When the Carbon Border Adjustment Mechanism (CBAM) becomes fully operational, India will face a duty of Euro 173.8 per tonne (Indian Rupees 15,394) on steel exports to the European Union (EU), according to a recent study by the Foundation for European Progressive Studies (FEPS) and the National Institute for Public Finance and Policy (NIPFP). This additional cost is equivalent to 16.06 per cent of the unit value of steel exports of the 2022 price.
With high carbon emission intensity and substantial export dependence on the EU for steel and iron, India ranks among the countries most exposed to CBAM’s impact. Though the EU’s CBAM claims to aim for global climate benefits, the FEPS-NIPFP study argues that it imposes undue costs on trading partners.
CBAM, proposed by the EU to levy a carbon tax on imported goods, was enacted in October 2023. It is currently in a transitional phase, where importers are required to declare the quantity and emissions embedded in imported goods but are not yet liable for carbon fees.
The definitive regime will begin in 2026, initially covering carbon-intensive goods like cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
Shayak Sengupta, a Senior Research Associate at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs, says that the EU CBAM increases the cost of Indian steel exports disproportionately due to their high emissions intensity and the large fraction of exports going to Europe.
As the date for CBAM’s full implementation approaches, debates around unilateral trade measures have intensified. Several of the EU’s trade partners have criticised it.
The recent study by FEPS and NIPFP highlights the concern of developing countries by saying that CBAM could impose extra pressure on developing countries’ production chains, making it harder for them to compete. As per it, Africa will be most negatively affected, with its exports declining by 5.72 per cent.
The paper highlights another concern related to the CBAM. It came into existence to stop carbon leakage, which means the local manufacturing units do not shift to other countries to avoid stringent local regulations. However, there is a fear emerging that CBAM-like measures may push large manufacturers to shift their manufacturing to the EU for local needs.
The study provides examples of two major companies, Tata Steel Ltd and JSW Steel, which accounted for 11.43 per cent and 20.01 per cent of India’s steel exports to the EU, respectively. Both companies operate in the EU and are covered by the European Union Emission Trading System (ETS). The paper mentions the possibility that these companies may decide to meet some of the local demands through EU-based operations.
Suranjali Tandon, an Associate Professor at NIPFP and one of the authors of the paper, says, “CBAM essentially inverts the economics. The primary logic behind CBAM is to prevent carbon leakage. But there are other possibilities too. Production that could have happened in India from big Indian steel manufacturers may move to facilities in Europe. So, in a sense, it is distorting production.”
In such cases, when big manufacturers move their production to the EU, it will affect the local supply chain as several MSMEs are linked to these corporations.
Besides this, there are standalone MSMEs exporting these products to Europe. They have to start emission tracking and price some of these emissions as per the EU’s pricing mechanism, she adds, underlining the possible consequential impact of CBAM.
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Production that could have happened in India from big Indian steel manufacturers may move to facilities in Europe. So, in a sense, it is distorting production.
Suranjali Tandon, associate professor, National Institute for Public Finance and Policy
Is it a fair price?
The EU describes CBAM as a tool to ensure a fair price on carbon emissions, applied equally to goods produced locally and those imported. The carbon price on imported goods will align with that of domestic production. However, the EU’s carbon pricing framework is the result of over two decades of effort.
The Emissions Trading System (ETS), introduced in 2005, has undergone several phases, and has faced legal challenges from member states and corporations. Initially, the ETS allowed national autonomy, gradually evolving into a regional market supported by financial and technological initiatives.
Based on the evolution of the ETS, the paper highlights that carbon-pricing mechanisms cannot begin with full coverage and must allow for free allowances, enabling manufacturing units to emit within limits during initial phases.
Although there is growing consensus on the need for carbon markets or ETS, the paper points out that EU trading partners are at varying stages of carbon pricing development and preparedness.
Tandon underscores this disparity, saying that not all countries are on the same page or at the same level when it comes to carbon pricing. How can the EU expect trade-reliant countries to match its level of ambition? With CBAM certificates linked to the ETS auction price, countries without a carbon market or with only shallow carbon pricing mechanisms will have their goods priced at the same level as the EU’s. This approach, I believe, is unfair to other countries and disregards the EU’s own experience.
