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

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India is likely to ask for a three-year exemption for its micro, small and medium enterprises (MSMEs) from a proposed mandatory tariff on carbon-intensive imports in talks on a free trade deal with European Union negotiators starting next week, two people aware of the matter said. 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. 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.