Indian Council of World Affairs

As India and the European Union (EU) prepare for the finalisation of the Free Trade Agreement (FTA), the CBAM has emerged as a major challenge. CBAM was introduced under the aegis of Europe’s Green Deal. It imposes taxes on imports of selected goods that emit carbon and other greenhouse gases during the manufacturing process. The Indian side has raised concerns regarding the tax, as it would increase the costs for Indian exports of carbon-intensive goods, such as steel and aluminium, to the European market. Against this backdrop, this issue brief provides background on the CBAM and the India–EU trade in CBAM commodities and highlights the Indian response to CBAM. 

Introduction 

The CBAM was proposed by the European Commission in July 2021 as part of its “Fit for 55” package. The transition period of CBAM started in October 2023 and is going to enter the final phase in January 2026[i]. It is an environmental policy instrument through which the EU applies the same carbon costs to imported products as it applies to firms operating in the EU[ii]. The aim is to reduce carbon leakage by levying a price on carbon emissions and achieve climate neutrality by 2050. 

Instead of focusing on individual countries, the CBAM applies the same carbon costs to goods entering the EU for sectors covered under the EU Emissions Trading System (ETS). The sectors included are fertilisers, hydrogen, electricity, iron and steel, cement and aluminium[iii]. In the transition period, importers had to report quarterly on the emissions in their imports[iv]. From 2026, the CBAM is expected to be fully operational, and free allocation under the EU ETS would be gradually phased out. Following the implementation of CBAM, the importing EU companies will have to report the emissions and surrender emissions certificates. From 2034, CBAM certificates will cover 100 per cent of embedded emissions of CBAM goods, and no free allocation will be given under the EU ETS for these goods[v].

European Green Deal is Europe’s growth strategy to achieve climate neutrality[vi]. It aims to reduce net greenhouse gas emissions by at least 55 per cent from 1990 levels and achieve climate neutrality by 2050[vii]. As part of it, the EU CBAM and EU Deforestation Regulation (EUDR) are implemented as non-tariff barriers. The CBAM’s final phase will commence in January 2026[viii]. Strikingly, India’s emissions are substantial, making it vulnerable to regulations under EU CBAM[ix]. Therefore, CBAM has become a major hurdle in concluding the ongoing FTA negotiations. As the final phase approaches, there is an internal divide in Europe. The tension is between industrial competitiveness and the ambition of climate policy. Moreover, European industry associations expressed their concern that “the CBAM is moving faster on paper than it is in practice”[x]. And this will lead to a significant increase in cost throughout the value chain of steel[xi].

India and EU Trade in CBAM Commodities

The EU is India’s major trading partner. India’s exports to the EU in CBAM-sector commodities are significant and of substantial value. India is the largest supplier of iron and steel to the EU market. Iron and steel exports increased from $1.92 billion in 2020 and have stabilised at about $4.4–4.6 billion in 2023 and 2024. Aluminium exports are also stabilising at around $1.1 billion in 2024.

While iron and steel and aluminium exports are stable, exports of fertilisers are small compared to metals. Given the limited trade in fertilisers with the EU and India’s domestic focus of the fertiliser industry, the values are low. Cement exports have also decreased gradually. Higher transport costs, saturation of the EU market, and compliance with the CBAM mandate for carbon-intensive cement production are all contributing factors to the steady decline in exports from the cement industry to the EU.

 Table 1: India’s CBAM commodity exports to the EU (USD Thousand)

(Source: ITC Trade Map[xii])

The iron and steel industry accounts for 90 per cent of India’s CBAM exports to the EU and is, therefore, particularly exposed. Although these exports accounts for only 0.2 per cent of the country’s GDP,[xiii] the CBAM would have a significant impact on Indian exports. 

First, the direct costs for Indian exporters will be incurred in purchasing the certificates required for embedded emissions. This would lead to the erosion of profit margins and, thus, loss of export competitiveness. Second, the burden of CBAM varies widely between covered sectors. The steel industry is particularly constrained by its high emission intensity, high export volumes and fixed production patterns that are resistant to rapid change. 

Third, larger Indian steel producers can adopt the new rules more quickly due to their better resources and capacities. It is likely that it will take time for small and medium enterprises. Consequently, the effects of CBAM on the Indian steel industry are likely to be uneven and unfair, with the larger players adapting more quickly and relatively more easily than the smaller players. On the positive side, Indian exporters can shift to more environmentally friendly production methods to mitigate the impact of the tax. This could result in increased investment in decarbonisation technologies and processes in the sectors concerned. Finally, the CBAM also influences the overall trade due to the imposition of a carbon tax.  As a result, the Indian exports would experience a substantial decline in volume. Moreover, the majority of the trade and welfare loss will be borne by India[xiv].

CBAM’s Role in the India–EU Trade Relations

The CBAM presents a major challenge for India’s trade relations with the EU. The EU is India’s second-largest export destination and accounts for almost 15 per cent of all goods exports[xv]. India has raised equity concerns on CBAM, as it imposes carbon costs on developing countries without obligations. It is disproportionate burden as equal carbon cost on all nations are imposed without taking into account their historical emissions.  For instance, the per capita emissions in developing countries like India is much lower than in developed countries. However, the responsibility is borne by the developing countries under CBAM. Furthermore, by ignoring the different levels of development and capacity, resources are being channelised from developing countries. On the contrary, developed countries have agreed to climate financing under the Paris Agreement for developing countries.

