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CBAM · Policy Analysis · Trade StrategyCarbon Border Adjustment Mechanism and Its Impact on Indian Industry
The EU Carbon Border Adjustment Mechanism entered its definitive financial phase on 1 January 2026. For Indian exporters of steel, aluminium, and fertilisers, financial obligations are now accumulating, making industrial decarbonisation a core element of global trade competitiveness.
Key Takeaways
The EU Carbon Border Adjustment Mechanism entered its definitive phase on 1 January 2026. Financial obligations are accumulating now, with the first certificate surrender deadline set for 30 September 2027.
India's CBAM-covered exports to the EU, primarily steel, aluminium, and fertilisers, represent approximately USD 6 to 7 billion, accounting for around 8 to 9% of total Indian exports to Europe.
Steel faces the sharpest exposure. A study by FEPS and NIPFP estimates a potential CBAM duty of €173.8 per tonne on Indian steel at full implementation, equivalent to roughly 16% of unit export value at 2022 prices.
India's average emission intensity for steel stands at 2.54 tCO₂ per tonne of crude steel, well above the global average of 1.91 tCO₂, driving substantial border adjustment calculations.
The CBAM coverage factor starts at 2.5% in 2026 and ramps up to 100% by 2034 as EU ETS free allowances are phased out, compounding financial liabilities each passing year.
India raised formal concerns about CBAM at the WTO 29 times between 2020 and 2024. The India-EU FTA concluded in January 2026 without a CBAM exemption, confirming that border adjustments apply across bilateral trade.
Establishing recognized domestic carbon pricing under India's Carbon Credit Trading Scheme (CCTS) provides a direct mechanism to offset EU certificate requirements and retain carbon revenues locally.
The EU Carbon Border Adjustment Mechanism entered its definitive phase on 1 January 2026. For Indian exporters of steel, aluminium, and fertilisers, this is no longer a future planning scenario: financial obligations are accumulating right now. The transitional phase, which ran from October 2023 to December 2025 and required only emissions reporting without financial payments, is officially complete.
This analysis examines what CBAM is, why it was introduced, what it costs Indian industry in concrete terms, how India has responded at the policy level, and the strategic choices facing affected exporters. For a practical walkthrough of the compliance process, see our companion guide: How the Carbon Border Adjustment Mechanism Works: An Operational Guide for Exporters.
What the Carbon Border Adjustment Mechanism actually is
CBAM is a climate trade regulation adopted by the European Union under Regulation (EU) 2023/956 as part of its Fit for 55 policy package. It requires EU importers of carbon-intensive goods to purchase certificates corresponding to the embedded greenhouse gas emissions of those imports, priced equivalently to allowances under the EU Emissions Trading System (ETS).
The mechanism targets carbon leakage, which occurs when rising carbon costs within the EU cause production to relocate to regions with weaker climate rules, shifting emissions abroad without reducing global climate impact. CBAM applies an equivalent carbon price at the border so that domestic products and imports compete on a level carbon pricing playing field.
Crucially, CBAM functions differently from traditional tariffs. Rather than applying flat rates by country of origin, it levies charges based on the verified embedded carbon content of individual shipments. A facility producing steel with lower embedded emissions pays significantly less than a higher-emitting plant, making production carbon intensity the primary driver of financial liability.
CBAM certificate prices mirror EU ETS allowance costs. For 2026, certificate prices are calculated as the quarterly average of EU ETS auction clearing prices, transitioning to weekly averages in 2027. The European Commission published the first quarterly benchmark on 7 April 2026 at €75.36 per metric ton of carbon equivalent for Q1 2026. With ETS allowance spot prices trading near €88 per tonne in early 2026, certificate obligations represent a material share of total landed product value for high-intensity steel and industrial goods.
Understanding the phase-in trajectory is critical for long-term planning. The CBAM coverage factor is set at 2.5% in 2026, meaning importers pay levies on only 2.5% of embedded emissions above benchmarks because EU manufacturers still receive 97.5% free ETS allowance allocations. Free allocations phase out gradually to 95% in 2027, then accelerate downward, reaching zero by 2034. As free allocations end, the CBAM coverage factor reaches 100%, causing border charges to escalate sharply between 2029 and 2034.
The six covered sectors
CBAM applies to six specific sectors defined by exact EU Combined Nomenclature (CN) codes: iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen. Coverage is product-specific rather than sector-wide, requiring exporters to audit their product catalogs against official CN code listings to confirm compliance duties.
In December 2025, the European Commission proposed extending CBAM scope to roughly 180 downstream steel and aluminium products, including industrial equipment, automotive parts, and machinery. While that proposal continues through the EU legislative process, it highlights the direction of policy. Companies manufacturing complex finished goods incorporating basic metals will need to monitor downstream scope additions closely.
