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 date to prepare for — it is the reality they are now operating in. The transitional phase, which ran from October 2023 to December 2025 and required only emissions reporting without financial obligations, is over. From this year, the financial mechanism is live.

This article explains what CBAM is, why it was introduced, what it actually costs for Indian industry in concrete terms, how India has responded at the policy level, and what the realistic strategic options are for affected exporters. For a step-by-step explanation of how the compliance process works operationally, see our companion piece: How the Carbon Border Adjustment Mechanism Works: A Guide for Exporters.

What the Carbon Border Adjustment Mechanism actually is

CBAM is a regulation adopted by the European Union under Regulation (EU) 2023/956 as part of its Fit for 55 climate package. In plain terms, it requires EU importers of certain carbon-intensive goods to purchase certificates equivalent to the greenhouse gas emissions embedded in those products — at the same price that EU producers pay under the EU Emissions Trading System.

The problem it is designed to solve is called carbon leakage. When EU industry pays a rising price for its carbon emissions under the ETS, there is a risk that production simply moves to countries with weaker climate regulations, taking the emissions with it while Europe’s market share shrinks. CBAM addresses this by applying a comparable carbon cost at the border, so that imports and domestic production face roughly the same carbon price signal.

The mechanism is not a tariff in the traditional sense. It does not discriminate between countries — it charges based on the actual embedded emissions in the product, regardless of origin. A producer anywhere in the world whose steel has lower embedded emissions than the EU benchmark will pay less, or potentially nothing. A producer with higher emissions will pay more. The carbon intensity of production, not the country of origin, determines the financial obligation.

One critical detail that is often misunderstood: the CBAM factor in 2026 is 97.5%, not 100%. This means importers only pay for 97.5% of the embedded emissions above benchmark in 2026, because EU producers still receive some free allowances under the ETS. That free allocation is being phased out progressively — 95% in 2027, declining each year until it reaches zero in 2034. What starts as a modest compliance line in 2026 becomes a fully operational carbon levy by 2034. The financial burden grows every year for producers who do not reduce their emission intensity.

The six covered sectors

CBAM currently covers six product categories defined by specific EU Combined Nomenclature (CN) codes: steel and iron, aluminium, cement, fertilisers, electricity, and hydrogen. Coverage is based on specific CN codes, not entire sectors — exporters must verify their exact product classification because not every product within a broadly covered sector is automatically subject to CBAM obligations.

In December 2025, the European Commission proposed a significant expansion of CBAM scope to downstream products — goods that incorporate CBAM-covered materials, such as machinery, automotive components and industrial equipment containing steel or aluminium. This proposal is subject to the EU legislative process and is not yet in force, but it signals the direction of travel. Sectors that consider themselves insulated because they do not directly export the six primary categories may find themselves within scope sooner than expected.

A new 50-tonne annual mass-based de minimis threshold was introduced under the October 2025 simplification package, exempting importers who bring in 50 tonnes or less per year of covered goods. This exemption covers the great majority of small importers by volume but applies to cement, iron, steel, aluminium and fertilisers only — it does not apply to electricity or hydrogen.

India’s exposure — the numbers that matter

The EU is India’s second-largest trading partner, accounting for approximately EUR 124 billion in total goods trade in 2023 and nearly 17.5% of India’s total exports. Within that relationship, the CBAM-covered sectors are a significant subset. Steel and iron is India’s largest single CBAM-covered export to Europe, accounting for 23.5% of total iron and steel exports by value in FY 2022-23. More than 60% of India’s steel exports went to Europe in 2024, which is why Shri Sandeep Poundrik, Secretary, Ministry of Steel, stated publicly that CBAM poses a larger risk to India’s steel exports than US tariffs.

