India must seek carbon safeguards for small firms in FTA talks with EU

The Carbon Border Adjustment Mechanism (CBAM) of the European Union (EU) was notified primarily to prevent carbon leakage and provide a level playing field for domestic (European) producers. Initially, the most energy-intensive sectors — such as iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen — have been covered by the scheme. Other sectors will be included over time. The CBAM will become operational from January 2026.

 

The EU is India’s second-largest export market. India exported $70 billion worth of merchandise to the EU in 2023, out of which CBAM-covered commodities were worth $7.3 billion, amounting to 10.5 per cent of its merchandise exports to the EU. Iron and steel ($5.5 billion) and aluminium ($1.8 billion) together constituted 99 per cent of India’s CBAM-covered exports. According to a study conducted by the Centre for Science and Environment, if carbon is priced at €100 per tonne, the impact of CBAM would amount to an average additional tax of 25 per cent on India’s exports of CBAM-covered products to the EU. This would cost India $1.7 billion, or 0.05 per cent of its gross domestic product. The World Bank’s Relative CBAM Exposure Index, which measures the impact of CBAM on a country’s competitiveness in the EU market, also indicates an adverse impact on Indian exports, with iron and steel being the worst hit.

 

In the business-as-usual scenario, price competitiveness is decided on the basis of explicit or private cost without internalising negative externalities in the price matrix. In that case, India is competitive vis-à-vis other competitors owing to its use of more emission-intensive technologies in its production processes. For example, 46 per cent of crude steel produced in India is primary steel, which uses the blast furnace–basic oxygen furnace (BF–BOF) route. Secondary steel production uses direct reduced iron–electric arc furnace (DRI–EAF) and DRI–induction furnace routes making up 23 per cent and 31 per cent, respectively. Primary steel is generally produced by the big players, whereas small and medium-sized players mainly make secondary steel. Currently, the BF–BOF route is the most prevalent and cost-effective method globally, and it is likely to constitute 60 per cent of total crude steel production in India by 2030, according to an estimate by the Ministry of Steel. The emission intensity of the BF–BOF route is roughly 3 tonnes of CO₂ per tonne of crude steel (tcs), which is much higher than the global average of 2 tCO₂/tcs. Other routes also have higher emission intensity than the global average. Once the emission cost is accounted for along with private cost, India’s price competitiveness vis-à-vis competitors will erode. The same is true in the case of aluminium.

 

The market structure of authorised importers in the EU will also significantly influence the performance of exporters following the implementation of CBAM. It is estimated that around 20,000 authorised importers would be importing more than the  proposed new exempted limit ( 50 tonne per importer per  calendar year). The presence of such a large number of big importers indicates a reasonably competitive market structure. In a competitive environment, the exporters can reduce their profit margins to offset the additional costs arising from CBAM-related carbon pricing and still remain competitive. Similarly, importers facing competitive pressures might also choose to share the burden of these additional costs to retain market share and sales volume.  This more balanced market dynamic could help Indian exporters maintain their foothold in the EU, despite the added compliance costs.

 

 The small and medium enterprises (SMEs) will be worst hit as a result of the implementation of CBAM. They would not be able to initiate the decarbonisation process owing to a lack of finances and meet measuring, reporting and verification (MRV) requirements without hand-holding by the government. In the ongoing free trade agreement (FTA) negotiations with the EU, it is advisable to press for special concessions for SMEs . This demand is likely to find some traction, especially in light of the EU’s recent efforts to strengthen its strategic partnership with India, partly in response to a shift in US engagement. The increased de minimis limit for exemption from the  CBAM obligations for EU importers can also be helpful. Some facilitation efforts by the government, for example, by opening a facilitation office in the EU may help. (Though market forces should help Indian small players gain market access in the same way as in the pre-CBAM regime).

 

The big players are still better placed to combat this challenge. They have deeper pockets and some of them have already taken measures through their ongoing decarbonisation initiatives. These companies can also employ a dual-market strategy — exporting their low-carbon production to the EU while reserving higher-emission goods for the domestic market or countries with less stringent environmental regulations. This approach is particularly viable for sectors like steel and aluminium, which enjoy strong and growing domestic demand — a trend expected to continue given India’s growth path. 

 

 

The authors are, respectively, distinguished fellow and consultant with Research and Information System for Developing Countries. The views are personal.