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A $64-billion export market for India faces a clouded future as EU’s carbon tax mechanism kicks in

Since phase-1 of the Carbon Border Adjustment Mechanism went into effect on October 1, it has become more difficult for Indian enterprises to sell to the European Union. Are businesses prepared to submit the necessary reports?

According to experts in the field, many exporters are not. There are still a lot of businesses that haven't implemented the policies and procedures needed to meet EU requirements.

"Most are not ready," says Ajay Srivastava, the brains behind the Global Trade Research Initiative (GTRI) in New Delhi. They hope the government will reach an agreement with the EU so that business can continue as usual for them. No way does this happen.

It should be made clear that exporters are not directly obligated to shoulder the costs of the Carbon Border Adjustment Mechanism (CBAM) in its initial phase. Greenhouse gas emissions from the manufacturing of iron and steel, aluminum, cement, energy, fertilizer, and hydrogen must now be disclosed by European Union (EU) importers. There would be no penalty for this voluntary submission as long as it lasted until December 31, 2025. Indian suppliers and exporters to the EU, however, are obligated to provide the importing EU company with the necessary emission information. Otherwise, the importer would either pass on the carbon charges that will be imposed on them later, or hunt for suppliers who comply with the required emissions.

Srivastava claims that if the EU-based importer is fined due to noncompliance or inaccurate reporting, the fine will be swiftly recouped from the Indian exporter.

Exporters' Concerns About Carbon

The European Union is India's third-largest trading partner, after only the United States and China, so this is bad news. India's merchandise trade with the EU27 amounts to around 11% of the total. About 64 billion dollars' worth of commodities leave India every year for the European Union. A considerable drop in export earnings is possible if Indian exporters do not comply with the European Union's Carbon Border Adjustment Mechanism.

Indian businesses are finding it difficult to comply even with the first step. Many exporters claim they have not yet taken the time to learn the CBAM regulations. They also don’t know how it will affect their business. Their difficulties are exacerbated by the lack of a national policy on carbon pricing.

According to the GTRI, there are more than 800 pages of thick legal and technical writings in the CBAM legal and guiding material, and the reporting requirements are precise. It is imperative that Indian exporters learn every nuance of these forms. Srivastava claims Indian businesses continue to complain about the goods and services tax (GST) forms' complexity even though they were implemented in 2017. The complexity and details of the GST paperwork pale in comparison to the CBAM.

Problems are minimal for multinational corporations

Jindal Aluminium, the largest aluminum extrusion firm in India, exports between fifteen and twenty percent of its products to different regions, and this demand for compliance has not affected them.

Jindal Aluminium claims it took a methodical approach to becoming ready for CBAM, starting with an in-depth review of its greenhouse gas (GHG) emissions. This assessment was performed by an environmental consultant, and the report is currently being double-checked by an outside organization.

The aluminum industry leader acknowledges that it is a multi-step process that necessitates careful data collecting and analysis. It also requires a thorough investigation of supply chains to find places where emissions might be cut.

"Jindal Aluminium is on track to be ready with phase 1 of our compliance measures," said Pragun Khaitan, Vice-Chairman & Managing Director, Jindal Aluminium. However, "achieving seamless compliance" necessitates a multi-stage process that includes conducting internal audits, revising supplier networks, and adapting to EU regulations.

The European Union, the business explains, is a huge market whose significance can't be overstated. If you ask Khaitan, "it is not easily replaceable by other territories," he will tell you the same thing. "The CBAM is not currently causing us financial distress. We hope to turn this catastrophe into an advantage.

Apollo Tubes Limited, the largest manufacturer of structural steel tubes in India, also pledges to promptly bring its operations into compliance with the new EU standard. CBAM regime fully aligns with APL Apollo's ambition of becoming a net-zero firm by 2050," says Sanjay Gupta, Chairman & Managing Director. About 25% of our exports are now going to countries in the European Union, and this shift demonstrates our commitment to a cleaner industrial production process.

The biggest concern for smaller businesses

However, not every business has the same access to funding as Jindal or Apollo did in order to meet these regulations. Working finance needs and other problems plague most small firms. It would be an inconvenience for them to have to set aside resources to get such information.

Companies that are eager to disclose the data are also powerless in this situation. Srivastava explains that small businesses often produce products for export after purchasing steel or aluminum from larger businesses. These smaller companies rely on their suppliers for emission data. It has been gathered, however, that major Indian corporations are not in the mood to share their emission figures with their smaller rivals. According to Srivastava of GRTRI, "this will cause the EU to calculate tax at default or highest possible values beginning in January 2026."

