Article 2: Tariffs to carbon, the new rules shaping India’s trade
Why in news: The European Union’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase from January 1, 2026, raising concerns over India’s exports, fertilizer prices, competitiveness, and carbon-compliance obligations in global trade.
Key Details
- CBAM imposes carbon-linked charges on imports entering the EU.
- Carbon-intensive sectors like steel, aluminium, cement, and fertilizers are affected.
- Indian exporters may face higher compliance costs and reduced competitiveness.
- Rising global fertilizer prices could increase India’s import burden and food inflation.
- India must invest in clean energy and negotiate fair transition support internationally.
About CBAM
- The European Union (EU) introduced the Carbon Border Adjustment Mechanism (CBAM) in July 2021.
- It entered its definitive implementation phase on January 1, 2026.
- CBAM aims to prevent carbon leakage by imposing a carbon-based charge on imports.
- The charge depends on the embedded carbon emissions in imported products.
- Major affected sectors include:
- Steel
- Cement
- Aluminium
- Fertilizers
- Electricity
- Hydrogen
Impact on India
- India’s carbon-intensive exports to Europe may become more expensive.
- Even with a trade agreement, Indian exports to the EU will still face CBAM rules.
- Market access is now influenced not only by tariffs but also by carbon-emission standards.
- Developing countries like India may face:
- Higher compliance costs
- Reduced export competitiveness
- Pressure to adopt cleaner production technologies
- Similar carbon-related trade measures may also be adopted by other developed countries.
Sectors Likely to be Affected
1. Steel and Aluminium
- India’s steel and aluminium sectors are expected to face the strongest impact.
- These industries depend significantly on European markets.
- Their production processes are highly carbon-intensive.
- EU importers will formally pay the levy, but exporters may indirectly bear the burden.
- Indian firms may need to:
- Reduce emissions
- Invest in clean technologies
- Absorb additional costs to stay competitive
2. Fertilizer Sector
- India imports large quantities of fertilizers.
- Major suppliers like:
- Egypt
- Russia
- Morocco
- China
also export fertilizers to the EU.
- Higher carbon-compliance costs may increase global fertilizer prices.
- This could:
- Raise India’s import bill
- Hurt farm profitability
- Increase food inflation
How CBAM Differs from Traditional Trade Measures?
- Traditional Non-Tariff Measures (NTMs) focus mainly on product standards and quality compliance.
- CBAM is different because it is:
- Price-based
- Directly linked to carbon emissions
- Quantifiable and measurable
- Even if products meet quality standards, high carbon emissions can still increase export costs.
- Transitioning to low-carbon production is much more expensive in the short term.
Way Forward for India
1. Domestic Measures
- Increase investment in:
- Clean energy
- Green technologies
- Carbon-efficient production systems
- Strengthen implementation of domestic carbon policies.
- Reduce fertilizer import dependence through:
- Higher domestic production
- Better implementation of the Soil Health Cards Scheme
- Balanced fertilizer use
2. International Measures
- Negotiate for fair treatment of developing countries in climate-related trade rules.
- Seek:
- Phased transition periods
- Technology transfer
- Financial and transitional support
- Ensure climate policies do not weaken India’s:
- Economic growth
- Export competitiveness
- Development goals
Conclusion
CBAM reflects the growing linkage between climate policy and international trade. While it promotes low-carbon production globally, it poses significant challenges for developing economies like India. India must strengthen domestic green transitions, improve carbon efficiency, and secure equitable treatment in global negotiations. Balancing sustainability with economic growth and export competitiveness will be essential for India in the emerging carbon-conscious trade order.