Assessing the Impact of CBAM on EITE Industries in India

Abstract

The implementation of the Carbon Border Adjustment Mechanism (CBAM) in 2026 is expected to pose considerable challenges for nations heavily dependent on exporting energy-intensive goods and materials to the European Union (EU). This research specifically focuses on the uncertainties surrounding the potential impact of CBAM on trade-exposed sectors with high energy intensity, particularly in developing countries like India. The primary aim of this study is to assess the effects of fluctuations in energy prices and carbon taxes on the economic performance of companies operating within these trade-exposed sectors. To achieve this objective, the study analyses data from Indian manufacturing firms belonging to five key trade-exposed industries with high energy intensity within the timeframe from 2012 to 2021.The research’s key findings indicate that a 10% increase in fuel costs corresponds to a 2.41% decrease in earnings from exports, a 0.23% reduction in Return on Assets (RoA), and a 1.34% decline in post-tax profits. Additionally, our study underscores the significance of a firm’s size and age. For a 10% rise in fuel costs, medium-sized enterprises demonstrate a statistically significant 2.9% profit decrease, while large firms experience a 3.5% decline, although this latter finding is not statistically significant. In contrast, smaller firms exhibit a statistically significant profit decrease of approximately 0.75%, and newer firms witness a 2.1% profit drop along with a 0.26% RoA reduction. This suggests that larger and newer companies are more vulnerable to fuel cost fluctuations. Furthermore, when examining sector-specific impacts, the cement industry faces a substantial 6.7% decrease in post-tax profits. In contrast, the coal, fertiliser, and steel and iron industries experience RoA declines of around 0.22%, 0.24%, and 0.21%, respectively. Moreover, the steel and iron industry also suffers a statistically significant 2.9% reduction in export earnings. In summary, the implementation of CBAM is poised to have an adverse effect on the economic performance of enterprises operating within India’s Energy-Intensive and Trade-Exposed (EITE) industries.

Keywords: CBAM, EITE-Industries, EU carbon tax, climate change mitigation