Why the European Union's CBAM is worrying for Indian steel exports

The mechanism will come into force in 2026, with a levy linked to EU carbon market price, on imported iron, steel, aluminum and other products

The proposed EU Carbon Border Adjustment Mechanism (CBAM), a tariff on import of carbon-intensive goods, is likely to impact steel exports from India, putting manufacturers here in a quandary.

The CBAM, aimed at preventing “carbon leakage”, will be phased in gradually. As things stand, starting October 1, importers in the European Union, of products from specific sectors such as iron & steel, aluminium, electricity, certain fertilisers, cement and hydrogen, would have to start collecting and reporting carbon data. CBAM will come into force in2026, with a levy linked to the EU carbon market price.

The EU is a key market which, according to Crisil Market Intelligence, accounted for 25-30 per cent of India’s finished steel exports over the last three fiscals (FY20-FY22).

India has committed to carbon neutrality by 2070 and firms are charting a decarbonisation roadmap aligned to it. Some have set much earlier goals. But the CBAM is more imminent, and could potentially put competitiveness of exports in question.  

Jayant Acharya, deputy managing director, JSW Steel, said CBAM would disrupt global trade with little impact on climate. “Developed countries have generated 79 per cent of the historical carbon emissions and that is why it is agreed that they will bear a higher share of the carbon mitigation plan.”

“In its current form, we consider CBAM to be a trade barrier and not based on the basic principles of CBDR (common but differentiated responsibilities) to achieve the Paris agreement,” Acharya added. “We would request the government of India to engage with the EU to communicate that India will follow its own NDC (nationally determined contribution) as per the Paris agreement.”

Alok Sahay Secretary General, Indian Steel Association, also said that the implementation of EU- CBAM would act as a trade barrier as it is not based on the principle of level playing field and is not WTO compliant It also forces developing countries to toe the line of accepting EU – NDCs.

Kalyan Bhattacharjee, Chief Sustainability Officer at Jindal Stainless, said CBAM was expected to impact Indian steel and stainless steel industry as EU happens to be one of India’s major exporting geographies.

“What we have to understand is that CBAM is going to be applicable to all manufacturers, European or otherwise. However, how it will play out in pricing of Indian manufacturers vis-à-vis European and other counterparts is something that will unfold with time,” Bhattacharjee said.

He added that clean energy was a clear advantage that European manufacturers enjoy, owing to the green grids in EU, which are not available in countries like India. “So for Indian manufacturers, own efforts for aggressive greening are as important as the country’s strength in providing clean energy to its industries.”

India has already raised its concerns at the World Trade Organisation. The CBAM, however, will be subject to the EU’s internal legislative process which is expected to be finalised in May 2023.

But even in the trial phase, the reporting of carbon data may also throw up challenges. Producers would need to set up systems and processes for collecting, collating, monitoring, reporting and verifying data, Acharya said. The methodology is yet to be notified by the EU.

“This will naturally increase the administrative costs including setting up of data management systems, annual verification etc. This will be in addition to the investments required to reduce the carbon footprint,” Acharya added.

Indian steel companies have lined up major expansion totalling 35-40 million tonnes by FY26 and embedded in the plans are exports. Would CBAM impact competitiveness of Indian steel?

Satnam Singh, Director-Consulting, Crisil Market Intelligence and Analytics, said the pathway for achieving carbon neutrality by most Indian industries was aligned to India’s overall vision and deviated from EU’s carbon policy resulting in the need to buy carbon certificates under CBAM to export to Europe. “Purchase of carbon certificates would result in making India’s steel exports to the EU costly rendering them less competitive,” he added.

Singh also said that this would negatively impact India’s overall vision in becoming a leading export hub for steel and may impact capacity expansions proposed to be undertaken, normally envisaged by estimating 30 per cent of production as exports.

If the carbon tax is actually implemented in 2026, it would definitely hit steel exports from India even as all firms are on the decarbonisation journey, a producer said.

However, Ranjan Dhar, chief marketing officer, ArcelorMittal Nippon Steel India (AM/NS India), said, the exporter can claim credit for a similar tax paid on carbon in the country of origin. “Therefore, discussions are underway with relevant stakeholders to align all environment-related taxes on steel, such as coal cess, renewable purchase obligations, and energy saving certificates, under a common scheme that is recognised by CBAM.”

It’s not just steel exports that’s going to be impacted by the CBAM; stricter norms would have a bearing on other metals. According to Crisil Market Intelligence, the share of EU in total exports of primary (unwrought) aluminum from India rose from 21 per cent in fiscal 2022 to 31 per cent (till January) in fiscal 2023. As far as pellets are concerned, the EU’s share stood at 12 per cent of total exports in FY23 (April-January).