India to flag concerns over EU's carbon tax, deforestation regulation in WTO meet

New Delhi: Developing countries like India will flag serious concerns over the impact of European Union's (EU) regulations on climate change and trade such as carbon tax, on their domestic industry, during WTO ministerial meeting next year, an official said.

The four-day 13th ministerial conference (MC) of the World Trade Organization (WTO) is scheduled for February 26 next year in Abu Dhabi. MC is the highest decision making body of WTO.

“These issues will come up in the WTO in a big way. Countries like India will oppose these measures in the WTO,” the official said.

In the first seven months of this year, the EU has introduced four regulations on climate change and trade. These are carbon border adjustment mechanism (CBAM); deforestation regulation; including shipping in the EU's emissions trade system; and Foreign subsidies regulation. EU member Germany too has announced a supply chain due diligence act (SCDDA).

“This will become a major issue in the MC13. Many member countries  have already submitted papers against some of these regulations in the WTO. It looks like discussions will happen on these regulations and a general view will also converge,” the government official, who did not wish to be named, said.

Geneva-based 164 member multi-lateral body WTO deals with global exports and import-related norms. Besides, it adjudicates trade disputes between the member countries.

According to think tank Global Trade Research Initiative (GTRI), the EU will collect billions annually once these provisions come into operation completely. They need these funds to provide subsidies to their companies and farmers.

The carbon border adjustment mechanism (CBAM) will have an adverse impact on India's exports of metals such as iron, steel and aluminium products to the EU. It will come into force from October 1 this year. CBAM will translate into a 20-35 per cent tax on select imports into the EU starting January 1, 2026.

From January 1, 2026, the EU will start collecting the carbon tax on each consignment of steel, aluminium, cement, fertilizer, hydrogen and electricity.

In 2022, India's 27 per cent exports of iron, steel, and aluminium products of value USD 8.2 billion went to the EU.

Further, India's exports of products like coffee, leather hides and paperboard worth USD 1.3 billion annually to the EU will get impacted due to European Union Deforestation-Free Products Regulation (EU-DR).

The regulation covers cattle, buffalo, the meat of bovine animals, preparations, oil cake, soya beans, palm oil, cocoa bean, powder, chocolate, coffee, leather hide, skin, paper, paperboard, wood, wood articles, wood pulp, boards and wood furniture.

The exporters now have to ensure that these products have been grown on land, which has not been deforested after December 31, 2020.

The new rules will apply to large firms after 18 months and small firms after 24 months. Thus, the timeline for large firms is December 2024 and for small firms is June 2025.

As the EU parliament has included shipping in its emissions trade system on April 18 this year, it will charge a carbon tax like levy from EU's inbound and outbound shipping firms from January 1, 2027.

Similarly, under the Foreign subsidies regulation, which came into force on January 12 this year, the EU can investigate cases where foreign subsidies distort competition within the region.

The German law to prohibit forced labour and protect human rights in global business supply chains will have little impact on India's trade with the European country as India already has comprehensive rules to deal with these issues, according to a report by GTRI.

Germany has banned forced labour and other labour law violations in its supply chains extending within and outside Germany. The law, SCDDA, came into effect from January 1 this year.

It applies to firms with more than 3,000 employees. These include German firms and foreign firms doing business with Germany.

India is already engaging bilaterally with the European Union on these issues.

India's exports to the EU has increased to USD 74.9 billion in 2022-23 from about USD 65 billion in 2021-22.

The EU accounts for over 16 per cent of India's total merchandise exports. Imports from the EU rose to about USD 60 billion in 2022-23 as against USD 51.4 billion in 2021-22.