India and the EU are working to resolve a looming hurdle in their trade relationship, the EU’s Carbon Border Adjustment Mechanism (CBAM), with the two sides discussing it during a Minister-level meeting in Brussels this week. The EU is India’s second-largest trading partner as well as its second-largest export market.

The EU describes the CBAM as a ‘landmark tool’ that places a “fair price” on carbon emitted during the production of goods that are entering the EU and a mechanism to “encourage cleaner industrial production” outside the EU.

The CBAM regulations came into effect on May 16 and will begin their transitional phase of implementation on October 1.

An Indian delegation led by Commerce Minister Piyush Goyal and External Affairs Minister S. Jaishankar discussed the tax during a visit to Brussels for bilateral meetings and the first edition of the EU-India Trade and Technology Council (TTC).

The TTC said in a statement that the two parties would “intensify their engagement to address the issues that emerge in implementation” of the CBAM.

The two sides “remain engaged” and are discussing the issue, Mr. Goyal said following the meeting on Tuesday.

“And we have a long time ahead of us within which we’ll be working together to find the right solutions to this,” he said, during a press conference of the ministers and their EU counterparts — EU Competition Commissioner Margrethe Vestager and Trade Commissioner Valdis Dombrovskis.

“I am sure the intention is not to create a barrier to trade,” Mr. Goyal said, emphasising that the measure was about sustainability.

For their part, the EU officials asserted that the mechanism did not run afoul of WTO rules.

“We were of course very careful to ensure WTO compatibility of the initiative,” Mr. Dombrovskis said. “And a key word for this is ‘non-discrimination’. So we apply the same price of carbon to imported goods that we are going to apply also on our domestic producers,” the EU official added.

“There are about six-seven commodities on which the EU has proposed carbon taxes, of which the two sectors where India is likely to feel some impact is steel and aluminium,” a senior Commerce Ministry official said in New Delhi. “In the rest of the areas, we don’t export much to Europe,” he added.

The ministry is still calculating the likely monetary impact as the EU has prescribed different mechanisms of imposing carbon tax. “For example, in steel manufacturing through electric arc furnace and blast furnace, the carbon border tax will be different. So an assessment of how much of steel is going out of which furnace – that segregation has to be done. That will take some time. It will definitely impact to some degree,” the official said.

While the move will likely impact less than 2% of India’s exports, the government is examining the extent to which the overall carbon tax and the differential tax treatment proposed for instance, for steel using different furnace technologies, is compatible with WTO (World Trade Organisation) norms, said another official. “The verification process could be very complex and tedious and mutual recognition agreements will be vital,” the second official noted.

The first meeting of the TTC included working groups covering Strategic Technologies, Digital Governance and Digital Connectivity; Green and Clean Energy Technologies; and Trade, Investment and Resilient Value Chains.

In a joint statement, the two sides listed the progress made and said that an MoU on semiconductors would be concluded by September 2023. Mr. Goyal said the TTC would supplement trade deal talks between India and the EU and that it would help make the relationship “the defining partnership of the 21^st Century”. The Working Group on trade discussed resilient value chains, market access issues, screening of FDI and multilateral trade issues.

(With additional reporting by Vikas Dhoot in New Delhi)