Context:

• From 1 January 2026, the European Union (EU) will effectively impose a carbon-linked import tax under the Carbon Border Adjustment Mechanism (CBAM) on select carbon-intensive products, including steel and aluminium.
• Though certificate payments begin in 2027, the price impact starts immediately in 2026, significantly affecting Indian exporters.
• This marks a structural shift in global trade, where carbon intensity becomes a determinant of competitiveness.

What is CBAM?

• CBAM is the EU’s instrument to extend its carbon pricing regime (EU Emissions Trading System – ETS) to imports, preventing carbon leakage (shifting production to countries with weaker climate norms).
• Covered sectors (Phase I): Steel, Aluminium, Cement, Fertilisers, Electricity, Hydrogen (and more sectors likely to be added).
• Key objective: It will ensure a level playing field between EU producers and foreign exporters by pricing carbon emissions embedded in imports.

How CBAM Works?

• Basis of taxation: CBAM liability depends on -
  • Plant-level carbon emissions during production.
  • EU carbon price (equivalent to €80 per tonne of CO₂):
    • Only Scope 1 (direct fuel) and Scope 2 (electricity) emissions are counted.
    • No company-wide averages; only the exact supplying plant matters.
    • Emissions from mining, transport, or product use are excluded.
• Who pays?
  • EU importers officially buy CBAM certificates.
  • Actual burden is passed to Indian exporters through lower prices and tougher contracts.

Impact on Indian Steel and Aluminium Exports:

• Shrinking margins:
  • 16–22% reduction in realised prices.
  • Example:
    • Blast Furnace–Basic Oxygen Furnace (BF-BOF) steel emits almost 2.4 tonnes CO₂/tonne
    • CBAM cost equivalent to €192 per tonne
    • Exporter bears €95–€133 per tonne after cost pass-through
    • €600 sale price falls to €467–505
• Export decline:
  • In FY2025, India exported $5.8 billion worth of steel and aluminium to the EU — 24% lower than the previous year — despite no carbon tax.
  • The decline began after new EU rules took effect in October 2023, requiring exporters to report plant-level carbon emissions under CBAM’s transition phase.
  • Compliance costs, data gaps, and verification hurdles forced many Indian firms to scale back exports well before CBAM formally became a tax.

Compliance and Verification Challenges:

• Mandatory plant-level emissions reporting.
• Risk of default CBAM values (30–80% higher than actual emissions) if data is missing.
• From 2026, data must be verified by ISO 14065 / EU-approved auditors.
• Limited availability of eligible Indian auditors.

Impacts:

• On contracts and trade practices:
  • Renegotiation of long-term contracts.
  • Introduction of CBAM adjustment clauses, dual pricing (base price + CBAM-linked price), and price revisions linked to changes in EU carbon prices.
  • Reduced bargaining power of Indian exporters.
• Production routes and differential impact: CBAM rewards cleaner production -
  • Highest burden: Coal-based BF–BOF steel
  • Moderate burden: Gas-based DRI
  • Lowest burden: Scrap-based / Electric Arc Furnace (EAF) steel
• Equity and protectionism concerns:
  • EU carbon price (almost €80) applied uniformly, even to developing countries.
  • Comparison: China’s carbon price is equivalent to 10% of EU level. India has no nationwide carbon tax.
  • Raises concerns of climate inequity, disguised protectionism, and revenue generation under the garb of climate action.
  • Irony: Steel and aluminium (equivalent to 10% of global emissions) are now among the most protected sectors in developed economies (EU CBAM + US 50% tariff). 

Challenges for India:

• Absence of a national carbon pricing mechanism.
• High dependence on coal-based steel.
• Weak carbon accounting and verification ecosystem.
• Risk of losing EU market share (22% of India’s steel and aluminium exports).
• Slower industrial growth with minimal global emission reduction impact.

Way Forward:

• At the international level: Seek CBAM resolution or exemptions in India–EU FTA negotiations. Push for differentiated responsibilities reflecting development levels.
• At the domestic level:
  • Strengthen carbon accounting frameworks.
  • Build capacity of emissions auditors.
  • Support transition to gas-based DRI, scrap-based or electric arc furnace (EAF) steel
  • Encourage green steel through incentives, technology upgrades, and financing.
  • Prepare exporters for data discipline and contract restructuring.

Conclusion:

• CBAM is not a temporary compliance hurdle, but a fundamental reordering of global trade rules where carbon becomes a trade currency.
• For Indian steel and aluminium exporters, continued access to the EU market will depend on accurate emissions measurement, verified data, cleaner production routes, and strategic trade negotiations.
• In the emerging low-carbon trade regime, competitiveness will be defined not only by cost efficiency, but by carbon efficiency — a critical insight for India’s industrial and trade policy going forward.