India seeks exemptions for MSMEs from EU's carbon tax: Sources

India is pressing the European Union for a mutual recognition agreement for its carbon certificates and exempt MSMEs in certain sectors to insulate the domestic industry from the burden of the EU's carbon tax, which would kick in from October this year, a government official said.

The EU is introducing the Carbon Border Adjustment Mechanism (CBAM) from October 1 this year. CBAM would translate into a 20-35 per cent tax on select imports into the EU starting January 1, 2026. From October, domestic companies from seven carbon-intensive sectors—including steel, cement, fertiliser, aluminium, and hydrocarbon products—would have to seek compliance certificates from the EU authorities to comply with the CBAM norms.

Under the mutual recognition agreement, India has asked the EU to give recognition to its Carbon Credit Trading Scheme (CCTS), which is under preparation by the power ministry. Acceptability of CCTS by the EU would help Indian companies to reduce additional burden in the form of carbon taxes on exports of these products.

"India is dealing with the issue both at bilateral and multilateral levels. Bilaterally, we are asking the EU to have a mutual recognition agreement with us and make a carve-out for MSMEs and, if possible, for the country, as has been done in the case of some other countries," the official said.

All these issues came up for discussion during a meeting of top officials of different ministries, including finance, commerce, power, mines, and steel, and industry leaders from the steel sector on Tuesday, they said The meeting was chaired by commerce secretary Sunil Barthwal.

In the meeting, the industry was suggested to be ready for this carbon tax and take steps to deal with it. According to a report from the economic think tank GTRI, from October 1, India's iron, steel, and aluminium exports to European Union countries will face extra scrutiny under the mechanism. From January 1, 2026, the EU will start collecting carbon tax on each consignment of steel, aluminium, cement, fertiliser, hydrogen, and electricity.

In 2022, India's 27 per cent exports of iron, steel, and aluminium products worth USD 8.2 billion went to the EU. At the multilateral level, India and certain other countries have flagged their concerns to the World Trade Organisation (WTO) on CBAM. India submitted a paper on the subject to the WTO in February.

"In today's meeting, the government told the industry about what is happening on the issue at the domestic level. The industry also has certain tasks, and that includes having an MRA with the EU," the official said.
India is likely to raise these issues in the forthcoming meeting of the Trade and Technology Council (TTC) in Brussels on May 15–16. Commerce and Industry Minister Piyush Goyal, External Affairs Minister S Jaishankar, and Minister for Railways, Communications, Electronics, and Information Technology Ashwini Vaishnaw would participate in the TTC.

Though the 27-member European Union (EU) is claiming CBAM to be a part of their climate action efforts, countries like India are of the view that it is a trade-related measure.

Domestic companies from different sectors, such as steel, are taking steps like setting up a captive solar power plant and following climate-friendly manufacturing processes to reduce carbon emissions. The government is also taking steps like afforestation and promotion of the use of renewable energy. "We are engaging both at bilateral and multi-lateral level with the EU so that our industry is not hurt," another official said.

India and the European Union in February announced the setting up of a new Trade and Technology Council (TTC) that is expected to facilitate the exchange of critical technologies relating to an array of domains, including artificial intelligence, quantum computing, semiconductors, and cybersecurity.

The TTC pact with India is the European Union's second such technology partnership after the first one with the US, that was firmed up in June 2021.