Editorial 2 : Carbon Trade Challenge
Context
The European Union’s Carbon Border Adjustment Mechanism (CBAM) links trade with carbon emissions, imposing higher costs on Indian steel and aluminium exports and challenging India’s industrial competitiveness.
Introduction
From January 1, 2026, Indian steel and aluminium exporters face increased cost pressures due to CBAM, which taxes imports based on carbon emissions during production. This marks a structural shift in global trade, where carbon footprints are becoming a determinant of competitiveness, highlighting the need for India to adapt domestically and in international negotiations.
Impact on Indian Exports
- The EU accounts for around 22% of India’s steel and aluminium exports, making CBAM a significant economic challenge.
- Even before full taxation, exports fell by 24% in FY2025, reflecting compliance costs and data reporting challenges during CBAM’s transition phase.
- Coal-based steel faces the highest carbon burden, potentially reducing realised export prices by 16–22%, affecting margins and contract negotiations.
- Costs are indirectly passed back to Indian exporters through lower prices, despite importers legally paying CBAM.
Structural Challenges for India
- India lacks a national carbon tax or emissions trading system, preventing any CBAM credit.
- Compliance requires plant-level emissions verification (Scope 1 and Scope 2), with only ISO 14065–accredited auditors recognised.
- Default EU emission values, often 30–80% higher than actual emissions, could increase costs if exporters delay verification.
- Production methods, such as gas-based DRI or electric arc furnaces, will now influence competitiveness, rewarding cleaner technologies.
CBAM: Climate Action or Green Protectionism?
- Applying rich-country carbon prices to developing economies raises equity concerns under the Common but Differentiated Responsibilities (CBDR) principle.
- Steel and aluminium are now among the most protected sectors globally, alongside US tariffs (50%), highlighting CBAM’s dual role in climate action and industrial protection.
- The mechanism provides revenue for the EU while potentially slowing industrial growth in developing economies with minimal impact on global emissions.
Role of India–EU Free Trade Agreement (FTA)
- The ongoing India–EU FTA negotiations provide a platform to seek transitional relief or exemptions for developing countries.
- Mutual recognition of carbon accounting frameworks could reduce compliance costs.
- Negotiations could also address climate finance and technology transfer commitments to balance industrial and environmental priorities.
Way Forward
- Accelerate the Indian Carbon Market (ICM) under the Energy Conservation (Amendment) Act, 2022.
- Support cleaner production technologies to reduce emissions and CBAM burden.
- Strengthen emissions measurement, reporting, and verification (MRV) systems to avoid default EU charges.
- Leverage FTA negotiations to ensure fair treatment in carbon-linked trade rules.
Conclusion
CBAM signifies a structural transformation in global trade, where carbon pricing is now a key determinant of competitiveness. India’s response must combine domestic policy reforms, cleaner industrial production, and proactive diplomatic engagement to protect exports and ensure equitable trade. Survival in the EU market will increasingly depend on emission efficiency alongside cost competitiveness.