New Delhi: During ongoing negotiations for a Free Trade Agreement (FTA) between India and the European Union (EU), a significant development has emerged regarding carbon tax policies. On Tuesday, India's Commerce and Industries Minister Piyush Goyal revealed that the EU has proposed an alternative to its Carbon Border Adjustment Mechanism (CBAM). Instead of India paying the CBAM tax, which is set to come into effect in 2026, the EU has suggested that India could devise its own carbon tax mechanism. This proposal is aimed at mitigating the impact of the CBAM on Indian industries.

Understanding the Carbon Border Adjustment Mechanism (CBAM)

The CBAM is part of the European Green Deal, designed to address carbon leakage and promote environmentally friendly industrial practices outside the EU. The mechanism will impose tariffs on imports from non-EU countries that are carbon-intensive. Key sectors affected include steel, cement, fertilizers, aluminium, and hydrocarbons. The CBAM will start with reporting requirements in 2023 and will fully take effect in 2026.

According to a report by the Global Trade Research Initiative (GTRI), the CBAM could impose a 20-35% tax on certain imports entering the EU starting January 1, 2026. This tariff is intended to incentivize cleaner production processes in exporting countries, aligning with the EU’s environmental goals.

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India’s Position and Potential Impact

India's commerce minister, Piyush Goyal, acknowledged the EU’s suggestion, stating that India will carefully consider this proposal. Goyal emphasized that the government would adopt a stance that best serves the interests of the Indian industry and the country’s economic well-being.

The potential impact of the CBAM on Indian exports is significant. In 2023, approximately 27% of India's exports in iron ore pellets, iron, steel, and aluminium were destined for the EU, amounting to a total export value of $7.4 billion. The imposition of the CBAM tax could lead to higher costs for Indian companies exporting to the EU, affecting their competitiveness in the European market.

EU's Proposal for an Alternative Carbon Tax Mechanism

The EU’s proposal for India to create its own carbon tax mechanism is seen as a potential way to alleviate the financial burden on Indian exporters. By developing a domestic carbon tax, India could potentially align its policies with the EU’s environmental standards while managing the economic impact on its industries. This approach would offer India greater flexibility in shaping its environmental policies and could help avoid the direct financial implications of the CBAM.

Conclusion

The ongoing FTA negotiations between India and the EU are crucial for determining the future of trade relations and environmental policies between the two entities. The EU’s suggestion for India to create its own carbon tax mechanism represents a significant development in these negotiations. As India considers this proposal, the implications for its industries, particularly those in carbon-intensive sectors, will be closely watched. The outcome of these discussions will shape the economic and environmental landscape for both India and the EU moving forward.

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