India is unlikely to get a derogation from the EU’s carbon border adjustment mechanism (CBAM). Instead, what the EU may be willing to offer are flexibilities and alternative mechanisms such as equivalent measures, capacity building and funding as both sides agree to address the “uncertainty” element in the on-going bilateral free trade agreement talks.
“In the on-going India-EU FTA talks, while the bloc is looking for certainty from India in the area of tariffs, India has argued that EU regulations which are coming in the future and creating an uncertain environment have to be addressed. The EU acknowledged that a solution has to be found,” a source tracking the India-EU FTA negotiations told businessline.
The EU regulations that would act as barriers most significantly include the CBAM, where carbon taxes are to be imposed on seven identified imports including steel, aluminium and cement, from 2026, and also the Deforestation Regulation, which has now been deferred.
- Also read: India-EU FTA: Commerce Department asks industry to point out required flexibility in rules of origin
Next round of talks
Commerce Secretary Sunil Barthwal visited Brussels last week for a stock-taking meeting on the India-EU FTA with the EC’s DG Trade. The tenth round of negotiations is tentatively scheduled in the first quarter of calendar year 2025.
“The stock taking meeting was constructive. There was an understanding on both sides that flexibility needs to be shown. The EU’s interest is reduction of tariffs while India’s is reduction of trade barriers. The point is that if the EU provides market access and then the regulations come up acting as barriers, then the deal loses its commercial significance for India. Brussels seems to understand the problem,” the source said.
- Also read: EU implements laws to protect its rice industry
‘Fair’ price
While the EU is not quite ready to give India an exemption from CBAM, which it says is a “fair” price on carbon emitted during production of the identified items exported to the bloc and is applied across countries, it is ready to examine alternatives to help the country deal with it, the source pointed out.
“Alternative means such as mechanisms for mutual recognition in terms of equivalent measures that can be implemented here, capacity building and funding are now all up for discussion. There is a recognition that this problem is critical and needs a solution. India is not being told that there is no solution, and you fall in line,” the source said.
Per estimates made by some analysts, about 10 per cent of India’s exports to the EU are at present of commodities covered under CBAM and imposition of carbon taxes (which could be 20-35 per cent) may cost the country up to 0.05 per cent of GDP.
India has insisted that the principle of ‘common but differentiated responsibilities’ applicable in the UN climate talks, where developed economies need to take more responsibility, should apply throughout in the India-EU FTA negotiations, the source said.
The EU is India’s largest trading partner, accounting for €124 billion worth of trade in goods in 2023. Both sides expect a significant boost in their exports once the FTA is implemented, with the EU pushing India to offer it greater tariff exemptions than in any of its past trade pacts.