Also, India has expressed concerns about the compatibility of the CBAM with WTO principles as it is a non-tariff barrier and undermines the FTA[xvi]. Therefore, CBAM becomes a crucial aspect of FTA negotiations. India can maintain its market share and develop a more competitive industrial base by coordinating trade strategy with climate transition investments. For a successful conclusion of the ongoing FTA, the CBAM issue needs to be resolved. If not addressed, it may result in lower export volumes and decreased competitiveness for Indian industries in the EU. This may affect employment and economic growth in these sectors. On the other hand, a resolution on CBAM and a successful FTA can strengthen bilateral trade and economic ties.

Notably, India already has its own emissions reduction mechanism, which includes the Perform, Achieve and Trade (PAT) scheme and the Renewable Energy Certificates (REC) scheme[xvii]. The PAT scheme sets energy consumption targets for various industries. Whereas the REC scheme requires industries to have a certain portion of renewable energy in their energy consumption[xviii]. Moreover, the PAT scheme does not qualify under the CBAM’s carbon emissions accounting. Thus, calculating the embedded emissions using the EU standard, the Indian industry may default to higher carbon values. This will impose costs on Indian exporters, even if their actual emission levels are lower.

Conclusion

The EU adopted CBAM in 2021 to achieve climate neutrality by 2050. CBAM is being implemented within the European Green Deal framework. It is going to be operational this month and aims to impose costs on the carbon-intensive goods. The iron and steel and aluminium sectors accounts for major exports from India to the EU. Thus, the implementation of the CBAM poses a challenge to India, as it is going to adversely impact exports. Moreover, India has raised concerns about equity issues and its compatibility with WTO principles.

Hence, CBAM emerges as an obstacle in concluding the FTA negotiations. However, inclusion of the Carbon Credit Trading Scheme (CCTS) in CBAM negotiations could provide some relief to the exporters. The CCTS is India’s mechanism to reduce greenhouse gas emissions through carbon pricing. It aims to incentivise and support decarbonisation efforts in the economy. Hence, the inclusion of CCTS will lower the Indian exporters’ costs, as industries will have already paid the carbon costs before entering the EU market.

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*Anchal Garg , Research Intern, Indian Council of World Affairs, New Delhi
Disclaimer: Views expressed are personal. 

Endnotes

[i] https://taxation-customs.ec.europa.eu/system/files/2023-11/CBAM%20Guidance_EU%20231121%20for%20web_0.pdf.

[ii] Carbon taxes in Europe, 2025, https://taxfoundation.org/data/all/eu/carbon-taxes-europe/.

[iii] European Commission (2023). Carbon Border Adjustment Mechanism. Taxation and Customs Union, https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en.

[iv] EUR-Lex (2023). Carbon Border Adjustment Mechanism, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=legissum:4696271.

[v] https://taxation-customs.ec.europa.eu/system/files/2023-11/CBAM%20Guidance_EU%20231121%20for%20web_0.pdf

[vi] Sharma, Vatsala, and Khushi Gupta. "Implications of Carbon Border Adjustment Mechanism: a case of India’s exports to European Union." Journal of Resources, Energy and Development 18, no. 1-2 (2022): 55-76.

[vii]https://taxation-customs.ec.europa.eu/system/files/2023-11/CBAM%20Guidance_EU%20231121%20for%20web_0.pdf.

[viii] Ibid.

[ix] Best, Frank. "The EU Carbon Border Adjustment Mechanism and its Influence on Imports from India." (2023).

[x] EUROMETAL (2025). "European steel industry warns CBAM risks 'structural mismatch' between rules, reality, https://eurometal.net/european-steel-industry-warns-cbam-risks-structural-mismatch-between-rules-reality/.

[xi] Ibid.

[xii] ITC Trade map, https://www.trademap.org/Bilateral_TS.aspx?nvpm=1%7c699%7c%7c%7c14719%7cTOTAL%7c%7c%7c2%7c1%7c1%7c2%7c2%7c1%7c1%7c1%7c1%7c1.

[xiii] https://csep.org/working-paper/assessing-the-distributional-implications-of-the-eus-cbam-on-india-a-cge-analysis/.

[xiv] Sikdar, Chandrima. &”Impact of EU’s carbon border tax on South Asian trade partners” &; Asia Europe.

[xv] https://www.policycircle.org/industry/india-eu-fta-cbam-impact/.

[xvi] https://www.cnbctv18.com/access/opinion/india-eu-free-trade-agreement-carbon-border-adjusted-mechanism-indias-export-challenges-19792995.htm.

[xvii] Oxford Institute for Energy Studies (University of Oxford). “Building the Indian Carbon Market: A Work in Progress.” Oxford Institute for Energy Studies, 2023. http://www.jstor.org/stable/resrep49373.

[xviii] Bureau of Energy Efficiency (2022), Policy Paper on Indian Carbon Market (ICM), Government of India.