As 2026 begins, Indian steelmakers confront a new trade reality: Europe’s Carbon Border Adjustment Mechanism (CBAM) has moved from reporting to enforcement, attaching explicit carbon costs to steel, aluminium and cement entering the European Union. What was earlier a compliance exercise has now become a hard commercial constraint, reshaping export competitiveness and forcing India to confront the carbon intensity of its industrial growth model.
What exactly has changed with CBAM’s definitive phase?
The CBAM, introduced by the European Union to prevent “carbon leakage”, mirrors the costs faced by European producers under the EU Emissions Trading System. From its definitive phase, exporters must effectively pay a carbon price equivalent to the EU’s internal carbon market for emissions embedded in their products. With EU ETS prices touching €87 per tonne of CO₂ in late 2025, carbon is no longer a marginal cost—it is a decisive one. For steel, where emissions are structurally high, this fundamentally alters trade economics.
How Indian steel exports to Europe have been hit
India’s exposure is significant. After the pandemic, iron and steel exports to the EU surged from USD 2.7 billion in FY21 to nearly USD 6 billion in FY22, accounting for over 9 per cent of India’s exports to the bloc. Once CBAM’s transitional reporting began, that momentum reversed sharply. By FY25, steel exports fell around 30 per cent year-on-year, and with the definitive phase approaching in FY26, shipments declined by over 50 per cent—even as India’s overall exports remained stable. This divergence highlights CBAM’s sector-specific bite.
Why EU buyers still look at Indian steel
Despite higher carbon costs, European importers have not fully exited Indian supply chains. Companies such as RWE and ArcelorMittal continue to source Indian steel, valuing India’s advantages in iron ore availability and labour costs—especially where producers can demonstrate relatively lower emissions. This underscores a key insight: CBAM does not eliminate trade; it rewards verifiable decarbonisation. Indian steel that can credibly prove lower carbon intensity remains competitive against cheaper but dirtier alternatives.
The MRV gap and strategic competition in Asia
CBAM also exposes a systems challenge. India’s measurement, reporting and verification (MRV) frameworks are not yet aligned with EU ETS standards. Without credible, plant-level emissions data, exporters risk default carbon assumptions and higher costs. Meanwhile, competitors such as South Korea, with its linked emissions trading system, and Japan, through hydrogen partnerships, are positioning themselves as “CBAM-ready”. Failure to upgrade MRV systems could quietly erode India’s market share even before formal trade disputes reach the WTO.
Green hydrogen: the hinge of steel decarbonisation
India’s National Green Hydrogen Mission targets 5 million metric tonnes per annum by 2030, a scale essential for shifting steelmaking towards hydrogen-based Direct Reduced Iron. Yet progress is lagging. By mid-2025, only about 3 GW of electrolyser capacity had been awarded, against an estimated need of 60–100 GW. Costs remain nearly three times global benchmarks, keeping producers dependent on imports. Projects like Sembcorp’s Tuticorin green ammonia hub illustrate the bottlenecks—technology IP restrictions, and European rules limiting Chinese electrolyser use despite their cost competitiveness.
Trade policy, tariffs and the cost of green transition
Green steel is capital-intensive, costing roughly three times more than conventional plants and requiring vast renewable energy back-up. Pure green hydrogen is unlikely to undercut legacy methods before 2040 without transitional blends. Yet CBAM compresses timelines dramatically. India’s relatively high applied tariffs—about 11.4 per cent versus a global average near 6 per cent—raise input costs for electrolysers and renewable components. Liberalising imports of intermediate goods, not just final green products, could materially accelerate capacity build-up.
From climate constraint to industrial opportunity
CBAM presents India with a strategic choice. One path leads to prolonged litigation at the WTO over climate tariffs. The other involves building a domestic carbon pricing and MRV architecture that aligns Indian industry with global climate rules. With abundant renewable energy potential, low-cost iron ore and scale ambitions in green hydrogen, India could reposition itself as a leader in green metals rather than a victim of carbon barriers. In that sense, CBAM may not signal the end of India’s steel export story—but the beginning of a new, cleaner one.
What to note for Prelims?
- CBAM is the EU’s carbon tariff on imports mirroring EU ETS costs.
- It applies initially to steel, aluminium, cement and fertilisers.
- EU ETS carbon prices exceeded €85 per tonne CO₂ in late 2025.
- India targets 5 MMTpa green hydrogen production by 2030.
What to note for Mains?
- CBAM’s implications for India–EU trade and export competitiveness.
- Role of MRV systems and carbon markets in global trade governance.
- Challenges in scaling green hydrogen for hard-to-abate sectors.
- Whether climate-linked trade measures can catalyse green industrialisation in India.
