From January 1, Indian steel and aluminium exports to Europe enter a far more hostile trade environment. The European Union’s Carbon Border Adjustment Mechanism (CBAM) will begin imposing a carbon-linked cost on imports, sharply squeezing margins for Indian producers and reshaping how carbon, competitiveness, and trade intersect.
What CBAM changes for Indian exporters
CBAM extends the EU’s domestic carbon pricing system to imports. Under this regime, imports are taxed based on the carbon emissions generated during production, aligning them with the costs faced by European producers under the .
For Indian steel and aluminium exporters, this translates into an estimated 16–22% erosion in realised prices. Europe accounts for about 22% of India’s exports of these products, making the impact economically significant. Contracts will need renegotiation, margins will shrink, and Indian firms risk losing market share to cleaner or better-prepared competitors.
Early impact even before the tax kicks in
The effects of CBAM are already visible. In FY2025, India’s steel and aluminium exports to the EU fell to $5.8 billion — a 24% decline from the previous year — even though CBAM had not yet become a tax.
This drop followed October 2023, when CBAM’s transition phase began. Exporters were required to report plant-level carbon emissions. Compliance costs, lack of emissions data, and difficulties with verification led many Indian firms to scale back exports pre-emptively. CBAM has thus acted as a trade barrier even before formal taxation.
How CBAM liability is calculated
CBAM charges are determined by two variables:
- The quantity of carbon emissions embedded in a product.
- The prevailing EU carbon price, currently around €80 per tonne of CO₂.
If exporting countries already price carbon domestically, CBAM liability is reduced. India, however, does not have a nationwide carbon tax, meaning Indian exporters must effectively bear the full EU carbon price unless future exemptions are negotiated.
Why exporters pay even if importers are taxed
Legally, the CBAM obligation falls on EU importers, who must register, calculate emissions, and purchase CBAM certificates. In practice, however, the cost is passed backward along the supply chain.
European buyers demand lower prices to offset their CBAM payments. This weakens Indian exporters’ bargaining power, compresses margins, and shifts the carbon cost burden onto producers who do not control EU climate policy.
Although certificate surrender begins only in 2027, this delay is purely administrative. From January 1, 2026, every shipment will carry a carbon cost that buyers will price in immediately.
The numbers behind the margin squeeze
The impact is most severe for coal-based steel. Producing one tonne of steel via the Blast Furnace–Basic Oxygen Furnace (BF–BOF) route emits roughly 2.4 tonnes of CO₂. At €80 per tonne, this implies a CBAM cost of about €192 per tonne of steel.
Importers are unlikely to absorb this fully. Estimates suggest 50–70% of the cost will be pushed back onto exporters, translating into losses of €95–€133 per tonne. On a €600 sale price, this reduces realisation to roughly €467–€505 — a margin hit of up to 22%.
Why data discipline matters under CBAM
CBAM is not a broad sustainability disclosure framework. It is a strict, plant-level accounting mechanism. Only:
- Scope 1 emissions (direct fuel use), and
- Scope 2 emissions (electricity consumption)
are counted.
Company-wide averages are irrelevant. Emissions must be reported for the specific facility supplying the product. If verified data is not provided, EU authorities will apply default emission values that are 30–80% higher than actual levels, and sometimes nearly double. Importers will not absorb this penalty, forcing exporters to accept deeper price cuts or lose contracts.
From 2026, emissions data must be verified by auditors accredited under ISO 14065 or EU rules. Many Indian auditors do not yet qualify, making early preparation critical.
Production routes will define competitiveness
CBAM effectively rewards cleaner production pathways. Coal-based BF–BOF steel faces the highest burden. Gas-based direct reduced iron (DRI) steel incurs lower costs, while scrap-based or electric arc furnace (EAF) steel faces the least penalty.
This shifts competitiveness away from traditional cost advantages towards emissions intensity. Firms that invest in cleaner technologies, accurate measurement, and early verification can still retain EU market access.
Trade, climate, and protectionism collide
CBAM applies the EU’s carbon price — around €80 per tonne — even to developing countries. By contrast, China’s carbon price is roughly one-tenth of that level, and India’s future price is expected to be far lower.
For developing economies, importing rich-country carbon prices raises production costs, hurts exports, and slows industrial growth with minimal impact on global emissions. Steel and aluminium, responsible for about 10% of global emissions, are also among the most protected sectors in advanced economies — through US tariffs and now EU carbon taxes. Climate policy thus overlaps with industrial protection and revenue generation.
India’s strategic response options
India needs a two-track response. Externally, CBAM must be addressed in ongoing trade negotiations with the EU to seek flexibility, credit for cleaner producers, or phased adjustments. Domestically, India must rapidly strengthen carbon accounting systems, expand verification capacity, and support cleaner production technologies.
CBAM marks a structural shift in global trade, not a temporary compliance hurdle. As carbon becomes a trade currency, Indian exporters’ competitiveness in Europe will increasingly depend not just on cost efficiency, but on emissions performance.
What to note for Prelims?
- Carbon Border Adjustment Mechanism (CBAM).
- EU Emissions Trading System.
- Scope 1 and Scope 2 emissions.
- Sectors covered under CBAM.
What to note for Mains?
- Assess the impact of CBAM on India’s steel and aluminium exports.
- Discuss whether CBAM is climate action or disguised protectionism.
- Examine India’s policy options to respond to carbon-linked trade barriers.
- Analyse how carbon pricing is reshaping global trade competitiveness.