Another concern, raised in the paper, is that CBAM requires detailed information of direct and indirect emissions along with the methodology used for the carbon-pricing mechanism. This information has to be reported quarterly. “This would present a significant cost in terms of compliance, especially where small and medium enterprises constitute a large share,” the paper says.
Addressing social implications
The paper talks about the social implications of the EU’s approach to decarbonising. CBAM’s impact on trade and trading partners is known, but it will adversely impact local consumers, too, as it will raise the cost of imports. However, the EU has internal measures to allocate funds towards social costs from the transition.
For instance, the Just Transition Fund (JTF) aims to support territories identified as the most negatively impacted by the transition towards climate neutrality. It supports re-skilling, job search, creation of new firms, investment in MSMEs, etc. The paper informs that the EU JTF will be operational between 2021 and 2027 with a total budget of Euro 19.32 billion.
With these examples, the paper argues for considering the CBAM costs to developing countries. It highlights several proposals regarding CBAM, including making the revenues from CBAM available for redistribution to developing countries.
Another study, published by the Centre for European Reform (CER), a London-based think tank, on December 3, highlights that many countries may require additional support from the EU to upgrade their heavy industries for a net-zero future.
Underlining the brewing stress, the study mentions India, Vietnam, Brazil, and Ukraine, which may require additional support. It also discusses smaller, lower-income countries that contribute a small share of overall EU imports but rely on CBAM-related goods as critical sectors of their economies. “These countries are rightfully concerned, and the EU should concretely support them in decarbonising their industries to retain their export capacity,” the study states.
India’s effort towards producing green steel
The impact of CBAM is visible across the globe as several other countries are planning similar unilateral trade measures, like the United Kingdom, which plans to introduce its own CBAM by 2027. Simultaneously, countries are looking for alternative markets, like India, which is exploring markets for steel and iron in countries like Egypt, Mexico, Qatar, Somalia, and the United Arab Emirates etc.
As the second largest crude steel producer in the world, India is trying several ways to reduce the sector’s emission intensity, which contributes around 10-12 per cent of India’s total emissions. In September, India released a roadmap and action plan for greening the steel sector. The report informs that the emission intensity of steel produced in India, at 2.54 T CO2/T Crude Steel (tCO2/TCS), is significantly higher than the global average of 1.91 tCO2/TCS.
The report mentions that the reason for the high emission intensity is its reliance on coal and low scrap usage. India has low-grade coal and iron ore, whose usage increases overall energy consumption and emissions. Other reasons include the lack of availability of energy-efficient technologies, and steel being produced by numerous smaller producers who lack the financial and technical capacity to make emission reductions.
To address these challenges, on December 12, the Ministry of Steel introduced a green taxonomy for steel production, defining “green steel” based on its carbon emission intensity. According to this taxonomy, steel produced in plants with a CO2 equivalent emission intensity of less than 2.2 tonnes of CO2 per tonne of finished steel (TFS) qualifies as green steel.
The taxonomy categorises green steel into three ratings based on emission levels. Steel with an emission intensity below 1.6 t-CO2e/tfs will be classified as five-star green-rated steel. Four-star green-rated steel includes steel with emission intensity between 1.6 and 2.0 t-CO2e/tfs, while three-star green-rated steel applies to steel with emission intensity ranging from 2.0 to 2.2 t-CO2e/tfs.
Sengupta says that India’s release of a green taxonomy signifies the Government’s seriousness about reducing emissions from the country’s steel sector. This will not only bolster the country’s efforts to address climate change but also to make Indian steel production competitive with peers in other countries.
However, the “green” standards for steel production proposed in India set an emissions threshold that is still relatively high compared to the current emissions levels of steel production in other countries. This means Indian steel production is playing catch up to reduce emissions compared to other countries, he says.
About the overall debate on CBAM and climate action, Tandon says that the debate around CBAM is broadly moving towards whether it is legally tenable under the principle of Common But Differentiated Responsibilities (CBDR) or meeting climate goals. The third way to look at it is: can it be made more just? Europe has its targets, and India has its own pace. Reconciling these priorities within the system is essential to balance fairness with economic costs.
This story was published with permission from Mongabay.com.
