GTRI: local carbon tax won’t ease EU carbon border adjustment impact on Indian exports

The European Union’s (EU’s) suggestion that India impose a local carbon tax to avoid the EU’s Carbon Border Adjustment Mechanism (CBAM) will not significantly benefit Indian exporters, according to the Global Trade Research Initiative (GTRI). Even with a local tax, Indian firms would still owe the EU USD 51.3 per tonne of CO2 under CBAM, starting January 2026. 

While the global average carbon price is around USD 6 per tonne of CO2, India’s potential carbon price is expected to be under USD 10 per tonne. The higher production costs could make Indian industries less competitive and lead to job losses.

To counteract CBAM, GTRI suggests using a calibrated retaliation mechanism (CRM), similar to India’s 2018 response to US tariffs on steel and aluminium. The CRM allows rapid adjustments to tariffs in response to actions by other countries.

India can also reclassify existing import and excise duties as carbon taxes, allowing companies to offset their domestic carbon tax against the EU’s CBAM, reducing overall tax liability. This should follow internationally accepted norms for EU acceptance.

GTRI also highlighted that other EU regulations, such as the Deforestation Regulation and Supply Chain Due Diligence Act, could impact Indian exports. The CRM could help mitigate these effects as well.