India to Face 0.05% GDP Loss from EU Carbon Tax, Mulls Retaliatory Tax

The European Union's Carbon Border Adjustment Mechanism (CBAM) will introduce a 25% tax on carbon-intensive goods exported from India to the EU, according to a report released on Wednesday. The report, titled "The Global South's response to a changing trade regime in the era of climate change," was published by the Centre for Science and Environment (CSE), an independent think tank. It suggests that India should consider imposing a counter-tax on wealthy nations historically responsible for climate change.

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CBAM is the EU's proposed tax on energy-intensive products like iron, steel, cement, fertilisers, and aluminium imported from countries such as India and China. This tax is based on the carbon emissions generated during the production of these goods. The EU argues that this mechanism creates a level playing field for domestically manufactured goods, which must adhere to stricter environmental standards, and helps reduce emissions from imports.

Impact on India's Exports

Trishant Dev, Programme Officer for Climate Change at CSE, highlighted that India's CBAM-covered goods exports to the EU accounted for 9.91% of its total goods exports to the bloc in 2022-23. He noted that 26% of India's aluminium and 28% of its iron and steel exports were destined for the EU in the same period. These sectors dominate the basket of CBAM-covered goods shipped from India to the EU.

In 2022-23, CBAM-covered goods made up about one-fourth (25.7%) of India's total such goods exported globally. Of India's total goods exported worldwide, CBAM-covered goods exports to the EU constitute only about 1.64%. Currently, hydrogen and electricity are not exported from India to the EU.

Historical Context and Recommendations

The report recommends that countries historically less responsible for climate change should consider imposing a historical polluter tax on trade partners to fund their own decarbonisation efforts. Avantika Goswami, who leads CSE's climate change programme and co-authored the report, stated that this tax could be levied on trade partners responsible for a significant share of cumulative historical carbon dioxide emissions since the pre-industrial period.

Historical trends show that carbon-intensive production has shifted from developed to developing countries, creating disparities in emissions intensity between nations. Today's differences in emissions intensity are also tied to historical emissions, as the Global North utilised fossil fuels like coal during the early stages of the Industrial Revolution, enabling it to amass wealth and grow its economies.

Domestic Carbon Tax Proposal

The CSE report also recommended collecting a carbon tax domestically to avoid being taxed in Europe. Countries like India could institute their own carbon tax on exports of CBAM products destined for the EU or any country imposing a carbon border tax. Revenues generated from a domestic carbon tax could be directed into a government-managed fund to support the decarbonisation efforts of Indian industries.

By collecting a carbon tax domestically, India can exert greater control over its mitigation strategies and achieve decarbonisation more effectively. This approach would allow India to manage its own decarbonisation efforts without relying on external mechanisms imposed by other countries.

The imposition of CBAM overlooks historical context and unfairly penalises developing countries. "It is not retaliation but rather a necessary course correction for the South to impose costs on the North for years of cheap polluting energy use," Goswami said. Developing countries argue that under UN climate change rules, countries cannot dictate how others should reduce emissions.

The move has sparked debate at multilateral forums, including UN climate conferences. Developing countries worry this would harm their economies and make it too expensive to trade with the bloc. The findings are based on data from 2021-22, 2022-23, and 2023-24.

This new tax burden would represent 0.05% of India's GDP according to CSE's report. The imposition of CBAM aims to create fairness in trade by ensuring imported goods meet similar environmental standards as those produced within the EU.

India must navigate these new regulations while considering its own economic interests and environmental responsibilities.