India’s Carbon Border Adjustment Mechanism (CBAM) Challenge: Strategic Response and Policy Options

Executive Summary

This study explores the complexities of the European Union’s Carbon Border Adjustment Mechanism (CBAM) and its implications for India, particularly its steel and aluminium export sectors. It explores various policy options, including a domestic emissions trading system (ETS) or a carbon tax, to facilitate a smoother transition for Indian industries under the new CBAM regime. The findings highlight the need for a carbon pricing mechanism in India to meet sustainability goals and international commitments. Given uncertainties, repurposing existing energy and environmental taxes on exported goods (excluding those subsumed within GST)—especially taxes used to prepare data for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme—emerges as a potentially reliable interim approach. The study recommends a multi-faceted approach: implementing a data-driven carbon tax system aligned with CBAM, followed by progress on the CCTS; promoting scrap availability and recycling; extensively increasing the use of renewable energy; exploring alternative fuels; and fostering research and development (R&D) for clean technologies.

Research Background

The backdrop of the research is the growing international discourse surrounding climate change mitigation and the responsibilities of various nations in curbing greenhouse gas (GHG) emissions, particularly carbon dioxide (CO2). The study highlights the contrasting views on emission responsibility —developed nations often point to current emission levels, while developing countries emphasise the historical contributions of industrialised nations to the existing atmospheric GHG concentrations.

This tension is central to the CBAM debate. The EU’s CBAM, part of its “Fit for 55” strategy, aims to reduce carbon leakage—where companies shift production to countries with less stringent environmental regulations to avoid carbon costs—and encourage global decarbonisation. However, CBAM has met with mixed reactions. While proponents see it as a crucial step towards global climate action, critics, particularly in developing countries like India, raise concerns about its potential to act as a trade barrier, harming their competitiveness and potentially hindering economic growth.

Research Questions

The study sets out to address several key questions:

1. How can India navigate the challenges posed by CBAM, and what policy options are available to the government and the affected industries?
2. What are the specific challenges and opportunities for Indian firms, including the impact on domestic production, trade, carbon emissions, and pricing?
3. Can India implement its own ETS, similar to the EU’s, or should it consider alternative policy measures like a domestic carbon tax?
4. What strategic initiatives are Indian companies undertaking to adapt to CBAM, and how can the government support them?

Methodology

The study adopts a mixed-methods approach, incorporating both qualitative and quantitative research methods. It draws upon secondary data on trade and carbon emissions from government databases and international datasets, as well as a review of existing research on CBAM, international trade, and CBAM Exposure Indices. It carries two case studies, one each for steel and aluminium producing and exporting firms. The study conducts surveys with various stakeholders in India, including policymakers, industry associations representing steel and aluminium producers, trade lawyers, specialists in green energy and green hydrogen, green startups, auditors, consultants, and representatives from Micro, Small and Medium Enterprises (MSMEs). This primary research offers valuable insights into the practical challenges and opportunities related to CBAM implementation.

Furthermore, in-depth case studies of two major Indian firms—JSW Steel (representing the steel sector) and Hindalco (representing aluminium)—provide a more granular understanding of how individual companies are responding to CBAM and adapting their sustainability strategies. Data for the case studies were drawn from company annual reports, sustainability commitments, and futureoriented plans, enriched by insights gathered through policy discussions.

Key Findings

1. Significant Export Exposure and Vulnerability: India’s steel and aluminium industries face significant exposure to CBAM due to their reliance on carbon-intensive production processes and their considerable exports to the EU. While larger firms like JSW Steel and Hindalco have initiated sustainability measures, MSMEs face significant challenges in adapting to the new regulations due to limited resources and awareness.
2. Carbon Pricing as a Necessary Step: The study argues that a carbon pricing mechanism—either an ETS or a carbon tax—is essential for India to meet its sustainability goals, address climate change, and fulfil its international commitments. Given the uncertainties surrounding the recommended Carbon Credit Trading Scheme (CCTS), the study suggests repurposing existing energy and environmental taxes on exported goods (excluding those subsumed within GST)—especially taxes used to prepare data for the RoDTEP scheme—emerge as a potentially reliable interim approach.
3. Strategic Responses of Indian Firms: Both JSW Steel and Hindalco have proactively embraced sustainability initiatives, including investments in renewable energy, improving energy efficiency, and exploring alternative fuels. However, challenges remain in fully transitioning to cleaner production processes due to technological and economic constraints.
4. Need for Policy Support: The study emphasises the need for policy support from the government to help Indian industries adapt to CBAM. This includes:

• Facilitating the development and adoption of renewable energy (RE) sources by strengthening regulations for mandatory RE obligations.
• Increasing the availability of scrap; a dedicated scrap recycling facility can be considered for a few countries, such as the EU, UK, Australia, the US, etc.
• Exploring and scaling alternative fuels like green hydrogen and biochar by developing an ecosystem with the help of technical institutions such as IITs.
• Providing financial and technical support to MSMEs.
• Promoting technology-sharing agreements to accelerate the development and adoption of clean technologies.

Conclusions and Policy Recommendations

The study concludes that CBAM presents both challenges and opportunities for India. While the short-term impacts may be adverse for some sectors, CBAM can act as a catalyst for India to accelerate its transition to a greener economy and enhance its competitiveness in the global market. The report emphasises a multi-faceted approach for India, including aligning a data-driven carbon tax system with CBAM, followed by focussed progress on the CCTS. Other crucial recommendations include increased scrap availability, aggressive recycling initiatives, extensive use of renewable energy, exploration of alternative fuels like green hydrogen and biochar, and fostering research and development (R&D) for clean technologies. Critically, the study emphasises supporting MSMEs and fostering international technology-sharing agreements. Rather than replicating the historical patterns of developed nations, it advocates a different approach that leverages technology to minimise the environmental impact of industrialisation from the outset.

Significance and Implications

The study is significant for several reasons:

1. Timely and Relevant: It addresses a critical and timely issue facing Indian industries, providing valuable insights for policymakers, businesses, and other stakeholders.
2. Comprehensive Approach: It adopts a comprehensive mixed-methods approach, combining secondary data analysis with primary research and case studies.
3. Policy Relevance: The study offers concrete policy recommendations for the government to consider in developing its response to CBAM.
4. Global Implications: The findings of the study have implications beyond India, contributing to the broader international discussion on climate change mitigation and trade policy.

The study concludes with a positive outlook and encourages a proactive approach. It highlights that technology is the key to tackling climate change in developing countries and emphasises the potential for developing domestic clean technologies, followed by trading them. This approach can promote sustainable growth, help India achieve its climate goals, and strengthen its position in the global economy.