According to a new study, India might reduce the economic impact of the EU’s Carbon Border Adjustment Mechanism by enacting a local carbon tax at a lower rate and keeping the money collected. Lead author Joydeep Ghosh of the Centre for Social and Economic Progress stated that “preserving domestic carbon tax revenue is essential to protecting the economy from the negative effects of the CBAM.” Carbon-intensive imports from nations with laxer climate policies will be subject to levies under the Carbon Border Adjustment Mechanism (CBAM), which goes into effect in 2026. The measure mainly targets fertiliser, cement, aluminium, iron, and steel for India.

India is particularly vulnerable to the new charge because the iron and steel industry accounts for 90% of its shipments to the EU, even though CBAM-covered exports to the EU only make up 0.2% of the country’s GDP. According to the report, the industry is already impacted by high logistical costs and competition from low-cost imports. In the absence of a domestic carbon tax, the researchers discovered that GDP might decrease by as much as 0.03 per cent as tariff revenue moves to Brussels rather than New Delhi, according to a calculable general equilibrium model customised for the Indian economy. Three scenarios were modelled in the report.

In the “PCARBON” case, India levies a domestic carbon tax on covered sectors that is equal to the EU pricing and retains the money collected. By 2030, this might provide income equivalent to roughly 1% of GDP, which could be utilised for household compensation, industrial support, and green subsidies. With income divided evenly, a combination model known as “PCARBON + CBAM” applies both a domestic tax and the EU charge, but at half the rate. This would restrict GDP losses to almost zero by 2030 and generate roughly 0.5 per cent of India’s GDP in income. In contrast, India receives minimal fiscal benefits under the “CBAM” scenario, in which the EU receives all tariff revenue. Household consumption declines more sharply in these places, especially in urban areas where carbon-intensive sectors are more prevalent. According to the paper, carbon pricing might offset drops in exports based on fossil fuels by accelerating investment in low-emission technology and renewable energy.

In all cases, exports of renewable electricity increased while exports of fossil fuel-based electricity decreased. “If the proper domestic measures are in place, the CBAM can be used as a catalyst for India’s net zero transition,” Ghosh stated. He cited the government’s proposed Carbon Credit Trading Scheme as a means of lowering exporters’ compliance expenses and making money through allowances that are put up for auction.

In order to lessen its reliance on Europe, the authors advised India to diversify its exports to non-EU countries while obtaining more equitable CBAM terms. Additionally, they called for policies that would increase energy efficiency, reduce carbon intensity, and offer specific assistance to homes and businesses that are at risk. According to the study’s findings, the CBAM’s effect on India will depend on the levels of carbon prices and the allocation of money between Brussels and New Delhi. It claimed that well-thought-out domestic policies may change the border charge from a financial hardship into a chance for green transformation.