India-EU trade talks may adopt middle ground on carbon tax

INdia and the European unification testament espouse a middle-path to solve the atomic number 6 tax issue and conclude their ongoing free trade negotiations before their leaders meet next week with Brussels likely to recognise India’s efforts in reducing carbon footprints that could be leveraged to offset Indian exporters’ liabilities under the Carbon Border Adjustment Mechanism (CBAM), people aware of the development said.The two teams are converging on a mutually-beneficial middle-path by abandoning their respective hard stands on CBAM -- India considers it a non-tariff barrier (NTB) that would nullify gains of tariff reductions for most of its key exports such as steel, cement, aluminium, fertilizer, electricity and hydrogen, they said requesting anonymity. For the EU, it is part of its domestic Emissions Trading System (ETS), hence cannot be waived off completely, they added. ETS requires polluters to pay for their greenhouse gas emissions.One of the solutions is to align the EU and the Indian methodologies of measuring emissions, as India already has the Carbon Credit Trading Scheme (CCTS) for energy-intensive sectors such as steel and cement and programmes such as the National Green Hydrogen Mission. This could offset significant costs incurred by India from its CBAM liabilities as per Article IX of the EU CBAM Regulation, they said. Article IX allows an offset for carbon price paid in a country of origin.The other solution rests in a time and sector-specific moratorium so that the industry has time to invest in clean technology, they said. “It is also possible that after a broad consensus on CBAM before January 27, its operational details could be worked-out later,” one of the people said, adding that a complete waiver from CBAM is unlikely.It is expected that the proposed pact may have a rebalancing mechanism that would allow India to proportionately reduce FTA benefits (in terms of tariff reduction) to the EU’s exporters if CBAM is used as a non-tariff barrier, they explained.Such measures are necessary to protect Indian industries, particularly small and medium enterprises (SMEs), they said. The recently-signed India-UK FTA has a rebalancing mechanism that allows India to proportionately withdraw benefits under the pact if Britain’s proposed CBAM in 2027 adversely impacts Indian exports. In the case of the EU, however, CBAM is in force from January 1, 2026.Email queries on this matter sent to the European Commission and India’s ministries of commerce and external affairs did not elicit any response. The people mentioned above said the proposed middle-path could be close to India’s stated position of common but differentiated responsibilities and respective capabilities (CBDR-RC), the kernel of the country’s argument at climate talks.In addition to measures such as ensuring funds from the carbon tax stay within borders and the need for the EU to provide additional decarbonisation-climate finance, a package of additional steps can be considered, a Centre for Science and Environment analysis said. These include recycling of CBAM revenues to developing country partners, support for monitoring and reporting of emissions, and exemptions for least developed countries. The analysis said CBAM could impose substantial cost pressures on steel and aluminium exports to the EU. The study estimated that affected exports could face a price burden of around 25%-- making Indian goods non-competitive.India and the EU are in an advanced stage of concluding their bilateral FTA negotiations before European Union leaders Ursula von der Leyen and Antonio Costa’s India visit next week as chief guests at Republic Day celebrations on January 26. The two sides are expected to announce the deal the next day, coinciding with the 16th India-EU Summit. The FTA negotiations were relaunched on June 17, 2022 after a hiatus of over nine years. Since the resumption, the two sides have held 14 rounds of talks and the negotiations are currently on to resolve last remaining issues such as CBAM, they said.CBAM is a carbon tax or import duty on selected goods, based on their greenhouse gas emissions. The tax is levied on identified carbon intensive products to offset “carbon leakage” while importing them. Carbon leakage occurs when firms in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place, or when EU products get replaced by more carbon-intensive imports. Importers of CBAM goods will be required to report the emissions associated with their imported goods and eventually pay for ‘CBAM certificates’. It is introduced to help the EU reduce emissions from imported goods and meet its target of cutting emissions.“The EU showing flexibility to accommodate India’s concerns is a positive sign; the talks should move towards a solution where decarbonisation of India’s manufacturing sector is assisted financially and technologically by the EU, rather than shifting the costs onto India as the CBAM aims to do,” said Avantika Goswami, programme manager, Climate Change, Centre for Science and Environment.Prerna Prabhakar, trade economist and fellow at the Centre for Social and Economic Progress (CSEP) said, “We call these non-tariff measures because they are not price-related, but then this one is, it’s kind of a tax, but not a tariff per se.” She expressed concerns over compliance costs for SMEs. “Larger firms are comfortable because they have the capital, they have better reach to the government, they are able to negotiate better as compared to the smaller units,” she said, adding that the government should give funding support to micro, small and medium enterprises (MSMEs). “Maybe in the upcoming budgets, allocations should be also made towards these MSMEs and their ability to adopt such technologies and comply with these standards, because now it’s already becoming a game of not just tariffs, but also these non-tariff measures,” she said.