The government has asked the industry to get ready for the “carbon tax” that European Union (EU) has said it will impose on import of products with carbon emissions higher than the prescribed threshold. However, it  said efforts will be made for a legitimate waiver from this tax for sections of the industry.

While the tax will be imposed by the EU on imports  from January 1, 2026, New Delhi will engage with the 27-country group to make the transition as smooth as possible, a senior official said Tuesday.

“The government sees carbon tax as a trade issue, and not an environmental issue. It has raised objections to it at the World Trade Organisation also but the industry has to be ready for the new regime, so that exports can continue unhindered,” the official who did not wish to be identified said here on Tuesday.

This was conveyed to the industry at the third stakeholder consultations on Tuesday even as different sectors of manufacturing listed out their expectations from the government, he said.

To start with, the tax will be imposed on seven products whose production is carbon intensive – iron, steel, aluminium, cement, electricity, hydrogen and fertilisers.

The carbon tax or Carbon Border Adjustment Mechanism (CBAM), which cleared all hurdles in April this year before coming into force, seeks to impose tax on imports of products into the EU from geographies where carbon emissions at production stage are higher than what the rules of the mechanism will prescribe.

The mechanism will enter into the transition phase on October 1, 2023. During this period, importers of seven products in the EU on which this tax will initially be imposed, will just have to report greenhouse gas emissions embedded in their imports without making financial payment and adjustments.

Gradually, the tax proposed will be extended to finished products too. Even indirect emissions like carbon emitted while producing electricity, which ultimately is used by a factory to make any of the products on the carbon tax list, will be taken into account while determining the tax. 

The EU says it has imposed this tax to bring parity between domestic producers and imports which tend to be cheaper because they have to follow lower standards of carbon emission in their home countries.

The official said that the tax impact of the CBAM on India’s exports to the EU will be substantial at around 20-35%.

To help reduce the burden on the industry, the government will press the EU on mutual recognition of  certification on emissions and recognition of its Carbon Credit Trading Scheme (CCTS), which is under preparation by the ministry of power, the official said. 

If India’s CCTS is accepted, then payment of tax for emissions beyond prescribed threshold will be determined on the basis of price of credits on Indian carbon exchange and not price of credits on EU Emissions Trading System (ETS).

“India is dealing with the issue both at bilateral and multilateral levels so that our industry is not hurt. Bilaterally, we are asking the EU to have a mutual recognition agreement with us and make an exception for MSMEs when the carbon tax on products kicks in,” the official added.

The UK, which is out of the EU, is independently working on a CBAM like mechanism. It also proposes to follow the timelines that the EU has adopted for implementing its carbon tax.

Domestic companies from sectors like steel are taking steps like setting up captive solar power plants and following climate friendly manufacturing processes to reduce carbon emission. The government is also taking steps like afforestation and promotion of use of renewable energy. “These measures will be stressed upon while negotiating with the EU,” the official added.

India’s exports to EU countries grew 15.19% on year to $74.84 billion. In the calendar year 2022, India’s exports of iron and steel to EU stood at $5.28 billion and aluminium at $2.22 billion. India does not export cement, fertiliser, electricity and hydrogen to the EU.