India must push EU hard on carbon border tax relaxation

Amidst the fears generated by US’ tariff threats and actions, the EU has proposed relaxing compliance requirements under its Carbon Border Adjustment Mechanism (CBAM) — which is expected to come into force from next January — for small EU importers of steel, cement and aluminium in particular (besides fertilizer, electricity and hydrogen). This benefit would be transferred to suppliers.

The EU’s efforts to ease green compliance comes at a time when the availability and prices of these products could turn volatile. In its present form, the EU proposals may not impact India significantly. But a change in provisions could alter the scenario. These proposals are now at a preliminary stage and could go through iterations before they are ratified by EU Parliament. It seems that the EU is seeking to deepen ties with alternative trade partners, besides preparing its own industries for the worst. Under the proposed rules, exporters of less than 50 tonnes annually of CBAM goods are exempt from CBAM, against the earlier regulation which capped the exemption at a very nominal value. Since the limit is very low indeed, it will not benefit most Indian shipments. The proposal argues that since 80 per cent of the importers, mainly SMEs in EU, account for less than 1 per cent of the emissions embedded in CBAM goods they will be exempted. But even if the move is targeted at giving EU SMEs a break, the 50 tonne cap appears too low. The proposal also says: “the Commission has set ambitious quantified targets for reducing administrative burden: at least 25 per cent for all companies and at least 35 per cent for SMEs.” The EU should be raising the limit, when its units, presumably under stress already, are expected to pay a tax at about $90 per tonne of carbon. This may just be a policy signal.

There is another change in the offing. So far (with CBAM being in the phased implementation stage between 2023 and 2025), importers needed to establish through elaborate documentation in the exporting country, the levels of emissions embedded in the commodity, on the basis of which they would pay their tax. A default level of emission would apply only if the importer was unable to proceed with such documentation. Now, in order to make matters easier, a default level fixed by the European Commission can be invoked by the importer at the outset. This seems like a major concession for both importers and exporters, even if the level is rather high. But more clarity is awaited in this regard on the manner in which such an emission level is arrived at.

India must push for more transparency and better terms in CBAM, if not its withdrawal in FTA talks with EU, while securing green technology in its ‘hard to abate’ sectors. Its steel exports being negligible, India is not likely to be hit on the whole. But the development of its ‘own cap and trade market’ will give it a lot of leverage in downstream products, as it negotiates CBAM-like issues in the future.