
Indian officials argue that the EU's approach to CBAM does not align with the principles of the United Nations Framework Convention on Climate Change (UNFCCC). While the EU seeks equivalence in the pricing of emissions, the UNFCCC recognizes differentiated emission reduction obligations, taking into account the historical emissions of developed countries and their commitment to climate finance for developing nations. India's demand for a waiver or exemption from CBAM compliance aligns with these principles.
Carbon Pricing Disparities
Another issue at the heart of the CBAM debate is the lack of a globally agreed-upon carbon pricing mechanism. Carbon pricing initiatives vary across the world, and there is no consensus on how to determine the price of emissions. The World Trade Organization (WTO) has been attempting to address this issue, but a clear solution remains elusive. The lack of uniformity in carbon pricing makes CBAM's demand for equivalent pricing challenging for countries like India.
Impact Beyond Steel
While steel is a significant concern, India's challenges with the EU's sustainability-focused regulations extend beyond this sector. The CBAM, coupled with other non-tariff measures (NTMs) like the Deforestation-free Regulation and the United States' Inflation Reduction Act, has the potential to disrupt 43% of India's exports to the EU. Product categories at risk include textiles, chemicals, selected consumer electronics, plastics, and vehicles, accounting for approximately $27 billion of India's exports to the EU in 2022.
Navigating the Complex Landscape
The CBAM and other sustainability-driven NTMs pose a complex challenge for India's foreign trade. Regulatory disparities between trading partners make compliance with these measures
difficult, leading to market access restrictions, especially for emerging economies. To address these challenges, a structured approach is necessary.
India can consider the development of mutual recognition of compliance assessment activities through bilateral trade pacts. Common information-sharing platforms for firms to register and track information can facilitate stronger compliance. Additionally, India may need to introduce its own standards and non-tariff measures to ensure the quality of its exports.
Sustainability-driven NTMs are on the rise, accounting for a significant portion of the total NTM notifications to the World Trade Organization. As India navigates this evolving trade landscape, the nation must work toward a clear solution to the problem of carbon pricing, ensuring that its exports are not adversely impacted.
Conclusion
The EU's CBAM and other sustainability-focused regulations represent a significant challenge for India's foreign trade. While the ambition to promote sustainability is laudable, the lack of consensus on carbon pricing mechanisms and the potential impact on Indian exports raise important questions about fairness and equity. As India and the EU continue their transition toward greener industries, it is essential that the concerns of developing nations like India are taken into account, fostering a balanced and equitable approach to addressing climate change through international trade.
Written by CA (Dr.) Raj Chawla, Rahul Nair
CA (Dr.) Raj Chawla is the Chairman of Taxation Audits Quality Review Board, ICAI. He is currently contributing as the Principal Advisor and Mentor at House of Startups India.
Rahul Nair is the Manager at House of Startups India and a Delhi-based lawyer who graduated from the National University of Advanced Legal Studies, Kochi.