A recent analysis by the think tank Sandbag indicates that the European Union's Carbon Border Adjustment Mechanism (CBAM) may have a much less significant impact on India's steel exports than previously anticipated. This finding challenges earlier concerns from both Indian importers and the government regarding the new carbon levy.
Revisiting CBAM's Economic Projections
Sandbag's interactive modeling tool, designed to assess CBAM's real-world effects on EU trading partners and specific industries, revealed revised projections for India's steel sector. The report, titled 'The EU CBAM’s real impact on India,' suggests that under various scenarios, the actual cost burden could be substantially lower, even negligible.
Initial projections estimated total CBAM costs for Indian steel at €762 million. However, the updated analysis shows these costs could drop to approximately €79 million, primarily due to rising EU market prices. Furthermore, the report highlights that India's already existing low-emission steel production facilities stand to benefit from the mechanism.
Potential for Profit in Low-Emission Production
In an 'ambitious' long-term scenario, which accounts for the deployment of new low-emission capacity, the CBAM could even shift from a cost burden to a net profit of €44 million for India. This optimistic outlook is based on reduced CBAM fees for cleaner production and Indian exporters capturing more benefits from higher EU steel prices.
“We identified Indian steel plants with emission intensity levels low enough to gain from the CBAM. Other criteria such as geographical location, readiness for CBAM reporting and new anti-circumvention rules still leave significant low-emission manufacturing capacity such as ArcelorMittal’s Hazira plant for low-carbon steel exports to the EU; such existing infrastructure can be leveraged to maintain competitiveness under the CBAM regime,” the report stated.
India's Stance and EU-India Climate Commitments
India has consistently voiced strong opposition to CBAM, labeling it as discriminatory, protectionist, unfair, and ineffective. The nation has argued that the mechanism violates principles of the World Trade Organization (WTO) and the 2015 Paris Agreement.
Despite these reservations, a groundbreaking Free Trade Agreement (FTA) between the EU and India, signed in February, included extensive climate-related commitments. These commitments comprise €500 million over two years to support India’s green transition and the establishment of a Climate Action Platform. This platform aims to foster collaboration and dialogue on critical issues, including CBAM and carbon pricing coordination, such as India’s planned Carbon Credit Trading Scheme.
Understanding CBAM's Purpose
The CBAM, implemented this year, serves as the EU’s mechanism to ensure that its domestic industries, which incur costs for their carbon emissions under the EU’s Emissions Trading System (ETS), are not disadvantaged when competing with imports from countries where production emissions do not face an equivalent price. It aims to prevent 'carbon leakage' – the relocation of carbon-intensive production to countries with less stringent climate policies.