To understand why the steel and iron industry is exposed to risk under the new regime, it is important to take note of CBAM\u2019s treatment of relative carbon intensity. Countries with cleaner production processes stand to gain competitive advantage. Under EU\u2019s Emissions Trading System, companies are offered free allowances to emit carbon and this limit is reduced every year. CBAM requires the importer of goods to purchase certificates to cover the emissions embodied in the imported goods. The producer\u2019s actual emissions determine the amount of certificates required.<\/p>\n\n\n\n
This is a critical issue for the Indian steel industry because of its high emission manufacturing processes. While globally 1.39 tonne of carbon is emitted for the production of 1 tonne crude steel (denoted as T\/tcs) , the Indian average is almost double that, at 2.67 T\/tcs. This leaves Indian steel at a disadvantage since major global exporters such as Russia, South Korea, and USA, manufacture steel using low-carbon processes, making the product cheaper for businesses to import into the bloc.<\/p>\n\n\n\n
The emission heavy steel production makes this a very hard-to-abate sector, alongside other emissions intensive production sectors – cement, aluminium, and fertilisers. Assuming that the price of one carbon certificate is $44, the table below reflects possible carbon adjustments based on countries and products. The numbers in the table can be read as possible additional tariffs for companies if they choose to import the products from India, proportionate to the emissions embedded into these products.<\/p>\n\n\n
![\"Potential](\"https:\/\/neufin.co\/blog\/wp-content\/uploads\/2024\/01\/CBAM-numbers.png\")
<\/figure><\/div>\n\n\nThe imposition of CBAM will result in increased financial and administrative burden on Indian goods. Thus, a sizeable portion of India\u2019s exports to the EU will run the risk. In fact, according to the UNCTAD, India risks losing $1-1.7 billion in exports of goods like steel and aluminium due to their energy and emission intensive manufacturing processes. For reference, India\u2019s exports of steel and iron to EU were valued at approximately $5 billion in 2021. This is consistent with general predictions that a USD 30 tax per metric tonne of CO2 emissions may cut overseas producers\u2019 earnings by around 20%. Given that EU steel producers will also face the phaseout of free carbon permits just as the new regime is implemented, the sector\u2019s domestic carbon costs will start rising sharply in 2026. <\/p>\n\n\n\n
CBAM seeks to utilise market-based measures to drive innovation and even force companies to abate the climate emergency. In 2026, CBAM will expand its scope to all products, giving industries and countries time to work on internal net zero policies, such that universal implementation does not send shockwaves through economies. If implemented equitably, the mechanism may serve as a nudge for countries and businesses to disrupt business as usual. While the principle of CBDR must apply to any ramifications with impact that echoes globally, it is critical to highlight that India positions itself as a political and economic power, with ambitious net zero goals, and businesses and governments must contribute to those goals.<\/p>\n\n\n\n
The next step for businesses would be to assess the impact of CBAM on their products and make amendments to production processes and supply chains, in order to minimise risk. Once the transitional period is over in 2026, more industries will be brought under the scope of the regime. Industries may treat this period as an opportunity to reduce the carbon emissions and stay competitive in the international arena. It\u2019s not all doom and gloom for Indian exporters though – at least not if invest in R&D to decarbonize production processes. Keep following us for the next article on what Indian businesses need to do to minimize the impact of CBAM \u2013 as the EU gradually increasing scope of industry coverage.<\/p>\n\n\n\n
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References: <\/p>\n\n\n\n
A European Union Carbon Border Adjustment Mechanism: Implications for developing countries (unctad.org)<\/a><\/p>\n\n\n\n The-EU-Carbon-Border-Adjustment-Mechanism-Implications-for-India.pdf (euindiachambers.com)<\/a><\/p>\n\n\n\n *CBAM! – Assessing potential costs of the EU carbon border adjustment mechanism for emerging economies (econstor.eu)<\/a><\/p>\n\n\n\n pbrief_cbam_sl_21.4.21.pdf (cer.eu)<\/a><\/p>\n\n\n\n