There is no shortage of commentary on what the Carbon Border Adjustment Mechanism means at a strategic level. There is far less written about what it actually requires you to do — what data to collect, what to report, what to buy, and when. For Indian exporters of steel, aluminium and fertilisers with EU customers, those operational details are now the most urgent question, because the definitive phase began on 1 January 2026.

This article walks through the CBAM compliance process step by step, as it stands today in its definitive phase. For the strategic context — what CBAM means for India’s trade competitiveness and how Indian industry is responding — see the companion piece: Carbon Border Adjustment Mechanism and Its Impact on Indian Industry.

The CBAM timeline — where things stand in 2026

Step 1 — Confirm whether your products are covered

CBAM applies to specific products within six sectors: steel and iron, aluminium, cement, fertilisers, electricity and hydrogen. But coverage is defined by specific EU Combined Nomenclature (CN) codes, not entire sectors. Not every product within a broadly covered sector is automatically subject to CBAM obligations.

This is a step that many exporters overlook. Flat-rolled steel products, for example, are covered. Certain downstream steel products — screws, bolts, some fabricated components — were not covered in the initial phase, though the December 2025 legislative proposal from the European Commission proposed expanding coverage to a wide range of downstream goods incorporating CBAM-covered materials. That expansion is not yet in force and is subject to the EU legislative process, but it signals that the perimeter of CBAM will widen.

The practical first step for any Indian exporter with EU customers is to run through the list of CN codes published by the European Commission and confirm which of your specific products are covered. Your EU importer needs this information to determine their obligations, and they will be asking for it if they have not already.

Step 2 — Understand what emissions must be calculated

Once product coverage is confirmed, the next task is calculating embedded emissions. CBAM distinguishes between two types of emissions, and which ones must be reported depends on the specific product category.

For aluminium, both direct and indirect emissions must be reported — which is why the source of electricity matters so much for aluminium CBAM obligations. A smelter powered by coal-based electricity will have a very different indirect emissions figure than one sourcing power from renewables, even if the physical production process is identical. This is what makes the Green Energy Open Access Rules and the ISTS waiver strategically important for Indian aluminium producers: switching to renewable power through open access procurement directly reduces the CBAM liability.

For steel, only direct emissions are counted by default under CBAM. The October 2025 simplification package also changed the default methodology for electricity-related emissions in some categories, calculating them based on all power sources in the exporting country rather than just fossil fuels, which reduces default values for countries with significant renewable capacity.

The EU requires that embedded emissions be calculated following the specific methodology set out in the CBAM implementing acts — not national GHG inventory rules and not the GHG Protocol. This is a meaningful distinction. Exporters cannot simply use their existing sustainability reports and assume the numbers will satisfy CBAM requirements.

Step 3 — Choose between actual data and default values

Importers can report embedded emissions using either actual production data from the exporting installation or EU default values published by the European Commission. The choice carries significant financial consequences.

From 2026, actual emissions data must be verified by an accredited third-party body. In the first year of verification, verifiers are required to conduct an on-site inspection of the production installation. This is the element of CBAM compliance that requires the most preparation time for mid-sized industrial exporters — building credible emissions measurement systems and establishing relationships with accredited verifiers takes months, not weeks.

Step 4 — Understand the cost calculation formula

The CBAM financial obligation is not simply the embedded emissions multiplied by the EU ETS price. There are two adjustments that reduce the gross liability.

The free allocation adjustment is important to understand correctly. In 2026, it means importers pay for 97.5% of the adjusted embedded emissions above the CBAM benchmark, because EU producers in covered sectors still receive 2.5% of their ETS allowances for free. As those free allowances are phased out, the CBAM factor rises. By 2034, there are no free allowances and the factor is 100% — the full carbon cost applies to imports without any adjustment.

Step 5 — The domestic carbon price offset

The CBAM regulation’s most strategically important provision for India is the ability to offset a carbon price already paid in the exporting country. If an exporter can demonstrate that a verified carbon price has been paid domestically on the production of the goods, the equivalent amount can be deducted from the CBAM certificate obligation in the EU. The intention is to avoid double-charging carbon — once at home and once at the EU border.

For India, this has a direct implication for the Carbon Credit Trading Scheme. India’s CCTS is operational in framework but still being fully built out in terms of sector coverage, verification systems and credit registry. If and when it is recognised by the European Commission as an equivalent carbon pricing mechanism, Indian exporters could use CCTS carbon costs to offset part of their CBAM obligation — keeping that revenue within India rather than surrendering it to EU national authorities.

The Council on Energy, Environment and Water (CEEW) has identified this as a central strategic priority for India’s CBAM response. CSEP research estimates that retaining carbon tax revenue within India through a domestic carbon pricing mechanism — rather than having it accrue entirely to the EU — could be worth approximately 1% of GDP by 2030. This is why the development of India’s carbon market is not merely a domestic climate policy question. It is a trade policy and fiscal strategy question with direct financial consequences for Indian exporters.

The rules for recognising foreign carbon prices under CBAM are still being finalised by the European Commission. Until formal rules are in place, the deduction depends on verified evidence consistent with CBAM regulation requirements. Standard annual average or default carbon prices may be used for countries where carbon pricing mechanisms are established, but actual verified carbon prices paid can also be submitted with appropriate documentation.

Step 6 — Verification and annual declaration

CBAM is not a self-declared system. Embedded emissions data submitted in annual CBAM declarations must be independently verified by accredited third-party bodies under rules aligned with the EU ETS verification framework. In the first year of CBAM compliance, verifiers must conduct an on-site inspection of the production installation where the goods were manufactured. Verification must confirm that reported emissions figures are within a 5% variance threshold of actual figures.

This verification requirement is the single most time-intensive element of CBAM compliance for exporters who have not previously operated within an emissions monitoring and reporting framework. Accredited verifiers with the expertise to work across multiple countries and production environments are in limited supply. Building the relationship with a verifier, establishing the data trail, and completing the on-site inspection process takes time that cannot be compressed into the weeks before a reporting deadline.

The annual CBAM declaration is submitted by EU importers — not directly by Indian exporters. But the declaration depends entirely on the data that Indian producers provide. The accuracy of that data determines whether the importer uses actual emissions or is forced into default values, which as explained earlier typically maximises CBAM costs. Producers who can provide high-quality, verifiable installation-level emissions data have a direct commercial interest in doing so: it directly reduces the cost burden on their EU buyer, which in turn protects the commercial relationship.

What Indian exporters need to do in practice — right now

The bigger picture for Indian exporters

CBAM is sometimes discussed as though it is primarily a political or trade policy question. Operationally, it is a data and compliance challenge that starts now and escalates every year until 2034. The companies that navigate it most effectively will be those that treat the current phase as an opportunity to build competitive advantage — not just a compliance burden to minimise.

Producers with genuinely lower emission intensity than the EU benchmark will pay less. Producers with verifiable actual data will pay less than those relying on default values. Producers who can demonstrate domestic carbon costs under a recognised pricing mechanism will pay less still. Every dimension of the CBAM formula rewards early investment in measurement, verification and decarbonisation.

For analysis of the decarbonisation economics in each covered sector — including what the realistic pathways and timelines look like — see the Steel, Aluminium and Fertiliser sector pages. For the full regulatory context of India’s carbon market and energy transition framework, explore the Regulatory Repository and the Interactive Policy Map.

Also read: Carbon Border Adjustment Mechanism and Its Impact on Indian Industry — the strategic context behind CBAM, India’s trade exposure, and the policy response.