EU's carbon border tax could undermine Indian exports—here's why

CBAM, in its transition period till December 2025, mandates that importers of goods in the scope of the new rules will have to report greenhouse gas (GHG) emissions embedded in their imports (direct and indirect). But more on that later.

Jindal Stainless isn’t the only Indian manufacturer to be impacted by CBAM. While Tata Steel’s, exports to Europe is only about 1-2% of overall India production, “the company is already reporting its emissions using the WSA (World Steel Association) and GHG methodologies in its integrated report and has completed life cycle analyses for its major steelmaking sites”, says Rajiv Mangal, Vice President (Safety, Health & Sustainability), Tata Steel.

Other manufacturers across sectors such as iron, aluminium, etc., that export to the EU are also taking steps to comply with CBAM. But what is CBAM?

The EU has pledged to reduce its net GHG emissions by at least 55% by 2030 (compared to 1990 levels) and achieve climate neutrality by 2050. Towards that, it has devised CBAM, with which it aims to impose a fair price on emissions during the production of carbon-intensive goods entering the EU and encourage cleaner industrial production in non-EU countries.

“CBAM is essentially a carbon pricing system for imports of certain goods into the EU, aimed to level the playing field between European companies, which pay for carbon emissions under the EU Emissions Trading System (ETS), and foreign firms that may not incur such costs as they enter the markets,” explains Jagjeet Sareen, Partner and Climate lead at advisory firm Dalberg Advisors. This mechanism charges importers based on the carbon emitted in the production of goods coming into the EU, in contrast to a straightforward carbon tax that charges a set fee per tonne of carbon emitted, irrespective of the product’s origin. Initially, CBAM will apply to imports of certain goods whose production is carbon-intensive, including cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. But by 2034, it is expected to be applicable to all materials and finished products that are covered under the EU ETS scheme for European producers.

In January 2026, the definitive regime will kick in, and importers will not only have to declare embedded emissions, but also buy CBAM certificates and surrender them to offset emissions. “Carbon cost paid at origin can be deducted from the payable CBAM charges (provided there is evidence of the cost). Under this, it is expected that the respective impacted countries will create official mechanisms so that the carbon cost can be paid within the country, which should be acceptable to the EU,” says Chaitanya Kalia, Partner & Leader, Climate Change and Sustainability Services, at consulting firm EY India.

The transition period will also have a big impact on Indian exporters who fall under the specified sectors—they must comply with CBAM’s reporting requirements. This involves calculating direct and indirect embedded emissions in accordance with the EU’s guidelines and submitting quarterly reports. But the biggest challenge is accurately calculating emissions. “The methodology for this calculation is stricter than the other frameworks like the GHG Protocol or product-level footprint analyses. A significant portion of Indian exporters lack in-house expertise and will need to hire professional consultants, adding to their expenses,” says Manish Dabkara, Chairman & MD of EKI Energy Services Ltd and President Carbon Markets Association of India.

The transition phase may lead to an increase in compliance costs to meet reporting requirements, says Vijay Chauhan, Executive Director at Deloitte India. Indian exporters might need to adapt their production processes to comply with evolving CBAM regulations, requiring investments in tech and infrastructure.

Experts estimate that CBAM’s definitive regime may translate into a 20-35% tax on steel, aluminium, and cement imports into the EU. Firms that rely heavily on carbon-intensive processes will need to purchase carbon credits to offset emissions, significantly raising operational expenses. “For instance, the added cost could be in the range of €30-50 per tonne of CO2 emitted, depending on the carbon price in the EU at that time,” says Sareen of Dalberg. Since GHG emissions from India are higher than other countries, CBAM’s impact may make exports to the EU uncompetitive. Acknowledging the disadvantage CBAM can put Indian exporters at, India is opposing it as an unfair trade practice and has challenged it at the WTO. But since no change in its present form seems likely as of now, large Indian firms are taking steps to lower their carbon footprint.

For instance, Vedanta Ltd’s aluminium business is in complete compliance with CBAM reporting requirements, says John Slaven, CEO-Aluminium Business, Vedanta Ltd. To mitigate the potential increase in export costs, Vedanta has introduced its low-carbon products Restora and Restora Ultra to realise a ‘green premium’ for its products.

Then there are steel and aluminium manufacturers who are switching to electric arc furnaces (EAF), which offer significant advantage in minimising CO2 emissions compared to traditional blast oxygen furnace (BOF)-based manufacturing. “EAFs can be powered by electricity sourced from renewable sources like solar or wind, dramatically reducing the reliance on fossil fuels and their associated emissions,” says Parmod Sagar, MD & CEO of refractory products maker RHI Magnesita India.

While large firms have the resources to pivot to CBAM-compliant processes, it could be challenging for smaller ones. Can carbon credits help them?

Under the framework, carbon credits from external emission trading systems are not accepted as a direct offset. But experts anticipate that CBAM’s implementation may indirectly boost carbon credit purchases in non-EU countries, since businesses may seek to mitigate the financial impact before their products reach the EU. Incidentally, India is actively working to establish a structured carbon trading system. The Bureau of Energy Efficiency and the Ministry of Environment, Forest and Climate Change are planning for an India-specific emissions trading scheme. “India’s proactive approach in establishing a domestic carbon market and seeking recognition from the EU could potentially help mitigate the impact of CBAM,” says David Sinate, Chief GM of the Research & Analysis Group at India Exim Bank, which has come up with a Sustainable Finance Programme, under which it finances green-, transition-, social-, and sustainability-linked investments of eligible borrowers.

CBAM is also a big opportunity. “It can act as a catalyst for broader sustainability and for India to meet national commitments around climate action,” says Hisham Mundol, Chief Advisor, India at the Environmental Defense Fund.

But CBAM isn’t the only carbon adjustment mechanism; more countries are evaluating similar mechanisms. So, it makes sense for Indian companies to gear up for such compliance regimes.

@nidhisingal