Does India share WTO’s concerns on EU’s CBAM?

The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) is poised to have a substantial impact on India’s exports, particularly in industries such as steel, aluminium, cement, and fertilizers. This policy aims to mitigate carbon leakage while addressing carbon costs faced by EU industries.

IBT looks into the aspects that should raise concerns for India in the context of this trade issue. Additionally, it highlights the specific concerns raised by the World Trade Organization (WTO) regarding this matter.

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What is the Carbon Border Adjustment Mechanism(CBAM)?

The Carbon Border Adjustment Mechanism (CBAM), which addresses the carbon costs paid by EU facilities that adhere to the EU Emissions Trading System (ETS), as well as imported goods, aims to promote fair competition. It operates by levying a tax on carbon emissions in a subset of imports that is equal to the tax levied under the ETS on domestic goods. By doing this, CBAM aids in preventing carbon leakage, which occurs when businesses move their manufacturing operations outside of the EU in order to save money by not having to comply with environmental standards.

The transitional phase of CBAM will simply call for quarterly reports on the greenhouse gas emissions of specific products imported into the EU, encompassing both direct and indirect emissions, from October 1, 2023, until December 31, 2025. But starting in 2026, purchasing CBAM certificates will be required to cover GHG emissions, and the price of these certificates will be determined by carbon prices under the EU ETS. CBAM will increase the cost of exporting to the EU market, which will be borne equally by the exporter or manufacturer and may have an effect on their marketing plans. It is anticipated that more nations will implement CBAM-like policies.

Source: India Briefing 

WTO’s concerns 

The World Trade Organization (WTO) has raised concerns about certain trade-related issues. These include environmental rules, like those from the European Union (EU) and the US Inflation Reduction Act.

These worries come before the European Union’s CBAM takes effect on October 1. The CBAM could mean a 20-35% tax on some imports to the EU starting from January 1, 2026. While the EU says this is for the environment, some countries like India will have it more on trade.

WTO chief economist Ralph Ossa said, “Countries are taking the climate challenge seriously… it is crucial that whatever policy matters they have, shouldn’t be contradictory to the multilateral trading system.” 

According to the WTO report, some countries fear the CBAM could make others adopt European standards and cost a lot to follow. They also talk about trade measures used for economic pressure, like Indonesia limiting exports and China restricting certain materials. The report also highlighted concerns about unilateral trade measures that are allegedly used for “economic coercion.” Examples of these include Indonesia’s export restrictions on raw materials and China’s export restrictions on gallium and germanium.

The organization that oversees international trade has expressed concerns about security issues affecting trade policies, which could result in more obstacles to international trade. According to officials from the World Trade Organization (WTO), many countries are using security concerns as a reason to impose restrictions on trade.

According to officials from the World Trade Organization (WTO), many countries are using security concerns as a reason to impose restrictions on trade.

“There is a risk that this could lead to fragmentation in the global economy as economies resort to re-shoring and friend-shoring,” it said in the report titled ‘Re-globalization for a secure, inclusive and sustainable future’.  

The WTO noted that trade is shifting due to geopolitics, with trade between certain groups of countries growing 4-6% slower than trade within these groups since the Ukraine conflict in February 2022.

Additionally, the report mentions a change in how countries cooperate on trade. They’re not always making formal trade agreements. For example, there’s a group called the Indo-Pacific Economic Framework (IPEF), which includes countries representing 40% of the world’s economy. This group focuses on trade, digital matters, supply chains, clean energy, and other areas, not just trade agreements.

Lastly, the WTO pointed out that it’s more expensive for businesses to trade in developing countries, especially in agriculture, where costs are 30% higher compared to high-income countries. In agriculture, costs are 50% higher than in manufacturing.

Why should India be concerned?

A prerequisite for India to become a US$ 5 trillion economy is to expand its exports and the EU is India’s second-largest trading partner, accounting for US$ 74 billion in exports in 2022-23, or 15.39% of total Indian exports according to the Department of Commerce and Industry.

The implementation of the EU’s CBAM will impact India’s exports of steel, aluminium, cement, and fertilizers. Indian companies selling these products to the EU are expected to face higher prices, reducing their competitiveness and potentially lowering demand in the EU market.

The steel industry is a significant contributor to global emissions, accounting for nearly eight per cent of total emissions. According to the International Energy Agency (IEA), carbon emissions from iron and steel production have increased in the past decade due to rising steel demand and the energy-intensive nature of its production.

As per a recent report from the Global Trade Research Initiative (GTRI), the introduction of the Carbon Border Adjustment Mechanism (CBAM) is anticipated to present a substantial challenge to India’s metal sector. In 2022, India exported iron, steel, and aluminium products valued at US$8.2 billion to the European Union (EU), constituting 27 percent of its total exports in these categories. Beginning on January 1, 2026, the EU will impose a carbon tax on every shipment of steel and aluminium, resulting in Indian companies having to pay an amount equivalent to 20-35 percent of the tariffs.

Source: GTRI Report March 2023

ICRA said that CBAM compliance requirements could pull down the profits of Indian steel exports to the EU by US$ 60-165/MT between CY 2026 and CY 2034. CBAM to impact between 15-40 per cent of India’s annual steel exports which are made to Europe. Failure to reduce the carbon footprint may result in lower profits in EU markets.

The effect of CBAM on India will vary based on the carbon emissions of the products they export and whether there are similar, low-carbon alternatives available in the EU market. Products with high carbon emissions might have to pay higher fees, which could make them less competitive. However, if there are no low-carbon alternatives for Indian products in the EU market, then CBAM may not have a significant impact on India’s exports.

Conclusion 

In conclusion, the CBAM introduced by the European Union (EU) is poised to have a significant impact on India’s exports, particularly in sectors such as steel, aluminium, cement, and fertilizers. This policy aims to address carbon costs faced by EU industries while also preventing carbon leakage.

It’s crucial for India to recognize the potential consequences of CBAM, especially given that the EU is a significant trading partner. India’s ability to achieve its economic goals, including reaching a 5 trillion-dollar economy, relies on expanding exports. Therefore, navigating the challenges posed by CBAM and adapting to shifting global trade dynamics will be paramount for Indian industries and policymakers.

Moreover, the steel industry, a major contributor to global emissions, faces a substantial challenge. The industry’s carbon footprint and its vulnerability to CBAM underscore the need for India to focus on sustainable and environmentally friendly production processes.