Centre asks industry to be ready for EU carbon tax, vows smooth transition

The carbon tax aims to impose a tax on goods imported into the EU from regions where production-stage carbon emissions are higher than those allowed by the mechanism's rules

The Centre has asked the industry to get ready for the 'carbon tax' that the European Union (EU) has said it will impose on imports of goods with carbon emissions that are higher than the established limit, a report by The Financial Express (FE) said.

The Centre has also said that efforts would be made to exempt certain sectors of the industry from the carbon tax, it added.

While the EU will begin levying the tax on imports on January 1, 2026, the Centre will work with the 27-country group to make the transition as seamless as possible, a senior official told FE.

"The government does not view the carbon tax as an environmental issue, but rather as a trade issue. It has voiced opposition to it at the World Trade Organisation (WTO) as well, but the industry must be prepared for the new regime in order for exports to proceed unhindered," the official said.

The tax will be imposed on seven products whose production is carbon intensive – iron, steel, aluminium, cement, electricity, hydrogen and fertilisers.

The carbon tax, also known as Carbon Border Adjustment Mechanism (CBAM), aims to impose a tax on goods imported into the EU from regions where production-stage carbon emissions are higher than those allowed by the mechanism's rules. The CBAM cleared all hurdles in April this year and is now in effect.

Beginning on October 1, 2023, the mechanism will move into the transitional phase. Importers of the seven products that will initially be subject to this tax will only need to report the greenhouse gas emissions that are already present in their imports during this time, and no payments or adjustments will need to be made.

The proposed tax will gradually be expanded to include finished goods as well. The tax will be calculated taking into account all emissions, even indirect ones like carbon released when electricity is produced and ultimately used by a factory to produce any of the goods on the carbon tax list.

The EU claims that by enacting this tax, it hopes to level the playing field between domestic producers and imports, which are frequently less expensive because they must adhere to laxer carbon emission regulations in their home countries.

The official said that the CBAM will have a significant tax impact —between 20 and 35 per cent— on India's exports to the EU.

According to the official, in order to lessen the burden on the industry, the government will push the EU for mutual recognition of emission certifications and acceptance of its Carbon Credit Trading Scheme (CCTS), which is being developed by the Ministry of Power.

If India's CCTS is approved, the price of credits on the Indian carbon exchange—rather than the price of credits on the EU Emissions Trading System (ETS)—will be used to calculate the tax payment for emissions that exceed the threshold.

"India is addressing the issue at both the bilateral and multilateral levels to prevent harm to our industry. Bilaterally, we are asking the EU to have a mutual recognition agreement with us and make an exception for MSMEs when the carbon tax on products goes into effect," said the official.

The UK, which is not a member of the EU, is working on a CBAM-like mechanism on its own. It also suggests adhering to the timelines set forth by the EU for the implementation of its carbon tax.