India should use retaliation mechanism to deal with EU's carbon tax: GTRI

India should positively consider imposing retaliatory customs duties in a calibrated manner on certain EU goods to deal with the European Union's decision to impose a carbon tax on imports of certain sectors, a report by think tank GTRI said on Wednesday.

The European Union (EU) has decided to impose a carbon border adjustment mechanism (CBAM) from January 2026. But, its compliance starts from October this year, as businesses exporting carbon-intensive goods like steel, aluminium, cement and fertiliser will have to share detailed production data from next month with the EU authorities.

The retaliation measures, it said, offer several advantages, including rapid implementation.

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," GTRI co-founder Ajay Srivastava said.

In March 2018, when the US imposed import tariffs on India's steel and aluminium, India responded by increasing tariffs on 29 specific US products.

This retaliation involved precise calculations, ensuring that India collected equivalent revenue from US products as the US did from Indian steel and aluminium.

"Moreover, it is essential to recognise that CBAM is just one of several schemes that could negatively affect Indian exports. The EU has also introduced the Deforestation Regulation, Foreign Subsidies Regulation (FSR), and Supply Chain Due Diligence Act (SCDDA). CRM, if adopted, could be used to counteract the impact of these schemes on Indian exports," the report said.

The imposition of carbon tax is expected to disrupt global supply chains, increase trade costs, render free trade agreements meaningless, and impose a significant compliance burden on businesses, it added.

The report also recommended the government to rename specific existing levies as carbon taxes to reduce the final tax paid in the EU.

"India imposes import and excise duties on petroleum products and natural gas, along with GST on items like coal, steel, and aluminium. India can officially designate these as carbon taxes, specifically for steel and aluminium," it said.

Under this approach, the carbon tax paid by a company in India can be offset when calculating the tax due in the EU, and this adjustment would ultimately reduce the total tax liability for the firm.

"It is crucial to design this scheme using internationally accepted norms to ensure acceptance by the EU," the report said, adding if India and the EU establish an FTA, EU goods will enter India duty-free while Indian exports to the EU will still be subject to CBAM taxes ranging from 20-35 per cent.

Global Trade Research Initiative (GTRI) said the EU's argument that CBAM is meant to prevent carbon leakage and reduce emissions is flawed as taxing global imports may not effectively address the climate change problem.

"The EU's introduction of CBAM is seen as serving three primary purposes: protecting local industries, generating substantial revenue, and enabling a trillion-dollar subsidy initiative, even if it disrupts global trade," 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 is the phenomenon of companies moving production to countries with weaker environmental regulations to avoid paying carbon prices in the EU.

This objective, it said, could have been achieved by merely taxing imports from the EU firms, which have shifted production to other countries. However, the EU chose to tax all world imports through CBAM.

"CBAM will not reduce global emissions, as it does not stop importing high-emission goods but merely taxes them. According to the UNCTAD Trade and Development Report 2021, CBAM is estimated to reduce global carbon emissions by not more than 0.1 per cent," as per the report.

Srivastava said 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, he added.