Posted on 09 Sep 2024
Morning Brief: India's steel industry is likely to be the hardest hit as a result of the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM) which will come into full effect from January 2026.
In fact, according to the World Bank, India is placed right at the top after Zimbabwe, Ukraine, Georgia and Mozambique in the CBAM Exposure Index due its high volume of steel exports to the EU and high GHG emissions intensity of steelmaking.
The Index, designed by World Bank, measures the relative CBAM exposure of different countries.
The EU CBAM, designed to restrict production relocation and leakage of carbon emissions to non-EU countries with far less strict and/or non-existent carbon regulatory frameworks, is expected to have an adverse impact on global trade.
The Asian Development Bank (ADB) estimates a cumulative reduction of 1.1% in Asia's total exports to the EU. However, the impact of the proposed regulation will not be the same for all countries.
A study conducted by the Centre for Science and Environment shows that at a rate of Euro 100 (or $106) per tonne of carbon dioxide equivalent (CO2e), the CBAM would impose a tax burden of roughly 25% on average, over and above the value of CBAM-covered goods exported to the EU. Taking 2022-23 as a sample year, CSE estimates that the tax burden would be equivalent to 0.05% of India's GDP.
Exports & steelmaking CO2 intensity
EUROFER data shows that the EU's imports of finished steel products in 2023 stood at over 25 million tonnes (mnt). Imports of flat steel products were roughly 70% of total imports at over 20 mnt.
The top steel exporters to the EU in 2023 were South Korea with around 3.2 mnt, while India came second with export shipments of over 3 mnt.
India's steelmaking emissions intensity, as per government data, is around 2.55 tCO2/tcs (tonne of crude steel), which is much higher compared with South Korea (1.7 tCO2/tcs), Taiwan (1.4 tCO2/tcs), Turkiye (around 1 tCO2/tcs) and even China (2.1 tCO2/tcs).
It is apparent, therefore, that Indian steel producers and exporters to the EU, mostly the leading integrated mills, are at a competitive disadvantage compared to other key steel exporting nations against the backdrop of CBAM.
Considering the fact that the EU is a high-realization export market for Indian steel mills, it is not difficult to understand that the CBAM exposure of the Indian steel industry is likely to be the highest, financially, as and when the regulation comes into full effect in January 2026 with the total phase out of free allowances in the EU-ETS.
Carbon price-how effective will it be?
The EU CBAM allows for a reduction in border carbon tariff upon payment of a carbon price in the country of origin. A new domestic compliance carbon market is under development in India-the Carbon Credit Trading Scheme (CCTS) spearheaded by the Bureau of Energy Efficiency. However, it is unclear when the market will be ready to offer an equivalent carbon price to that of the EU to counter the CBAM exposure.
Carbon prices in developing economies like India, it is believed, will be structurally weaker compared to developed economies like the EU. The experience related to carbon taxes and emissions trading schemes even in the advanced economies thus far offer no hope in this regard.
Therefore, an Indian carbon tax or price at this juncture is unlikely to mitigate the impact of CBAM at least in the short-to mid-term.
How will mills counter CBAM impact?
As per sources, Indian steel mills are looking to diversify exports. Some studies have suggested that CBAM offers an opportunity to mills to achieve higher revenues through export diversification. However, export volumes to different geographies are low compared with the EU. In addition, realizations are not as attractive as the EU.
Some sources informed that CBAM may just turn out to be the necessary push mills need to kick-start or bolster decarbonisation projects. In the mid-term and as an interim step, allocating low-emission production processes for goods destined for the EU is a distinct possibility.
In view of the potential impact on MSMEs, certain regulatory interventions such as levying a tariff on embedded CO2 emissions of steel products at the Indian border may also be considered to mitigate the adverse impact of CBAM.
Source:BigMint
