The European Union’s new Carbon Border Adjustment Mechanism, a historic trade and climate action policy that Indian experts think might transform international trade and put climate equality principles to the test, poses a serious threat to India’s $8.2 billion worth of steel and aluminium exports to the EU.

According to the Council on Energy, Environment, and Water’s paper, “EU Carbon Border Adjustment Mechanism: Dominant Perspectives in India”, which was released on Wednesday, the CBAM would result in $771 million in lost export revenue for India, or a 0.72 per cent decrease in output to the EU.

Based on interviews with 16 key Indian stakeholders, the findings underscore growing fears that the policy will disproportionately affect emerging countries and the possibility of trade disruptions.

Lead author Harman Singh stated that the CBAM functions more as a trade weapon intended to safeguard European industry than as a climate policy. “It erodes the spirit of justice and confidence that is essential to global climate action.” In order to protect exporters from expenses associated with CBAM, experts quoted in the report urged New Delhi to expedite the implementation of its new Carbon Credit Trading Scheme.

Additionally, they called for the development of a “carbon tax nomenclature” in order to combine current coal and fuel taxes into an open carbon pricing that might be accepted by EU regulations. Singh thinks that setting a reasonable domestic carbon price is “essential for India’s competitiveness.” In order to “not only meet domestic climate goals but also align with international compliance requirements,”, he stated that India’s carbon pricing regime needs to change.

The recognition of carbon prices paid in non-EU nations was made clear by the European Commission’s omnibus amendments earlier this year. However, analysts warned that the benefits would be limited due to the significant price differences between EU and Indian carbon allowances. The research cautioned that the majority of the costs associated with CBAM compliance will fall on micro, small, and medium-sized businesses. Due to their limited financial and technical resources, smaller exporters find it difficult to comply with the EU’s stringent integrated emissions reporting and verification requirements.

Singh stated, “MSMEs run the risk of losing their competitiveness not because they pollute more, but rather because they cannot afford the bureaucracy.” To aid smaller businesses in making the shift to cleaner production, the report called for government-backed financial support and low-carbon technology assistance. In 2023, India, the EU’s second-largest trading partner after the US, sent items totalling EUR 124 billion to the bloc, or 17.5% of its overall exports.

Steel, aluminium, cement, and six other high-emission industries will be subject to full carbon levies beginning in 2026 under the CBAM, which is currently in its transition period.

India objected to carbon border tariffs 29 times at the World Trade Organisation between 2020 and 2024, second only to China and Russia. According to New Delhi, the CBAM goes against the idea of “common but differentiated responsibilities”, which gives developing countries more leeway in their response to climate change.

According to experts CEEW spoke with, India should look for revenue-sharing plans and staggered implementation schedules under the EU-India Free Trade Agreement that is presently being discussed. “A portion of CBAM revenues must be recycled back to affected countries if the EU is serious about fairness,” Singh stated.