The European Union has begun implementing the world’s first carbon border tax under the Carbon Border Adjustment Mechanism (CBAM), a move that has sharply divided global opinion. While the EU projects it as a climate action tool, many developing countries — including India — see it as a new generation trade barrier that could reshape global manufacturing and exports.
What is CBAM and why has it been rolled out now?
CBAM is a mechanism through which the will impose a carbon-related charge on imports of selected carbon-intensive goods. The idea is to ensure that imported products face a carbon cost comparable to what EU producers pay under the bloc’s Emissions Trading System.
Initially, CBAM applies to energy-intensive sectors such as steel, aluminium, cement, fertilisers, chemicals, power, paper, glass, and oil refining. The scope can be expanded later. From 2026, exporters will have to buy CBAM certificates linked to the embedded emissions of their goods, converting climate policy directly into a border levy.
Why CBAM matters for India’s exports
India exports large volumes of steel, aluminium, and iron products to Europe. These sectors are carbon-intensive, largely because Indian manufacturers rely on blast furnace–basic oxygen furnace (BF–BOF) routes, which have significantly higher emissions than electric arc furnace (EAF) routes widely used in Europe and the US.
Trade analysts estimate that Indian exporters may need to cut prices by 15–22% to remain competitive, effectively absorbing the carbon tax indirectly. MSMEs face a disproportionate burden due to high compliance costs, complex reporting requirements, and lack of access to verified plant-level emissions data.
Blast furnace versus arc furnace: the technology divide
Steel production methods matter greatly under CBAM:
- Blast furnace–basic oxygen furnace routes emit the highest CO₂ per tonne of steel.
- Gas-based direct reduced iron (DRI) routes are moderately cleaner.
- Scrap-based electric arc furnaces are the least carbon-intensive.
The EU, US, and UK benefit structurally because they dominate global steel scrap supply and rely heavily on EAFs. Indian producers, by contrast, face both technology constraints and restricted access to scrap, widening the competitiveness gap.
CBDR and the dispute over fairness
Developing countries argue that CBAM violates the principle of Common But Differentiated Responsibilities (CBDR), a core norm of international environmental law recognised in global climate agreements and trade discussions at the .
CBDR holds that while all countries share responsibility for tackling climate change, obligations must reflect historical emissions, development levels, and capacity. India and others contend that CBAM ignores these asymmetries by imposing uniform carbon costs, effectively shrinking the policy space of poorer countries.
What global institutions are saying
The has warned that CBAM could undermine export-led growth in developing economies. Its studies suggest that CBAM would cut global emissions by only about 0.1%, while significantly reducing exports from poorer countries.
UNCTAD has suggested that if CBAM revenues are retained by the EU without supporting technology transfer or climate finance, the mechanism risks becoming a trade protection tool rather than a climate solution.
India’s response and the limits of negotiation
Indian exporters are seeking government support to comply with CBAM norms, including assistance in emissions certification and recognition of Indian verification agencies through mutual recognition agreements. MSMEs have also asked for carve-outs during India–EU trade negotiations.
However, the EU maintains that CBAM is a climate instrument, not a trade measure, and therefore not open for negotiation. This stance limits India’s options to domestic reforms, diplomatic pressure, or eventual dispute settlement.
More trade barrier than climate tool?
Many trade experts argue that CBAM reflects a broader trend of climate-linked protectionism. With the US imposing high tariffs on metals and the UK planning a similar carbon border measure, global trade is increasingly shaped by green conditionalities set by developed economies.
For India, the challenge lies in balancing climate transition with industrial competitiveness — without allowing climate policy to become a disguised restriction on trade.
What to note for Prelims?
- CBAM: Carbon Border Adjustment Mechanism of the EU.
- Applies to carbon-intensive imports like steel, aluminium, cement.
- Linked to EU Emissions Trading System.
- CBDR: Common But Differentiated Responsibilities.
- UNCTAD’s role in trade and development analysis.
What to note for Mains?
- CBAM as a trade–climate linkage and its implications for developing countries.
- Debate on environmental protection versus green protectionism.
- Impact on India’s MSMEs and export competitiveness.
- Compatibility of CBAM with WTO norms and CBDR.
- Policy options for India: technology transition, certification frameworks, and diplomacy.
