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Reporting period of EU’s carbon tax kicks-in

October 2, 2023 02:15 IST

From Sunday, the Indian exporters of steel and aluminium to the European Union will have to keep a record of carbon emissions at the production stage as the reporting phase of carbon tax kicks-in. However, most exporters are unprepared for the task, a report by a trade policy think tank said.

“Only a few have undergone emission audits for their facilities. Many are hoping for a last-minute deal between the government and the EU that allows them to continue business as usual,” co-founder of Global Trade Research Initiative Ajay Srivastava said.

The issue of unpreparedness and complications in the carbon reporting process has been brought to the attention of the government by exporters in their meetings with the officials. Many have requested the government to intervene to get exemptions from the EU at least for smaller and medium production units.

Small firms often purchase steel or aluminium from larger firms and use them to create export products. These small firms will require emission data from the large firms. However, it appears that many large Indian firms are reluctant to share this data, which could lead the EU to calculate taxes based on default or maximum values.

Reporting data of seven products — cement, iron and steel, aluminium, fertilisers, electricity and hydrogen — is compulsory for exports to the EU starting October 1. Out of the seven products, India has an interest only in the export of steel and aluminium.

Emission data from October to December of a producer has to be submitted to the EU-based importer called declarant by January 31, 2024. Non-reporting or mis-reporting of data will invite penalties.

CBAM will enter the taxation phase from the reporting phase by January 2026.

Once fully implemented, Indian firms exporting steel from blast furnaces may face taxes of around 40% of the product’s value, while steel from electric arc furnaces may have a 20% tax due to lower emissions. Many aluminium firms will be severely impacted, potentially facing CBAM taxes of 95-100% on the product’s value due to high carbon dioxide emissions, according to GTRI.

CBAM will impact India’s $8.2 billion (in CY 2022) exports of iron ore pellets, iron, steel, and aluminium products to the EU by over a thousand large, medium and small firms. India’s 27% export of these products goes to the EU.

While industry looks to the government for a way out, there are limited options to cushion the blow. The government is working on indigenous carbon trading system and is planning to ask the EU to calculate the tax on the basis of the price of carbon on the local exchange. Price of per tonne of carbon on the EU’s Emission Trading System is $100 per tonne and in China’s carbon exchange it is $8 a tonne. According to GRTI the price of carbon reflects the level of development and therefore in India it will come to $5 billion. There is an air of uncertainty that the EU will accept the proposal.

There is a talk of India collecting carbon tax rather than the EU, but it will be a tough task to make the 27-bloc Union agree to it. India also has the option to designate existing local taxes as carbon taxes, which could offset the tax liability in the EU. If done properly it can reduce tax liability.

If all else fails then India can retaliate with taxes on imports from the EU. Designing something similar to what it did with the US when it imposed additional duties on steel and aluminium under a defence law. It would require identifying products and imposing duties on them, which equals what Indian exporters would pay in the EU.

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).

Calibrated retaliatory mechanism, if adopted, could be used to counteract the impact of these schemes on Indian exports, GTRI’s Srivastava said.

[The Financial Express]

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