CBAM as an opportunity

Indian exporters could proactively adjust to it

Ever since the European Union’s (EU’s) Carbon Border Adjustment Mechanism (CBAM) was announced in mid-2023, Indian industry has openly expressed its reservations about this framework, which places an emission tariff on imports. A recent survey on tax transparency in ESG (environmental, social, and corporate governance) by consultancy firm PriceWaterhouseCoopers (PwC) showed that 67 per cent of respondents said CBAM was likely to impact their supply chains. These fears are not misplaced. A study by the Delhi-based Centre for Energy, Environment and Water has estimated that the tax would impact 43 per cent of India’s exports to the EU, the country’s second-largest overseas market, by raising costs and eroding competitiveness. In steel, for instance, Indian mills’ carbon footprint is significantly higher than that of competing producers, so its prices could rise 56 per cent, according to some calculations, under the CBAM regime.

The carbon border tax will be effective from January 2026 as part of the EU’s programme to meet its emission-reduction target of 55 per cent by 2030 (with 1990 as the baseline). But Indian exporters already have had an idea of the complex compliance challenges involved since October 2023 with the start of a mandated trial requiring companies of seven carbon-intensive sectors to share emission data with the EU. Most Indian corporations see CBAM, not unreasonably, as a protectionist non-tariff barrier. The Indian government is considering an appeal against the mechanism at multilateral forums on the basis of the “common but differentiated responsibility” principle. Equally, commentators have suggested that Indian companies diversify their export markets to destinations with less stringent emission requirements, such as Latin America or Africa.

These are valid and necessary responses but are likely to take time. But given the direction of global climate change commitments and the urgency of the exercise (with 2023 being a standout year for high temperatures), Indian producers would do better to proactively examine ways to meet the CBAM challenge. Indeed, one of the objectives of CBAM is not only to ensure a transition in the EU but also globally. The PwC study shows that most companies understand the risk-mitigation opportunities in early transitions. It said half the companies surveyed had made the point that they had net-zero commitments and were actively exploring ways to meet those targets. Almost half these companies have set themselves challenging net-zero targets by 2030. This impulse can already be seen in the steady shift towards renewable energy by carbon-intensive industries such as steel, cement, and fertiliser, partly to address the structural deficiencies in state-owned grid power supplies and partly to access lower-cost ESG funds.

Others are proactively examining ways to explore green-hydrogen technologies for similar reasons. The immediate fallout of this transition may well be cost-intensive and painful, as all technological evolutions are. But, in the long run, Indian industry has the opportunity to emerge as a more robust competitor. Recent Indian industrial history shows that companies have gained from rising to such challenges. In the 1990s, the organised carpet-weaving industry in UP, for example, internalised this lesson quickly after Germany banned imports of carpets made by child labour and using carcinogenic dyes. Today, neither problem exists in this belt; in fact, India bans imported textiles that use Azo dyes. CBAM could be a similar opportunity to make a great leap forward with a lighter carbon footprint.