An annual 50-tonne mass de minimis threshold introduced in late 2025 exempts smaller importers bringing in minor quantities of cement, steel, aluminium, or fertilisers. While this rule relieves high volumes of small shipments, it does not apply to commercial industrial exporters shipping thousands of tonnes annually.
India's exposure: the numbers that matter
The EU represents one of India's largest trading partners, accounting for over €120 billion in total goods trade annually and receiving roughly 15 to 16% of India's total exports. Within this trade flow, steel and iron represent India's largest single CBAM-covered export category, comprising about 45% of total Indian steel export volume. Steel Secretary Sandeep Poundrik noted publicly that CBAM presents a more substantial long-term trade challenge for Indian steel exports than regional tariff measures.
Financial impact models illustrate the scale of potential levies. Research by the Foundation for European Progressive Studies (FEPS) and NIPFP estimates potential CBAM charges of €173.8 per tonne on Indian steel at full phase-in, roughly equal to 16% of unit export values at 2022 prices. Analysis by Rystad Energy indicates that by 2034, carbon costs could reach USD 116 per tonne under a USD 100/t ETS price scenario, with high-end carbon price projections reaching up to USD 397 per tonne.
India's average emissions intensity of 2.54 tCO₂ per tonne of crude steel reflects structural reliance on the blast furnace-basic oxygen furnace (BF-BOF) route using metallurgical coal, which accounts for roughly 46 to 50% of national capacity and is projected to reach ~55% by FY30. In comparison, the global average sits at 1.91 tCO₂ per tonne. This intensity gap explains why Indian steel faces higher relative CBAM adjustments than competitors operating scrap-based electric arc furnaces or gas-based direct reduced iron facilities. Trade flows are already adjusting: Indian steel exports to the EU fell by more than 31% in the first eight months of 2025 compared to 2024 as European buyers began incorporating emissions considerations into supply agreements.
Sector-by-sector exposure for India
Steel: the most exposed sector
Steel faces the highest immediate CBAM exposure due to high carbon intensity, substantial reliance on European export markets, and capital-intensive transition requirements for existing blast furnace infrastructure. Major producers like Tata Steel and JSW Steel account for significant shares of Indian exports to Europe. Both groups maintain domestic and European production facilities, creating complex cross-border emissions tracking requirements. Detailed sector analysis is available on our Steel sector page.
Aluminium: an electricity challenge
For aluminium, CBAM rules require accounting for both direct processing emissions and indirect emissions from electricity generation. India exports roughly 0.7 MMTPA of primary aluminium to Europe. Because around 80% of Indian aluminium sector emissions stem from captive coal-based power plants rather than the electrolysis process itself, decarbonisation priorities center on securing clean power. Policies like the Green Energy Open Access Rules and interstate transmission fee waivers serve as primary tools for reducing electricity-related carbon intensity. Further details appear on our Aluminium sector page.
Fertilisers: green hydrogen alignment
Nitrogenous fertilisers like urea and ammonia carry high embedded carbon footprints because steam methane reforming of natural gas generates substantial process emissions. India maintains large manufacturing capacity for nitrogen fertilizers. Reducing CBAM exposure in this sector relies on scaling green hydrogen to replace fossil-based feedstocks in ammonia synthesis, directly connecting trade policy with the goals of the National Green Hydrogen Mission. For additional analysis, see the Fertilisers sector page and Green Hydrogen regulatory repository.
Sector-level comparison
| Sector | EU Export Exposure | Primary Emission Driver | CBAM Scope | Decarbonisation Pathway |
|---|---|---|---|---|
| Steel | 3.71 MT; ~45% of total steel exports | BF-BOF coal use (2.54 tCO₂/t average) | Direct emissions | Scrap-EAF expansion, natural gas DRI, long-term H2-DRI |
| Aluminium | ~0.7 MMTPA to European markets | Captive coal power (~80% of total emissions) | Direct and indirect emissions | Renewable open access PPAs, hybrid power, scrap recycling |
| Fertilisers | Urea and ammonia export shipments | Natural gas SMR ammonia production | Direct process emissions | Green ammonia synthesis via green hydrogen feedstocks |
| Cement | Limited direct EU export volumes | Clinker calcination (~60% of process) | Direct emissions | Clinker factor reduction, alternative fuels, CCUS |
India's policy response to CBAM
India's policy response addresses CBAM through three main channels: international trade diplomacy, domestic carbon market development, and industrial transition policy.
Internationally, India raised concerns regarding CBAM at the WTO 29 times between 2020 and 2024, highlighting issues related to trade equity and climate responsibility principles. While India sought a CBAM exemption during bilateral trade talks, the India-EU Free Trade Agreement concluded in January 2026 without an exemption clause, confirming that border adjustments apply to Indian exports entering the EU market.
