By Ajay Srivastava, Founder, Global Trade Research Initiative
From January 1, every shipment of Indian steel and aluminium to the European Union will face a carbon tax as the EU’s Carbon Border Adjustment Mechanism (CBAM) moves from reporting to actual payment phase. CBAM makes the EU the first economy to tax imports based on a product’s carbon footprint.
CBAM currently covers six sectors—steel, aluminium, cement, fertilisers, electricity, and hydrogen—but this is only the start. The EU has made it clear that the list will expand steadily, and within a few years, most industrial goods entering Europe will carry a carbon cost.
Although EU importers are legally required to bear the compliance costs associated with buying CBAM certificates, these costs will be passed back to foreign suppliers. As a result, many Indian exporters may need to cut prices by 15-22% to remain competitive in the EU market.
The impact on each firm will depend on its production process. Lower emissions during the making of a product mean lower tax. In steel, blast-furnace routes are the most carbon-intensive; gas-based direct-reduced iron is cleaner; and scrap-based electric arc furnaces are the lowest-emission option. In aluminium, emissions depend mainly on electricity use, with coal-based power sharply raising carbon costs. Since India imports most of its metal scrap, scrap prices are also likely to rise once CBAM takes effect.
Micro, small, and medium enterprises (MSMEs) manufacturing products such as pipes typically buy steel sheets from large producers. Most carbon emissions occur during the steelmaking stage carried out by these large manufacturers, not during the value-addition processes performed by MSMEs. If large firms do not share plant-level emissions data with MSMEs, EU authorities will apply default emission values, which are often nearly double the actual emissions.
This will sharply raise CBAM costs and push many MSMEs out of the EU market, making urgent action by industry associations essential. How should India respond to CBAM? Here is a brief action plan for exporters, industry associations, and the government.
Exporters: EU buyers will assess whether Indian steel or aluminium—after factoring in carbon costs—can compete with EU or third-country suppliers. To compete, Indian exporters will need to master the CBAM rulebook.
First, start by mapping exposure. Identify EU-bound products, buyers, shipment volumes, and production plants to see where carbon costs will hit the hardest and where documentation will be strictest. Use this mapping to calculate an internal CBAM shadow price by estimating emissions per tonne and applying the EU carbon price, assuming buyers will do the same.
Second, put emissions systems in place immediately. CBAM is based on plant-level, verifiable data covering fuel use and electricity consumption. Track fuel inputs, power use, production volumes, and emission factors every quarter, and maintain auditable records aligned with EU rules. From 2026, emissions must be verified by EU-recognised or International Organization for Standardization-compliant auditors, similar to a financial audit, at a recurring cost. Without verified data, the EU will apply default emission values—often 50-80% higher—sharply increasing carbon costs.
Third, update contracts and operations. CBAM clauses on cost pass-through, verification, data-sharing, and price renegotiation will become standard and must be negotiated to avoid exporters absorbing the entire carbon risk. Keep production, compliance, and logistics data aligned, as inconsistencies raise audit risk and may lead EU buyers to delay shipments or switch suppliers.
Finally, prepare standardised CBAM data packs for each plant, covering production routes, quarterly output, emissions intensity, verification statements, and audit contacts. This information will accompany every shipment and will soon be as essential as invoices or certificates of origin.
Industry associations: The Federation of Indian Chambers of Commerce and Industry, Confederation of Indian Industry, Federation of Indian Export Organisations, PHD Chamber of Commerce and Industry, Engineering Export Promotion Council, and other Indian industry associations must act to prevent CBAM from becoming a firm-by-firm survival test. They should set up sector-level CBAM support platforms to pool costs for emissions measurement, verification, and data management, with special focus on MSMEs.
Associations must negotiate collective deals with EU-recognised verifiers to cut audit costs, issue simple, standardised CBAM data templates accepted by EU buyers, and create secure mechanisms for large producers to share verified plant-level emissions data with downstream MSMEs. At the same time, they should engage EU importers and regulators to clarify rules, push back against punitive default emission values where data gaps exist, and seek transitional flexibilities for complex supply chains.
Government: Understand that CBAM will cover all industrial products in the next few years. Act now to prevent a sharp loss of export competitiveness. First, support MSMEs by subsidising CBAM compliance, covering the cost of emissions measurement and verification, issuing simple standard carbon-accounting templates, and setting up a national CBAM helpdesk. Second, seek CBAM carve-outs along the lines of those the EU has offered the US, and use ongoing EU free trade agreement negotiations to underscore that an agreement becomes unviable if EU goods enter India freely while Indian exports face a carbon tax.
Third, urgently quantify the carbon costs Indian industry already bears through energy taxes, renewable obligations, and efficiency mandates, and use this evidence to claim deductions under CBAM. Finally, fast-track India’s Carbon Credit Trading Scheme by finalising steel and aluminium benchmarks, putting in place robust monitoring, reporting, and verification systems, and accrediting enough verifiers so exporters are not held back by compliance delays when CBAM takes effect.
CBAM marks a structural shift in global trade. Indian exporters who integrate carbon into the production process, pricing, contracts, and operations will remain competitive; the rest will have a tough time.