India Should Adopt Calibrated Retaliation Mechanism In Reply To EU’s Carbon Tax, Says GTRI

The report recommended that the government should look into renaming certain existing duties as carbon taxes to decrease the final tax paid in the European Union.

The GTRI stated that the EU's rationale for CBAM, aimed at preventing carbon leakage and reducing emissions, is flawed because taxing global imports may not effectively tackle the climate change issue.

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India should contemplate levying custom duties on certain EU goods in retaliation for the carbon tax being imposed by the European Union on imports of certain sectors, a report by GTRI said on Wednesday. The report by the Global Trade Research Initiative (GTRI) suggested that India should adopt these duties in response to the EU’s carbon taxation on specific imports. 

The carbon tax, CBAM (Carbon Border Adjustment Mechanism), will come into effect from January 2026. However, compliance with the tax starts next month in October for carbon-intensive sectors like steel, aluminium, fertiliser, and cement, as businesses will be required to provide comprehensive production data to the EU authorities from next month.

The report noted that the retaliation measures provide several advantages including rapid implementation for India. GTRI’s co-founder, Ajay Srivastava, said, “India can easily adjust product lists and tariff levels to mirror the actions of the EU or any other partner country precisely. Use a calibrated retaliation mechanism (CRM) to retaliate in equal measure. We have done it before,” as quoted by PTI.

Notably, the US imposed tariffs on India’s steel and aluminium products earlier in March 2018. India responded to these tariffs by increasing it’s own duties on 29 specific US products. This decision involved detailed and exact calculations, to ensure that India collected the same revenue from US products as the US did from Indian steel and aluminum. 

The report further stated that it is important to understand that CBAM is not the only scheme adopted by the EU that will severely impact Indian exports. Notably, the EU also introduced the Deforestation Regulation, Foreign Subsidies Regulation (FSR), and the Supply Chain Due Diligence Act (SCDDA).

If implemented, the CRM could be used to resist the effect of these schemes on Indian exports, the report stated. The think tank in it’s report stressed that the implementation of the carbon tax is projected to disrupt global supply chains, escalate trade costs, make free trade agreements meaningless, and impose a significant compliance burden on businesses. 

The report recommended that the government should look into renaming certain existing duties as carbon taxes to decrease the final tax paid in the European Union. It added that India levies import and excise duties on petroleum products and natural gas, in addition to GST on products like coal, steel, and aluminium. The report called for India to formally name these as carbon taxes, specifically for steel and aluminium. This method will help offset the carbon tax paid by a company in India when it is calculated in the EU and will ultimately help reduce the tax liability for the company. 

However, the report stated that it is essential to implement the design keeping in mind the international norms to ensure it is accepted by the EU.  It noted that if India and the EU establish a Free Trade Agreement (FTA), EU products will enter India without duties, while Indian exports to the EU will still face CBAM taxes ranging from 20-35 percent.

The GTRI stated that the EU's rationale for CBAM, aimed at preventing carbon leakage and reducing emissions, is flawed because taxing global imports may not effectively tackle the climate change issue.

The EU's CBAM has three main goals: protect local industries, generate revenue, and support a trillion-dollar subsidy initiative, even at the cost of global trade disruption, the report titled, 'The Chameleon's deception: How the EU is using the climate argument to subsidise local firms and make imports expensive', said. Carbon leakage, the primary reason behind the tax, could have been addressed by taxing imports from EU firms that moved production to other countries. Instead, CBAM taxes all global imports. However, it won't reduce global emissions as it simply taxes high-emission imports. 

The UNCTAD Trade and Development Report 2021 noted that CBAM is projected to reduce carbon emissions globally by not more than 0.1 per cent. Srivastava noted, “The EU needs this money to continue to provide substantial subsidies to its firms and farmers. For instance, the European Green Deal aims to raise 1 trillion euros in the next ten years, with 503 billion euros coming from the EU budget. The new regulations can provide a full share of the EU budget.”