The European Union’s Carbon Border Adjustment Mechanism (CBAM) is poised to significantly impact global trade, particularly affecting steel and aluminium exports from India. A recent World Bank report highlights the implications of CBAM on India’s industrial sector, warning that new carbon tariffs could pose challenges for exporters and disrupt trade flows. As the EU takes a firm stance on reducing carbon emissions, Indian manufacturers are under pressure to adapt to stricter environmental regulations to maintain their market presence.

Understanding CBAM

The Carbon Border Adjustment Mechanism (CBAM) is a regulatory framework introduced by the European Union to curb carbon leakage and encourage greener industrial practices. Under CBAM, companies exporting high-carbon-emitting products, such as steel, aluminium, cement, and fertilizers, to the EU must pay a carbon tax equivalent to what European companies pay under the EU Emissions Trading System (ETS). The mechanism ensures that imports meet the EU’s carbon pricing standards, preventing businesses from relocating production to countries with lax environmental regulations.

CBAM is being phased in gradually, with a transition period that began in October 2023. Full implementation, including financial obligations for exporters, is expected by 2026.

Impact on Indian Steel and Aluminium Exports

1. Increased Costs for Exporters

The World Bank report emphasizes that Indian exporters of steel and aluminium will face higher costs due to CBAM’s carbon pricing framework. Indian manufacturers, who rely on coal-based production processes, could see their profit margins shrink as they struggle to meet EU environmental requirements. Steel Channel and Steel Suppliers Near You

2. Competitive Disadvantage in EU Markets Top 10 Steel Companies in the USA – Leading the Industry in 2025

Indian steel and aluminium producers are at risk of losing competitiveness in European markets compared to producers from regions with lower carbon footprints. Countries that rely more on renewable energy, such as Sweden and Norway, or those with advanced decarbonization strategies, may benefit from CBAM while Indian exporters face additional costs.

3. Supply Chain Disruptions

Companies exporting raw materials and semi-finished products to the EU could experience disruptions in supply chains due to the need for increased compliance with carbon regulations. The additional administrative burden of reporting carbon emissions and purchasing CBAM certificates could slow trade and increase logistical complexities.

4. Shift in Export Destinations

In response to the EU’s carbon levy, Indian exporters may seek alternative markets in Asia, the Middle East, and Africa. However, shifting to new markets may not fully compensate for potential losses in European exports, given the EU’s role as a major importer of Indian steel and aluminium.

Indian Government and Industry Response

1. Policy Measures to Support Exporters

The Indian government is exploring various policy interventions to mitigate the impact of CBAM. Strategies include negotiating with the EU for exemptions or reductions in carbon taxes for Indian exporters, promoting green technology adoption, and strengthening domestic carbon pricing mechanisms to align with global standards.

2. Investment in Decarbonization

To maintain their export competitiveness, Indian steel and aluminium producers are investing in cleaner production technologies, such as electric arc furnaces and hydrogen-based steelmaking. The transition to renewable energy sources, including solar and wind power, is also being accelerated to reduce carbon emissions.

3. Advocacy for Fair Carbon Accounting

Indian industry leaders and trade bodies are advocating for a fair carbon accounting framework that recognizes the carbon reduction initiatives already undertaken by Indian manufacturers. Ensuring that the EU considers these efforts could help mitigate CBAM’s financial impact on Indian exporters.

Global Trade and Economic Implications

1. Changing Trade Dynamics

CBAM is likely to reshape global trade dynamics, encouraging countries to accelerate their green transition. Nations exporting carbon-intensive goods to the EU will need to adopt cleaner technologies to remain competitive.

2. Potential Trade Disputes

CBAM has already sparked debates over potential trade conflicts, with developing economies arguing that it disproportionately affects their industries. Some countries may challenge CBAM’s legality at the World Trade Organization (WTO), citing concerns over protectionism and unfair trade practices.

3. Incentivizing Global Decarbonization

Despite criticisms, CBAM could serve as a catalyst for global decarbonization by compelling industries worldwide to adopt more sustainable practices. Countries with significant steel and aluminium exports, including India, may accelerate their green transition to align with evolving international regulations.

Conclusion

The EU’s Carbon Border Adjustment Mechanism presents both challenges and opportunities for India’s steel and aluminium industries. While the new carbon tariffs could increase costs and reduce competitiveness in European markets, they also provide an impetus for Indian manufacturers to adopt greener production technologies. The Indian government and industry stakeholders must collaborate to navigate CBAM’s complexities, ensuring that India remains a strong player in the global steel and aluminium trade. Strategic policy adjustments, investment in sustainability, and proactive engagement with international regulators will be key to mitigating CBAM’s impact and positioning India for a greener future in global commerce