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The Commerce Ministry is exploring various options to cope with the European Union’s decision to introduce a Carbon Tax
✅It includes retaliatory tariff measures, a challenge at the World Trade Organisation and measures to help smaller Indian exporters
● Key highlights:
✅The EU plans to introduce a Carbon Border Adjustment Mechanism (CBAM)
✅It will entail a monitoring mechanism for imports from producers deploying non-green technologies starting this October and a tax levy from January 2026.
✅This is likely to hit Indian metal and engineering products’ exports to the EU.
✅Addressing this challenge is one of the top agenda items for the Commerce Department and several options are being examined
● About Carbon Border Adjustment Mechanism (CBAM):
✅It aims to equalise the fees on the carbon content of goods in the EU regardless of where they were produced by imposing carbon border taxes.
✅The proposal initially covers cement, iron and steel, aluminium, fertilisers, and electricity; any carbon fees already paid at the source will be deducted. The proposed CBAM could help alleviate “leakage.”
✅When emissions are restricted in the home country, for example by cap-and-trade mechanisms, firms can relocate production to other countries to avoid restrictions giving rise to pollution havens.
✅Consumers in the home country can then buy cheaper, carbon-tax-free imports rather than the more expensive domestic alternatives.
✅The fact that most high-income countries have become net importers of CO2 while most developing economies are net exporters indicates that leakage is a serious problem.
✅Carbon border taxes can suppress this effect by effectively equalising carbon prices for domestic and foreign producers in the home market.
● India’s concerns regarding the CBAM:
✅The border taxes on India’s goods entering the EU would increase the prices of its goods and make them less attractive to buyers and could negatively affect demand.
✅Such a tax could pose a serious threat to companies with larger greenhouse gas footprints.
✅India's third-largest trading partner is the EU.
✅This tax could reduce demand and make Indian goods less appealing to consumers in the EU by raising their prices.
✅Companies with a larger greenhouse gas footprint would face significant challenges in the near future as a result of the tax.
✅The CBAM puts the burden of climate action on them, while the rich countries have contributed the most to warming.
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