EU’s Carbon Border Tax: Climate Regulation or Trade Barrier for India?

Why in News ?

From January 1, the European Union has operationalised the Carbon Border Adjustment Mechanism (CBAM) on selected carbon-intensive imports. The move is expected to significantly impact India’s exports of steel, aluminium, and other energy-intensive products, raising concerns over trade competitiveness and climate equity.

Background & Context

As the European Union intensifies its climate action agenda to achieve net-zero emissions by 2050, it has adopted market-based mechanisms to prevent “carbon leakage”—a situation where industries relocate production to countries with weaker emission norms.

CBAM represents the EU’s attempt to align international trade with its domestic carbon pricing regime under the EU Emissions Trading System (ETS). However, for developing countries like India, which rely on carbon-intensive manufacturing for export-led growth, the measure has sparked concerns over protectionism disguised as climate action.

What is the Carbon Border Adjustment Mechanism (CBAM) ?

CBAM is a carbon pricing mechanism that imposes a levy on imports entering the EU based on the embedded carbon emissions generated during their production.

It effectively extends the EU’s domestic carbon costs to foreign producers, requiring importers to purchase CBAM certificates corresponding to the carbon footprint of their goods.

Sectors Covered Under CBAM

CBAM currently applies to imports from the following carbon-intensive sectors:

• Iron and steel
• Aluminium
• Cement
• Fertilisers
• Electricity
• Hydrogen
• Certain downstream products

The EU retains the authority to expand the product scope in the future, increasing long-term uncertainty for exporters from developing economies.

Impact on India and Other Developing Economies

India’s exports to the EU are heavily concentrated in steel, iron, and aluminium, making them particularly vulnerable to CBAM-induced costs.

Key concerns include:

• Increased landed cost of Indian exports in the EU
• Erosion of price competitiveness vis-à-vis EU producers
• Higher trade barriers for developing countries lacking carbon pricing regimes

Additionally, the United Kingdom is expected to introduce a similar carbon border tax, while high US tariffs on metals continue to strain India’s external trade environment.

Global Pushback and Legal Concerns

CBAM has attracted resistance from several countries:

• Russia initiated a formal dispute against CBAM
• Developing nations have raised concerns at WTO platforms
• UNCTAD has warned that CBAM may:
  • Undermine export-led development
  • Reduce market access for poorer countries
  • Worsen global trade inequalities

Critics argue that exempting countries with existing carbon taxes creates an uneven playing field, disadvantaging nations with limited fiscal and technological capacity.

Developed vs Developing World Debate

EU’s Argument

• CBAM prevents carbon leakage
• Ensures fair competition between EU and foreign producers
• Is a climate measure, not a trade barrier

Developing Countries’ Concern

• CBAM violates the principle of Common But Differentiated Responsibilities (CBDR)
• Ignores historical emissions of developed nations
• Imposes uniform obligations regardless of developmental stage

CBDR, recognised under international environmental law and WTO norms, mandates differentiated responsibilities based on capacity and historical contribution.

CBAM and the Shift in Steelmaking Technology

To comply with CBAM, Indian exporters are under pressure to transition towards low-emission steelmaking technologies.

Emission Intensity of Steel Production Routes

• Highest emissions: Blast Furnace–Basic Oxygen Furnace (BF–BOF)
• Moderate emissions: Gas-based Direct Reduced Iron (DRI)
• Lowest emissions: Scrap-based Electric Arc Furnaces (EAFs)

India’s steel sector is predominantly BF–BOF-based, making compliance costly and technologically challenging.

Industry Demands and Trade Negotiations

Indian exporters have urged the government to:

• Provide financial and policy support for green transition
• Facilitate access to low-carbon technologies
• Seek exemptions or transitional relief for MSMEs in the India–EU trade agreement

However, the EU has maintained that CBAM is non-negotiable, as it is framed as a climate instrument rather than a trade measure.

Scrap Availability and Structural Disadvantages

A key constraint for Indian steelmakers is limited access to steel scrap:

• The EU and US, the largest scrap producers, heavily rely on EAFs
• The EU is regulating scrap exports to retain domestic supply
• This structural advantage may allow Western producers to comply with CBAM at lower costs

As a result, Indian manufacturers face a competitive disadvantage unrelated to efficiency or intent.

CBAM Impact: Price Cuts Likely for Indian Exporters

From January 1, 2026, CBAM will impose a direct carbon cost on every shipment of Indian steel and aluminium entering the EU.

According to the Global Trade Research Initiative (GTRI):

• Exporters may need to cut prices by 15–22% to remain competitive
• MSMEs will be disproportionately affected due to:
  • High compliance and verification costs
  • Limited bargaining power
  • Risk of exclusion from EU markets

Data Gaps and Compliance Challenges

A major operational challenge lies in emissions data availability:

• MSMEs often lack access to plant-level verified emissions data
• Large producers may not share verified figures with downstream buyers
• In absence of verified data, EU authorities may apply default (highest) emission values, inflating CBAM costs

Experts recommend pursuing Mutual Recognition Agreements (MRAs) so that emissions certified by Indian authorities are accepted by the EU.

CBAM: Climate Action or Trade Protectionism ?

Indian trade experts argue that CBAM reflects commercial and strategic interests of developed economies more than genuine climate mitigation.

A UNCTAD study (2021) estimated that:

• CBAM would reduce global CO₂ emissions by only 0.1%
• Export losses for developing countries would be disproportionately high

UNCTAD has suggested that CBAM revenues should be channelled towards financing green technologies in developing nations to uphold climate justice.

India’s Official Position

India has consistently opposed CBAM, describing it as:

• Unilateral and arbitrary
• A violation of multilateral trade norms
• A barrier to energy transition efforts in developing countries

The Finance Minister has formally conveyed India’s concerns to the EU, emphasising the need for cooperative, not punitive, climate action.

Analysis: Why CBAM Matters for India

• Tests the balance between climate ambition and trade equity
• Raises questions over WTO compatibility of climate-linked trade measures
• Highlights technological and financial constraints in India’s green transition
• Could reshape global manufacturing and supply chains

CBAM represents a critical intersection of climate policy, geopolitics, and economic development.

Way Forward

• Accelerate India’s shift to low-carbon industrial technologies
• Develop robust plant-level emissions measurement and verification systems
• Pursue MRAs and climate finance mechanisms at global forums
• Strengthen South–South cooperation on green manufacturing
• Advocate for CBDR-compliant climate–trade frameworks at WTO and UN platforms