India to seek three-year carbon tax exemption for MSMEs in trade talks with EU

India, which opposed the tax at the World Trade Organization's last ministerial meeting in February-March in Abu Dhabi, will make its stand clear again on the during upcoming talks on a free trade agreement (FTA) with the EU.

The eighth round of FTA talks is slated to be held in Brussels on 24-28 June.

"India will make a strong point during the FTA talks that the unilateral decision taken by the EU is not in India's interest," the first person mentioned above said, requesting anonymity.

"India is likely to seek a three-year exemption for MSMEs from the EU’s Carbon Border Adjustment Mechanism (CBAM)," the person added.

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During the upcoming talks, the two sides will take up sticky issues like the carbon tax, India's demand for EU to relax its rules on the maximum level of pesticide residues allowed in agricultural imports, rules of origin, and issues related to services.

CBAM is a green tariff on carbon-intensive products, legislated as part of the European Green Deal. It effects in 2026, with the current transitional phase lasting between 2023 and 2025.

The CBAM will initially apply to imports of certain goods that are is carbon intensive and at significant risk of carbon leakage, which includes sectors like cement, iron and steel, aluminium, fertilizers, electricity and hydrogen.

Indian exports to Europe, especially those of iron and steel, aluminium, and cement are expected to be impacted by the tax.

With this enlarged scope, CBAM will eventually, when fully phased in, capture more than 50% of the emissions in energy, manufacturing and transport sectors. 

"The EU has been defending its stance on CBAM by stating that it has a target to achieve, which is carbon-free production by 2050," the second person mentioned above said.

"The Indian industry, on the other hand, believes its production costs will increase massively due to the carbon tax on products like steel, cement, and aluminium," the person said, requesting anonymity.

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According to trade experts, the EU's proposed CBAM and Deforestation-free Regulation (EUDR), a key topic of discussion between both sides, are expected to impact around 8-10% of Indian agricultural, steel, and aluminium exports to the bloc.

"There is a concern that Indian products entering the EU and UK might face additional tariffs, potentially ranging from 20 to 35%, under the CBAM charges. A suitable text may be inserted in the FTA chapters dealing with this possibility," economy think tank Global Trade Research Initiative (GTRI) said in a recent report.

"Other regulations that are expected to increase the cost of imports include the Deforestation Regulation, the Foreign Subsidies Regulation, and the Supply Chain Due Diligence Act. The path to a successful FTA requires a delicate balance of economic interests, political sensitivities, and a commitment to improving the quality of Indian goods," it added.

Queries emailed to the spokesperson of the commerce ministry remained unanswered till press time.

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While the EU negotiators have been arguing that its industry can not compete if the carbon tax is not imposed on imports, the India says it is committed to achieving carbon-free production by 2070, making the carbon tax detrimental to its trade, said the first person mentioned above.

"While they (the EU) are looking out for their industry, we too have to protect our industry," the person added.