India-EU free trade talks: Carbon tax back on the table
Mint | 17 August 2024
India-EU free trade talks: Carbon tax back on the table
by Nehal Chaliawala, Mihir Mishra
Mumbai/New Delhi: India has convinced the European Union (EU) to include the bloc’s proposed carbon tax in talks on a free trade agreement (FTA), said two officials in the know, ahead of a similar move with the UK.
Although Indian officials are pushing for a similar negotiating arrangement with the UK, the British have not yet agreed to this request, the people cited above said.
Negotiations on the Carbon Border Adjustment Mechanism (CBAM)—which proposes taxing imports of carbon-intensive products such as iron and steel, cement, aluminium and fertilizer—were earlier kept out of the FTA talks with the EU and the UK to fast-track the discussions.
Indian industries have described the tax as a non-tariff barrier.
“We would push for some relaxation in CBAM norms since we cannot be asked to measure on standards set by developed nations. Also, there is a relaxation in timelines that we are going to push for," one of the officials said.
The second official said clubbing CBAM discussions with the FTA could prove to be a major win for Indian steelmakers for whom Europe is an important export market.
“Including CBAM in the UK FTA is also a big ask from our side and that may also happen," the second official added.
Nearly half the 8.8 million tonnes of steel exported in FY24 by domestic mills found its way to European markets, as per data from BigMint, making the 27-nation bloc the largest foreign consumer of Indian steel.
To be sure, exports account for a relatively small share of India’s steel sales. Most of the139 million tonnes of finished steel India produced in FY24 was consumed domestically.
Emails seeking comment from the commerce ministry, steel ministry, Delegation of the European Union to India and the EU trade commissioner went unanswered.
Indian steelmakers argue that emissions of manufacturers from developed and developing countries should not be judged by the same yardstick. Manufacturers from developing countries should have lower emission reduction targets under CBAM, they say.
“Each nation is committed to its path to achieving net-zero emissions in the best possible way. Operating in India, which is a signatory to the Paris Agreement on climate change, we must align with the country’s specific journey towards net zero by 2070," said Ranjan Dhar, director and vice-president, sales and marketing, ArcelorMittal Nippon Steel India (AM/NS India).
Dhar highlighted the principle of ‘common but differentiated responsibilities’ outlined in the United Nations Framework Convention on Climate Change (UNFCCC).
“This principle recognizes that while all countries share the responsibility to reduce greenhouse gas emissions, the extent of their obligations depends on each country’s development needs, an argument strongly emphasized by the government," he said.
As part of the CBAM, between October 2023 and December 2025, European importers of specific carbon-intensive materials will have to report the carbon emissions caused during the production of these materials. The information is to be supplied by the manufacturers.
From January 2026, European importers will have to buy CBAM certificates corresponding to the excess emissions generated by the overseas manufacturers when benchmarked against European standards. Similar rules have been stipulated by the UK.
Lawmakers in Europe argue that these tariffs will level the playing field for their domestic manufacturers, who will be forced to make large investments in low-emission manufacturing to comply with local regulations.
However, the regulations are bad news for Indian steelmakers who are among the highest carbon emitters globally.
India’s five largest primary steel producers on average emit 12% more carbon dioxide per tonne of steel produced than the global average, according to an analysis by Icra Ltd. This would put Indian manufacturers at a steep disadvantage against competitors from Turkey, Ukraine, South Korea, Taiwan, Vietnam and Japan.
CBAM compliance requirements could pull down the profits of Indian steel exports to the EU by $60-165 per tonne of steel between 2026 and 2034, as per Icra’s analysis. A tonne of steel bound for Europe is currently billed at about $540-550 at the factory gate, as per BigMint estimates.
“The Indian steel industry is one of the highest emitters. So, our material will sell at a discount," analysts at BigMint said.
The pricing available to Indian exporters in Europe is better than other overseas markets. This is due to absence of any low-tariff quotas for Chinese exporters in the EU, making them less competitive.
“Anywhere China is not active is an important market for Indian mills," the BigMint analysts said.
To be sure, even today Indian steel sells in Europe at a discount to domestic prices in India. This is due to competition in Europe from sellers from Vietnam, Japan and South Korea. However, exports are key for Indian steelmakers to diversify beyond the domestic market. As Indian mills rapidly add new capacity, exports will become ever more important before domestic demand catches up.
