0.1 Background

0.1.1 From January 1, the European Union has begun implementing the Carbon Border Adjustment Mechanism (CBAM).
0.1.2 CBAM is the world’s first carbon tax on imports, targeting carbon-intensive goods entering the EU.
0.1.3 A similar mechanism is expected in the UK, adding to trade pressures after US tariffs on steel, aluminium, and copper.

0.2 What CBAM Covers

0.2.1 CBAM applies to imports from the power sector and other energy-intensive industrial sectors.
0.2.2 Products currently covered include cement, steel, aluminium, oil refinery products, paper, glass, chemicals, and fertilisers.
0.2.3 The EU has provisions to expand the coverage list in future phases.

0.3 India’s Exposure

0.3.1 India’s steel, iron, and aluminium exports to the EU are directly exposed to CBAM.
0.3.2 In FY2025, India exported $5.8 billion worth of steel and aluminium to the EU, a 24% decline from the previous year.
0.3.3 The decline accelerated after October 2023, when CBAM’s transition phase mandated plant-level emissions reporting.

0.4 How CBAM Operates

0.4.1 CBAM extends the EU’s internal carbon pricing system to imports.
0.4.2 Under the EU Emissions Trading System, European producers pay for their emissions.
0.4.3 Under CBAM, EU importers calculate embedded emissions and purchase CBAM certificates linked to ETS prices.
0.4.4 Although paid by importers at the border, costs are passed back to Indian exporters through lower prices and contract renegotiations.

0.5 Production Routes and Emissions

0.5.1 Indian steel production largely uses the blast furnace–basic oxygen furnace (BF-BOF) route.
0.5.2 Emissions intensity is highest under BF-BOF, lower under gas-based Direct Reduced Iron (DRI), and lowest under scrap-based Electric Arc Furnace (EAF).
0.5.3 The US, EU, and UK rely more on EAF-based production due to higher domestic steel scrap availability, creating a structural emissions advantage.

0.6 Cost Impact on Indian Exporters

0.6.1 The EU carbon price is around €80 per tonne of CO₂.
0.6.2 One tonne of BF-BOF steel emits about 2.4 tonnes of CO₂, implying a CBAM cost of roughly €192 per tonne.
0.6.3 Importers are expected to pass back 50–70% of this cost to exporters.
0.6.4 A €600 sale price may fall to €467–€505, implying a 16–22% margin loss.
0.6.5 The Global Trade Research Initiative estimates exporters may need 15–22% price cuts to remain competitive.

0.7 Compliance and Verification Issues

0.7.1 CBAM mandates factory-level emissions accounting.
0.7.2 Only Scope 1 (direct fuel use) and Scope 2 (electricity use) emissions are counted.
0.7.3 From 2026, emissions data must be verified by auditors approved under ISO 14065 or EU rules.
0.7.4 In the absence of verified data, EU authorities apply default (often highest) emission values, inflating costs.

0.8 Impact on MSMEs

0.8.1 MSMEs face the heaviest burden due to high compliance costs, limited access to emissions data, and costly third-party verification.
0.8.2 Exporters have sought government support and temporary MSME carve-outs in India–EU trade discussions.
0.8.3 The EU maintains that CBAM is a climate measure, not a negotiable trade instrument.

0.9 International Objections

0.9.1 Russia initiated a formal dispute against CBAM, later joined by other developing countries.
0.9.2 Critics argue that CBAM violates Common But Differentiated Responsibilities (CBDR).
0.9.3 UNCTAD has warned that CBAM could restrict export-led growth and disproportionately affect developing economies.

0.10 Climate Impact Versus Trade Impact

0.10.1 A UNCTAD study (2021) estimated that CBAM would reduce global emissions by only 0.1%.
0.10.2 At the same time, it would significantly curb exports from developing countries.
0.10.3 India’s Finance Minister Nirmala Sitharaman has termed CBAM arbitrary, trade-restrictive, and unsupportive of energy-transition efforts.

0.11 Way Forward

0.11.1 Exporters must improve emissions measurement, secure verified plant-level data, and adjust pricing and contracts early.
0.11.2 Government and industry must reduce compliance costs and develop Indian carbon certification systems recognised by the EU.
0.11.3 CBAM represents a structural shift in global trade where emissions performance, not just price, will define export competitiveness.