Domestically, developing the Carbon Credit Trading Scheme (CCTS) plays an important role in trade strategy. Article 9 of the EU CBAM regulation allows importers to deduct verified carbon prices paid in the exporting country from their certificate surrender obligations. If the European Commission recognizes CCTS compliance payments as equivalent carbon pricing, Indian exporters can offset domestic carbon payments against EU levies, keeping carbon revenues within India rather than transferring funds to European authorities. Research by CEEW and CSEP estimates that domestic carbon price recognition could preserve significant revenue for national industrial transition programs.
Regarding industrial policy, the Ministry of Steel introduced India's Green Steel Taxonomy in December 2024, establishing clear emissions thresholds (three-star rating below 2.2 tCO₂/t, four-star below 2.0 tCO₂/t, and five-star below 1.6 tCO₂/t). These national benchmarks provide a structured metric for tracking progress toward global carbon benchmarks. Major Indian steelmakers are executing decarbonisation plans expected to reduce emission intensity over the coming decade, helping bridge the gap toward competitive low-carbon production.
The India-EU FTA and trade dynamics
The conclusion of the India-EU Free Trade Agreement in January 2026 expanded tariff preferences for Indian manufactured goods, but CBAM levies create a parallel cost consideration for covered industrial sectors. Analysts note that combining border carbon adjustments with existing EU steel safeguard quotas increases the importance of verified emissions tracking for maintaining export margins.
The net trade impact for individual exporters depends on how quickly facilities reduce unit emissions. Companies that lower emissions ahead of escalating CBAM factors will capture the full value of FTA tariff reductions, while higher-emitting producers will see margin gains offset by rising carbon certificate costs.
Action priorities for exporters
Verify product lines against the official EU CBAM CN code list rather than relying on general industry classifications. Accurately matching codes ensures correct compliance filings with European buyers.
Implement monitoring systems that record facility-specific direct emissions (and indirect power emissions where required) using EU CBAM calculation methods. Verified facility data avoids default values that apply peak carbon estimates.
Engage accredited third-party verifiers early to complete mandatory facility audits required for annual CBAM declarations, preventing delays in quarterly reporting workflows.
Track CCTS target notifications from the Bureau of Energy Efficiency (BEE) to ensure domestic carbon payments qualify for offset deductions under Article 9 of the CBAM regulation.
The initial CBAM certificate surrender deadline is 30 September 2027, covering all embedded emissions from goods imported into the EU during 2026. Managing facility measurement systems today ensures accurate data delivery to European customers well ahead of formal filing deadlines.
Companies that treat CBAM as an opportunity to accelerate energy efficiency and clean technology adoption can strengthen their market position in low-carbon supply chains. As the CBAM coverage factor scales from 2.5% in 2026 toward 100% in 2034, early investments in lower-emission manufacturing will translate directly into lower landed product costs.
For detailed sector analysis, explore our dedicated pages for Steel, Aluminium, and Fertilisers. National policy interactions are outlined in the Industrial Decarbonisation Policy Map and India Climate Commitments page.
Frequently asked questions
Has CBAM officially started, or is it still in a transitional phase?
CBAM entered its definitive financial phase on 1 January 2026. The transitional phase, which involved reporting emissions without financial payments, ended on 31 December 2025. Certificate purchasing platforms open on 1 February 2027, with the first annual surrender deadline set for 30 September 2027 to cover 2026 imports.
How much will CBAM cost Indian steel exporters?
Studies by FEPS and NIPFP estimate potential duties of up to €173.8 per tonne on Indian steel at full phase-in. Analysis by Rystad Energy projects levies reaching USD 116 per tonne under a USD 100/t carbon price scenario, scaling higher if ETS allowance prices increase toward 2034.
Can domestic carbon payments in India reduce EU CBAM levies?
Yes. Article 9 of the EU CBAM regulation allows importers to deduct verified carbon costs paid in the origin country. Once India's Carbon Credit Trading Scheme establishes recognized verification structures, local compliance costs can be credited against EU border adjustments.
What is the 50-tonne de minimis exemption?
Under rules updated in late 2025, importers bringing in less than 50 tonnes total per year of covered steel, aluminium, cement, or fertilisers are exempt from CBAM filings. This rule supports small entities but does not apply to commercial industrial exporters.
How does CBAM interact with the India-EU Free Trade Agreement?
The India-EU FTA concluded in January 2026 does not exempt Indian goods from CBAM rules. Exporters benefit from lower baseline import tariffs under the FTA, but covered goods must meet CBAM carbon certificate requirements upon entering the EU.
Is CBAM aligned with WTO trade rules?
The EU designed CBAM to align with WTO guidelines by applying identical carbon costs to domestic producers under the ETS and importers under CBAM. India raised questions at the WTO 29 times between 2020 and 2024 regarding implementation details, and international discussions on trade fairness remain ongoing.