EU's carbon border tax poses a big challenge for Indian businesses

livemint.com:

Th EU’s Carbon Border Adjustment Mechanism (CBAM) requires all EU imports to bear the same cost for each tonne of carbon dioxide (CO2) emitted as those being produced in the EU. Initially confined to six sectors—iron and steel, aluminium, cement, fertilizers, electricity and hydrogen—it will eventually expand its coverage. For India, the immediate impact is on two sectors: aluminium and steel.

The EU is a major destination for these, accounting for about 27% of India’s aluminium and 38% of steel exports. The CBAM’s current phase, which runs till 31 December 2025, is focused on detailed data reporting of both direct and indirect emissions. The former are those generated during the production processes of CBAM goods, including of relevant precursors.

Indirect emissions cover the production of electricity that is consumed during the production of CBAM goods. CBAM levies commencing 1 January 2026 will focus only on direct emissions. Their impact on aluminium from India is expected to be in the range of 7-10% ad valorem duty.

However, when indirect emissions are included, the impact could potentially be over 70%, effectively closing the EU as a market for Indian aluminium exports. This is because in India, aluminium smelters run on coal-fired electricity. Greener sources of producing aluminium by way of hydro or gas-based electricity account for far fewer emissions.

But shifting to renewable energy is a challenge in India, given the need for round-the-clock power, constraints on the availability of alternative sources such as hydro, gas and nuclear energy, and unviable battery-storage options. There is also a significant ripple effect of the CBAM, even in the current ‘report only’ phase. Non-EU customers are demanding CBAM