Why in news?

The United States Trade Representative (USTR) has launched an investigation into the European Union’s expansion of its Carbon Border Adjustment Mechanism (CBAM) — a move that could escalate trade tensions between the two blocs.

The USTR has invited public comments from American small businesses till November 9. Seeking public comments is typically the first step toward possible retaliation — signalling the US may push the EU to soften CBAM’s implementation.

For India, this development carries an unusual silver lining: any US-driven softening of CBAM could automatically benefit Indian exporters too, thanks to a clause in the India-EU trade deal.

What’s in Today’s Article?

• What Is CBAM, and Why Is the US Investigating It?
• How India Stands to Benefit?
• The Stakes for Indian Industry
• India’s Response: The Green Steel Push

What Is CBAM, and Why Is the US Investigating It?

• CBAM is the EU’s carbon pricing mechanism. It requires EU importers of goods in six carbon-intensive sectors to declare the embedded emissions of imported products and pay a carbon price equivalent to what EU domestic producers already pay.
• Covered Sectors: Aluminium; Cement; Electricity; Fertiliser; Hydrogen; Iron and steel.
• The US’s Specific Complaint
  • The EU calculates default emission values using country- and sector-level production/energy data.
  • However, the EU adds a punitive mark-up to these default values — a measure meant to push companies toward submitting verified company-level data instead.
  • Any company-level data must be verified by an EU-accredited third-party verifier — adding cost and compliance burden, which the US says disproportionately hurts American small businesses.

How India Stands to Benefit?

• India had tough negotiations with the EU over CBAM while finalising the India-EU trade deal, since the regulation is expected to hit a wide range of Indian metal exports.
• Crucially, however, Indian negotiators secured a ‘forward-Most Favoured Nation’ (MFN) CBAM clause.
• What this clause does - It ensures that any concession the EU grants to another trading partner (here, the US) under a separate agreement automatically extends to India too.
  • In the EU-US trade deal joint statement (August last year), the EU had already committed: “...the European Commission... commits to work to provide additional flexibilities in the CBAM implementation” for US businesses.
  • If the ongoing USTR probe results in further CBAM flexibilities for the US, India would also receive those same concessions — without needing to renegotiate separately.

The Stakes for Indian Industry

• According to the Global Trade Research Initiative (GTRI), CBAM could translate into a 20–35% tax on select Indian exports — particularly iron, steel, and aluminium — into the EU.
• This is effectively being called a steel bill for India.
• Added complication — Steel Scrap
  • The EU is the world’s largest producer of steel scrap, and its move to curb steel-scrap exports, combined with CBAM, acts as a non-tariff barrier against Indian industry.
  • Despite Indian objections, the EU kept CBAM outside the scope of the India-EU trade deal.
• Why Production Method Matters?
  • Blast furnace–basic oxygen furnace (BF-BOF) route: highest emissions.
  • Gas-based direct reduced iron (DRI): lower emissions.
  • Scrap-based electric arc furnace (EAF) route: lowest emissions.
• India’s Vulnerability: Indian manufacturers largely rely on the blast furnace route, making them currently underprepared for CBAM’s carbon-price burden.

India’s Response: The Green Steel Push

• The government plans to scale up scrap-based steel production via electric arc furnace technology, under its Green Steel Initiative.
• However, a May 2025 report by the Indian Council for Research on International Economic Relations (ICRIER) flagged a major constraint:
  • Scrap currently makes up only 20% of India’s steelmaking feedstock.
  • This is limited by domestic scrap availability of just ~25 Million Metric Tonnes (MMt) annually.
  • The report notes: hard-to-abate sectors like steel face unprecedented pressure to decarbonise amid tools like CBAM, with scrap steel central to this transition — yet India’s constrained scrap access remains a critical bottleneck.

Conclusion

The US probe into CBAM is, at its core, a dispute over how the EU prices carbon at its borders — but it has inadvertently opened a door for India. Thanks to a carefully negotiated MFN clause, any flexibility the EU grants the US could flow to Indian exporters too, without further bargaining.

Yet this remains a short-term cushion, not a solution: India’s long-term competitiveness in a carbon-taxed world will depend on how fast it can scale scrap-based, low-emission steel production — a transition still constrained by domestic scrap scarcity.