The vast majority of exporters believe their businesses will not immediately suffer a financial hit. But they know things will change after the transition time, and that worries them.

After the United States and China, the European Union is India's third-largest trading partner, accounting for around 11% of India's merchandise trade.

Among those preparing for CBAM compliance is AG Polypacks Pvt Ltd, a distributor of raw materials to the fertilizer industry. AG Polypacks Managing Director Gaurav Daga sees it as a potential danger to the company's future success. There is evidence that businesses are beginning to put together the required documentation. Until the government provides clear direction on how to keep track of and account for everyone's carbon footprints in the sector, we may struggle to find our way through the CBAM maze.

The Engineering Export Promotion Council (EEPC), which works to encourage trade and investment in the engineering industry, is one of the sectors that stands to lose under the proposed changes. The European Union receives about $25 billion worth of engineering exports annually from the country. India's largest export sector is the engineering industry.

Many EEPC members and exporters in the engineering industry have begun providing the necessary details to their EU-based customers.

"a threat and a challenge for engineering exporters," says EEPC Chairman Arun Kumar Garodia. The council has asked the government to intervene. The Department of Trade is assisting us in our talks with European Union officials. We've asked if micro, small, and medium-sized enterprises (MSMEs) can be exempt from the CBAM. This is being pushed at the highest levels of government. He responds, "But this seems like a tough assignment to me.

Since the EU mechanism for enforcing sanctions is still in its early stages, there is no imminent threat to these exports. A certification detailing the carbon footprint created by the exported items is now required from companies hoping to sell their wares in the European Union. I don't see that as a problem because most exporters can already do so, with the exception of some MSME firms," Garodia explains.

Influence of CMAB

Cement, steel, aluminum, fertilizers, and power are the first products covered under the CBAM. Some of these difficult-to-regulate sectors are major sources of greenhouse gas emissions. Several important sectors of India's export portfolio to the EU are affected by the system. In fact, the European Union (EU) buys up to 27 percent of all exported iron ore pellets, iron, steel, and aluminum goods. It was estimated by GTRI that these exports were worth $8.2 billion in 2022.

In the year 2022, the total export value of iron, steel, and related items was $4.6 billion. Products such as flat-rolled steel, wire, tube, and structural steel are all included here. The aluminum product export market was worth $2.7 billion in 2017. Ingots, billets, plates, and foil are all important parts of this category.

According to the European Commission, CBAM can be used to stimulate cleaner industrial production in countries outside the EU by placing a price on the carbon released during the manufacture of carbon intensive items entering the EU.

95% of the country's EU-bound goods in iron ore concentrates, steel products, iron and steel, and aluminum products will be affected by this new standard, according to a GTRI analysis of 777 tariff lines (items). Exports of carbon-intensive organic chemicals and polymers from India will be subject to the CBAM beginning in 2026. Due to the MSME dominance and high labor intensity, millions of people's livelihoods would be negatively affected if these industries weren't CBAM-compliant.

The Carbon Tax is Unavoidable

Exporters, despite their feelings, must take action to ensure compliance. Jindal Aluminum notes that CBAM and other carbon pricing schemes are gaining support around the world. The United States of America, Canada, and maybe even India could be looking into doing something similar. According to Khaitan, this represents a "fundamental shift" in how firms must function in a "carbon conscious" world.

That's why it's crucial for exporters to have all the necessary information at the ready. Unless they want to see a drop in sales.

Plastics Export Promotion Council (Plexconcil) Executive Director Sribash Dasmohapatra argues that in order to achieve environmental goals, all businesses must work to apply sustainable business practices.

Plastics are not included in the CBAM's initial coverage. However, Plexconcil claims that its members are already aware of the obligation, and the organization is actively spreading the word to other businesses to ensure they are prepared when their time comes. "We know that non-compliance is bound to hurt not only EU importers' businesses but also our business," says Dasmohapatra.

In light of the CBAM's inevitable expansion beyond the first range of items, businesses have little choice but to implement green technologies.

According to independent trade expert Mansavi Srivastava, the exports that will be affected by the CBAM are anticipated to be less than 1% of the country's merchandise exports, but the key concern is more about the future than the present. Aluminum and steel exports are on the uptick, and it's possible that other countries will follow suit.

India is challenging the CBAM tax in both domestic and international forums. However, analysts warn that the government appears to have few good options right now. When the next phases of the carbon tax mechanism are implemented, exporters may be subject to a penalty of 8-30% if they are not prepared.

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