India seeks exemption for MSMEs from EU's carbon tax, presses for mutual recognition

Carbon tax

India is seeking an exemption for its Micro, Small and Medium Enterprises (MSMEs) from the European Union's carbon tax, which will be introduced on October 1, 2023.

During a meeting of all stakeholders, including top officials from various line ministries such as finance, commerce, and power, as well as industry leaders from the private sector, the decision was made to assess the level of awareness and find a strategy to move forward.

The ministry will also push the European Union for a mutual recognition agreement for its carbon certificates.

The official stated that the issue is being taken up bilaterally with the EU and multilaterally at the World Trade Organisation, as well as other forums. Bilaterally, India is asking the EU to have a mutual recognition agreement and exempt MSMEs in the country.

Furthermore, work is being done to develop India's own guidelines for the Carbon Credit Trading Scheme (CCTS) by the power ministry. The implementation of India's own carbon tax would assist Indian exporters in reducing the burden of carbon taxes.

The European Union is introducing the Carbon Border Adjustment Mechanism (CBAM) from October 1, 2023. The CBAM would result in a 20-35 per cent tax on selected imports into the EU from January 1, 2026. Domestic companies from seven carbon-intensive sectors, including steel, cement, fertiliser, aluminium, and hydrocarbon products, will have to seek compliance certificates from EU authorities to comply with the CBAM norms.

According to a report from the economic think tank GTRI, developing countries such as India will have to pay the highest taxes under the Carbon Border Tax (CBT).

The think tank also warns that the CBT will result in sharper trade diversion and more trade among developed countries. GTRI founder Ajay Srivastava stated that even if a product from India is less expensive than an American product, the tax plus the product price would make Indian products more expensive.

This would result in EU firms sourcing more from developed countries, causing trade to divert to more expensive suppliers. In 2022, India's exports of iron, steel, and aluminium products, accounting for 27% of its total exports, were valued at USD 8.2 billion to the EU.