EU’s carbon border tax plans trigger alarm in India

The EU’s planned carbon border tax has triggered alarm in India as the country’s fast-growing heavy industries race to respond to a measure they fear could wipe out one of their biggest markets.

Steel, aluminium and other industrial metal producers have grown rapidly in India as the economy has expanded, becoming competitive suppliers to countries around the world, including across Europe.

Yet this production overwhelmingly depends on coal — still the main fuel source in the world’s most populous country, as efforts to green the economy struggle to keep up with rapid economic growth. India’s coal demand is unlikely to peak until the next decade, according to officials.

This leaves the industry highly vulnerable to the EU’s carbon border adjustment mechanism (CBAM), the world’s first attempt to tax carbon­intensive imports such as steel, iron and fertilisers. It is due to come into force in 2026.

Indian authorities and companies fear the measure could lead to double-digit duties on their products and leave them unable to compete with both Europe-based suppliers and cheaper rivals, such as China. The UK also plans to introduce its own CBAM from 2027.

Gopal Nadadur, vice-president for South Asia at business consultancy The Asia Group, warns the measures could put Indian companies at a severe disadvantage if they do not adapt in time. “These industries are highly commoditised with low margins,” he says. “You already have Chinese supply, not to mention other supply, breathing down your neck.”

“The argument is that it’s unfair,” Nadadur explains. “India is saying ‘We’ve already committed to the Paris Accords [climate treaty from 2015], and are taking steps to get there’.” But he thinks CBAM could “hasten the pace or cause policymakers to think about hastening the pace” of their green transitions.

Piyush Goyal, India’s commerce minister, is a supporter of this argument — telling the Financial Times earlier this year that the EU’s carbon border tax was an example of “bias, discrimination and unfairness”, and threatening to challenge it at the WTO. Around a quarter of India’s $31bn exports of steel, iron and cement in 2022 went to the EU, according to the India-based Global Trade Research Initiative.

New Delhi is now seeking to shield industry from the brunt of these carbon border taxes, by seeking carve outs for Indian companies as part of free trade agreement negotiations with both the EU and UK, according to media reports.

“CBAM is going to act like a non-tariff measure,” says Biswajit Dhar, a trade professor at the Indian Institute of Foreign Trade. “Indian companies are still lagging behind in terms of their emission standards . . . Indian industry is really going to suffer.”

Critics argue that the CBAM amounts to an attempt by developed nations, that first became wealthy by freely burning fossil fuels, to penalise developing countries that are juggling growth with a need to green their economies at the same time.

They argue that unilateral measures like these disregard the decarbonisation commitments made at climate summits such as COP — including India’s pledge three years ago to reach net zero by 2070 — and undermine efforts to find globally negotiated solutions to the crisis.

“There’s definitely a concern that the principles are different,” says Seema Arora, deputy director-general at the Confederation of Indian Industry, a leading trade association. “This is not reflecting any of those well-agreed-to principles in the global negotiations and global discourse on climate that has been happening over a period of time.”

But, despite the outrage, Indian authorities and companies are also moving quickly to make their own heavy industries greener as they recognise that — with or without carbon border taxes — improving their own sustainability is crucial to remaining competitive.

Prime Minister Narendra Modi has set a target of installing 500 gigawatts of renewable energy capacity by 2030, of which about 150GW has already been built.

India has also introduced multibillion-dollar subsidies to try to kick-start a domestic manufacturing industry for green hydrogen — made by using renewable energy to electrolyse water so there are no emissions — to replace coal as a power source for carbon-intensive heavy industries, such as steelmaking.

Some of India’s largest industrial conglomerates are better placed. Groups such as JSW and Tata Steel already have facilities in Europe, and the latter — part of the country’s large Tata conglomerate — has previously expressed support for CBAM. JSW has said that it plans to establish a “green” manufacturing facility in western India by 2030 in order to supply steel to the EU.

CBAM is going to act like a non-tariff measure. Indian industry is really going to suffer

At the other end of the spectrum, though, many small and medium-sized businesses in heavy industry supply chains are at more risk of being caught unprepared.

“A lot of MSMEs [micro, small and medium enterprises] don’t even monitor their carbon emissions,” says Arora of the CII. Part of the challenge is “to make them aware of what these challenges are all about”, she argues. “We’re trying to ascertain what is the impact on trade, how it will impact trade in terms of the increase in cost.”

Dhar, however, believes that, for CBAM to truly make a difference in greening Indian industry, it would require more domestic acceptance. When policies are “imposed from the outside, then there’s a knee-jerk reaction”, he warns. “If it’s to be adopted honestly, there has to be buy-in from the inside.”