The year has begun on a worrying note for Indian exporters with the European Union extending its Carbon Border Adjustment Mechanism (CBAM) to imports. From 2026, Indian exports of steel and aluminium to the EU will face a new carbon-linked tax, potentially raising costs by 16–22%. While the stated objective is climate action, the move has serious implications for India’s trade competitiveness and highlights deeper tensions between global climate goals and development realities.
What is CBAM and how does it work?
The Carbon Border Adjustment Mechanism is essentially a carbon tax on imports entering the European Union. It seeks to equalise the cost of carbon between goods produced within the EU — where firms already pay under the Emissions Trading System — and imports from countries with weaker or no carbon pricing.
Under CBAM, importers must pay for the embedded carbon emissions generated during production. Cleaner production processes are rewarded with lower tax burdens, while carbon-intensive manufacturing attracts penalties.
Why Indian steel and aluminium are vulnerable
From 2026, steel and aluminium exports from India will fall squarely within CBAM’s scope. This is significant because:
- The EU accounts for about 22% of India’s steel and aluminium exports.
- Indian firms rely more heavily on coal-based and energy-intensive processes.
- This translates into higher “embedded emissions” per unit of output.
As a result, Indian exporters may either absorb the additional tax by cutting profit margins or risk losing market share to exporters from countries with cleaner production systems.
Climate intent or disguised trade barrier?
On the surface, CBAM is framed as a climate policy designed to prevent “carbon leakage” — the shifting of polluting industries to countries with lax regulations. However, critics argue that it effectively imposes developed-country carbon standards on developing economies.
Research by bodies such as the United Nations Conference on Trade and Development suggests that while CBAM could significantly restrict exports from developing countries, its impact on global emissions reduction would be marginal — estimated at just 0.1%.
This has fuelled concerns that CBAM functions more as a protectionist trade tool than as a meaningful climate solution.
Steel, aluminium and the politics of protectionism
Steel and aluminium are already among the most protected sectors globally, subject to tariffs, quotas, and anti-dumping measures across major economies. CBAM adds another layer of restriction, but this time justified through environmental regulation.
Importantly, CBAM is not limited to these two sectors. It already covers:
- Cement
- Fertilisers
- Electricity
- Hydrogen
The framework allows for the inclusion of additional sectors in the future, widening its impact on developing economies.
Why this matters beyond the EU
The EU is not alone. The United Kingdom has announced plans to introduce a similar carbon border tax. As climate-linked trade measures become more common, Indian exporters may face cumulative barriers across multiple markets.
This makes CBAM less of a bilateral issue and more a systemic challenge for India’s export-led growth strategy in a decarbonising global economy.
What options does India have?
Given the twin realities of climate action and rising protectionism, India cannot afford to ignore CBAM. Policy responses could include:
- Seeking carve-outs or transitional relief in ongoing India–EU free trade agreement negotiations.
- Supporting domestic industries with incentives to adopt cleaner technologies.
- Developing credible carbon accounting and reporting systems.
- Exploring alignment or partial linkage with global carbon markets.
The challenge lies in ensuring that climate responsibility does not translate into an unfair developmental burden.
What to note for Prelims?
- CBAM is the EU’s carbon tax on imports.
- Steel and aluminium from India will be covered from 2026.
- CBAM aims to prevent carbon leakage.
- Other covered sectors include cement and fertilisers.
What to note for Mains?
- Discuss CBAM as a conflict between climate goals and trade equity.
- Analyse its impact on developing countries like India.
- Examine whether CBAM constitutes green protectionism.
- Suggest policy responses for India balancing exports and decarbonisation.
