India's Carbon Tax Strategy to Counter EU's CBAM Proposal

The EU's suggestion for India to impose a local carbon tax to avoid its carbon tax may not help domestic players much, as they would still face export duties to the EU. Setting higher carbon prices could negatively impact Indian industries. The GTRI suggests using a Calibrated Retaliation Mechanism to address the issue.

The EU's suggestion that India could circumvent its carbon tax by imposing a similar levy locally will not offer much relief to domestic players, as they would still be liable for duties on their exports to the European Union, according to think tank Global Trade Research Initiative (GTRI) on Wednesday.

The primary issue is that carbon prices are typically based on a country's economic context. Simply adding a local tax won't significantly reduce the overall tax burden, GTRI explained.

While the European Union can afford high carbon prices, doing so may not be sustainable for a developing country like India. Currently, the global average carbon price is roughly USD 6 per tonne of CO2. If India established an Emissions Trading System (ETS) or set a carbon price, it would likely be less than USD 10 per tonne. Despite such a system, Indian firms would still need to cover the difference, amounting to USD 51.3 per tonne of CO2, under the Carbon Border Adjustment Mechanism (CBAM).