EU's Carbon Tax Rattles India's Export Economy: A Closer Look

The European Union's proposed Carbon Border Adjustment Mechanism, once operational, is set to change the dynamics of world trade because it would emerge concerning energy-intensive exports from countries like India. The mechanism proposes to impose a 25% tax on items like iron, steel, cement, fertilizers, and aluminum products to level the playing field of goods produced in the EU complying with more stringent environmental standards and curb the emission of imports of the same. Consequently, this new tax regime may bring India to the top of the list of the most affected major exporters of such energy-intensive goods to the EU. According to a publication by the Centre for Science and Environment (CSE), the tax might thus account for approximately 0.05 percent of India's GDP. The heavy impacts are expected to integrate the aluminum and iron and steel sectors, respectively, which currently represent eminent proportions of their export volumes to the EU. Avantika Goswami, who leads the program on climate change at CSE, said that "Almost 10% by value of India's goods exports to the EU in recent years are covered under CBAM". More specifically, high exports of India's aluminum iron, and steel are at the risk of this new tax regime, reflecting the extent to which these industries dominate the export basket of the country towards the EU. The EU contends that CBAM is necessary to ensure the principle of fair competition between products manufactured in the EU and products imported from countries that have laxer environmental regulations. It also dovetails the EU's commitment to climate goals by incentivizing other global partners to bring down all applicable supply chain emissions. This has nevertheless raised apprehensions in developing countries, including India, regarding the possible economic implications and the increased complexity this brings to international trade relations. Critics fear, however, that CBAM might not only be a disproportionate burden on developing economies but also make trade with the EU more expensive and hurt economic growth. These concerns have been placed on record by developing countries at multilateral forums, that unilateral action of this scale would water down collective efforts under international regimes that propagate principles of flexibility and cooperation on climate. Given the above concerns, India and other such affected countries are currently seeking ways to reduce the CBAM's harsh impact by improving their national environmental standards, cleaner means of production, and provisions of exemptions/ alternative arrangements under the respective EU frameworks. There is also an increasing demand for dialogue and negotiation to ensure the setting of parameters to implement CBAM in a manner consistent with the principles of equity and common but differentiated responsibility around worldwide climate agreements. This means that the trajectory of CBAM and implications for global trade will continue to be a disputed terrain as countries navigate their way forward as responsible stewards of the environment on one hand and drivers of economic development on the other. As a result, negotiations will proceed and will yet again call for comparable answers that uphold the environmental goals and, at the same time, respect the interests of developing economies that are reliant on energy-intensive exports. Therefore, while the EU's CBAM attempts to address carbon emissions within global trade, its impacts on countries like India will underline the complexity of the interplay between climate policies and international economic relations: balancing these interests will require cooperative efforts that need to be made in this direction to ensure a fair approach to global trade in the era of climate change.