India is hoping to engage directly with the European Union for leeway on its proposed carbon tax instead of adjudicating the issue through the World Trade Organization, according to people familiar with the matter.

A major exporter of steel and aluminum, India is seeking exemptions that would protect its small manufacturers from levies imposed by the Carbon Border Adjustment Mechanism, or CBAM, which will tax some imports from countries that don’t fix carbon pricing the way Europe does.

India has filed a discussion paper with the WTO about how environmental regulations impact trade, but with respect to CBAM specifically, it hopes direct negotiations with the EU will yield a relatively speedy resolution, the people said, asking not to be identified as the discussions are private.

The EU’s new levies are designed to prevent so-called carbon leakage, in which companies based in the bloc move their most carbon-intensive production abroad to take advantage of less stringent climate policies or taxes. CBAM will begin with a three-year “reporting only” period starting Oct. 1, with financial adjustments beginning in 2026.

As part of the ongoing negotiations for a free-trade agreement with the EU, India is pushing for a waiver for its small- and mid-size enterprises, similar to the one Europe had for some of its domestic companies in the Emissions Trading System that CBAM is set to replace, one of the people said. India is also considering a domestic mechanism similar to CBAM and what that would mean for the cost of imports, the person said.

“CBAM is definitely a trade barrier. There are number of issues, which needs clarity” Alok Sahay, Secretary -General of the Indian Steel Association, said in an e-mailed response to Bloomberg News.

The government should initiate a multilevel dialog to ensure that the Indian steel sector, which currently exports about 3.5 million to 4 million tons of steel to the countries in the European Union is given a level playing field, he added.

India’s Trade Ministry did not respond to an email seeking comment.

EU’s carbon tax “counters the spirit” of the Paris Agreement’s “common but differentiated responsibilities”, which recognizes that countries have different duties and abilities to address the negative impacts of climate change, India’s Chief Economic Adviser V Anantha Nageswaran said in an interview last month.

Author: Adrija Chatterjee, Vrishti Beniwal and Swansy Afonso