The financial implications are quantified clearly by the research. A 2024 study by the Foundation for European Progressive Studies (FEPS) and the National Institute of Public Finance and Policy (NIPFP) estimates a potential CBAM duty of Euro 173.8 per tonne on Indian steel at full implementation — equivalent to roughly 16% of the unit export value at 2022 prices. Rystad Energy’s analysis projects that by 2034, Indian steel producers could face carbon costs of up to USD 116 per tonne assuming a carbon price of USD 100 per tonne, and potentially up to USD 397 per tonne under higher carbon price scenarios.

India’s emission intensity of 2.54 tCO₂ per tonne of crude steel is substantially above the global average of 1.91 and well above European benchmarks, largely because approximately 55% of India’s steel is produced via the blast furnace-basic oxygen furnace route using metallurgical coal. This structural characteristic is why the CBAM burden is so disproportionately large for Indian steel relative to producers in countries with higher scrap availability or cleaner electricity grids. Steel exports from India to the EU had already fallen by more than 31% in the first eight months of 2025 compared to the same period in 2024, indicating that market anticipation of CBAM is already reshaping trade patterns before the financial obligations have been fully activated.

Sector-by-sector exposure for India

Steel — the most exposed sector

Steel is the sector with the sharpest and most immediate CBAM exposure for India. The combination of high emission intensity, significant EU export dependence, and no near-term cost-competitive pathway to reducing BF-BOF emissions makes it the sector where CBAM will cause the most acute financial impact in the 2026 to 2030 timeframe. Tata Steel and JSW Steel together accounted for 11.43% and 20.01% of India’s steel exports to the EU respectively, giving an indication of the concentration of exposure at the company level. Both companies have operations within the EU under the ETS, which creates a complexity around carbon cost accounting across production routes. For a detailed sector analysis, see the Steel sector page and the Carbon Markets regulatory repository.

Aluminium — an electricity problem as much as a CBAM problem

CBAM covers both direct emissions from aluminium electrolysis and, for this product category, indirect emissions from electricity generation — though the October 2025 simplification package changed the default values for electricity to reflect all sources in exporting countries, not just fossil fuels, which will reduce CBAM obligations for some producers. India’s aluminium sector produces approximately 0.7 MMTPA for European markets. The CBAM benchmark emission intensity for aluminium electrolysis is 1.55 tCO₂/t. Since approximately 80% of India’s aluminium sector emissions come from captive coal-based power plants rather than the electrolysis process itself, the decarbonisation response for aluminium runs through renewable electricity procurement — the Green Energy Open Access Rules and the ISTS waiver are the key policy instruments. For detailed analysis, see the Aluminium sector page.

Fertilisers — CBAM meets the hydrogen question

Nitrogenous fertilisers — urea, ammonia, nitric acid and ammonium nitrate — are among the covered product categories with some of the highest embedded emission intensities per tonne, because natural gas-based ammonia synthesis through steam methane reforming is an inherently carbon-intensive process. India is the world’s second-largest urea producer and a significant ammonia exporter. The CBAM exposure for the fertiliser sector is directly linked to the green hydrogen transition question — the only credible route to decarbonising ammonia production at scale is replacing grey hydrogen with green hydrogen. This is the primary target of India’s National Green Hydrogen Mission and the proposed Hydrogen Purchase Obligation. For the full analysis, see the Fertilisers sector page and the Green Hydrogen regulatory repository.

The sector-level comparison

India’s policy response to CBAM

India’s response to CBAM has operated simultaneously on three tracks: diplomatic and legal challenge, domestic carbon pricing development, and industrial decarbonisation planning.

On the diplomatic and legal track, India formally raised concerns about CBAM at the WTO 29 times between 2020 and 2024 — second only to China and Russia in volume of challenges. India has warned that CBAM could be a deal-breaker in its ongoing Free Trade Agreement negotiations with the EU, and has repeatedly signalled possible formal WTO proceedings. The India-EU FTA was concluded in January 2026 but without the CBAM exemption Indian industry had sought, confirming that the mechanism will apply to Indian exports regardless of the bilateral trade relationship.

On the domestic carbon pricing track, India’s development of the Carbon Credit Trading Scheme is not just a domestic climate policy decision — it is a strategic trade response to CBAM. The CBAM regulation explicitly allows for deduction of a carbon price already paid in the country of origin. If India’s CCTS becomes sufficiently robust and is recognised by the EU, Indian exporters could offset part of their CBAM certificate obligation against domestic carbon costs they have already paid, keeping that revenue within India rather than surrendering it to the EU. The Council on Energy, Environment and Water (CEEW) has recommended this as a central strategic priority. CSEP research suggests that retaining carbon tax revenue within India — rather than allowing it to accrue entirely to the EU under a pure CBAM scenario — could be worth approximately 1% of GDP by 2030.

On the industrial planning track, the Ministry of Steel’s Green Steel Taxonomy, introduced in December 2024, establishes emission thresholds that align with international decarbonisation benchmarks. Steel producing less than 2.2 tCO₂ per tonne qualifies as green; below 1.6 tCO₂ per tonne earns a five-star rating. This taxonomy provides a framework against which Indian producers can measure their CBAM exposure reduction progress. India’s top five steel producers — Tata Steel, JSW Steel, JSPL, SAIL and AM/NS India — collectively account for more than 50% of national output and are on trajectories that analysts estimate will cut emissions by around 43% over the next decade, which is meaningful progress but still short of what would be needed to fully neutralise CBAM exposure at 2034 free allocation phase-out.

The CBAM and the India-EU FTA — the unresolved tension

The India-EU Free Trade Agreement, concluded in January 2026, represents both a commercial opportunity and a CBAM complication. The FTA’s enhanced market access provisions for Indian industrial goods are partially offset by the carbon cost that CBAM imposes on the same exports. Industry analysts have described the combination of CBAM and EU safeguard tariffs on steel as a “double whammy” that could make Indian steel as much as 60% less competitive in the EU market.

The strategic question for Indian exporters is whether the FTA’s market access improvements — lower tariffs on a broader range of goods — are sufficient to compensate for the rising carbon cost that CBAM will impose between now and 2034. The answer depends entirely on how fast individual companies reduce their production emission intensity. Producers who decarbonise ahead of the CBAM cost escalation will see the FTA’s benefits outweigh the carbon costs. Producers who do not will find the CBAM eroding whatever tariff advantage the FTA provides.

What this means for Indian exporters in practice

The immediate priorities for companies with EU export exposure are clear. First, confirm which products fall within CBAM scope by checking the specific EU CN codes — do not assume coverage based on sector alone. Second, establish production-level emissions measurement systems that can produce installation-specific data verified by an EU-accredited third-party body; without verified data, EU default values apply and these are set at the highest emission intensity observed for that product type, which typically means maximum CBAM costs. Third, understand the domestic carbon offset provision: if India’s CCTS is recognised by the EU, carbon costs paid domestically can be deducted from CBAM obligations, making engagement with India’s carbon market development both a compliance strategy and a cost management tool.

The companies that will navigate CBAM most effectively are those that treat it as a long-term competitiveness question rather than a short-term compliance burden. The CBAM factor rises from 97.5% in 2026 to 100% in 2034 — which means every year of delay in reducing emission intensity is a year of rising carbon costs at the border. The window to build competitive advantage through decarbonisation investment is open. The question is whether it gets used.

For analysis of the specific decarbonisation economics for each covered sector, see the Steel, Aluminium and Fertiliser sector pages. For a visual overview of how CBAM fits within India’s broader industrial policy framework, see the Industrial Decarbonisation Policy Map. For India’s NDC targets and national climate commitments that provide the broader context, see the India Decarbonisation page.

Also read: How the Carbon Border Adjustment Mechanism Works: A Guide for Exporters — a step-by-step walkthrough of the compliance process, from CN code identification through to certificate surrender.