Introduction:
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a pioneering climate policy tool that reflects the EU’s commitment to achieving climate neutrality by 2050. By placing a carbon price on certain imports, CBAM seeks to prevent “carbon leakage”—a phenomenon where companies move production to countries with less stringent emissions rules—and ensure that climate efforts within the EU are not undermined by foreign competitors. This comprehensive article explains the full scope of CBAM, its implementation roadmap, its technical and practical dimensions, and what it means for India and other developing economies.
What is CBAM?
CBAM is a carbon pricing mechanism that targets imports of carbon-intensive goods into the EU. It complements the EU Emissions Trading System (ETS), which already places a carbon price on domestic producers. Without CBAM, EU industries would face unfair competition from imports produced in countries with looser climate regulations.
Key Objectives:
Level the playing field between EU and non-EU producers
Encourage cleaner production practices globally
Protect EU industries from carbon leakage
Strengthen the EU’s global climate leadership
How it Works:
Importers of CBAM-covered goods will need to:
Calculate the embedded CO₂ emissions of their products
Submit verified emissions reports
Purchase and surrender CBAM certificates equivalent to those emissions, priced at the EU ETS rate
The mechanism began with a transitional phase in October 2023 and will be fully enforced from January 2026.
Full Scope of CBAM (Post-2026)
Initially, CBAM focuses on a limited number of highly polluting sectors, but the regulation is designed to expand its coverage over time. As of 2026, the following goods will fall within its scope:
Core Sectors Covered:
Iron and Steel: Includes semi-finished and selected finished products (e.g., slabs, coils, tubes)
Aluminium: Unwrought and wrought aluminium products
Cement: Clinker and various cement forms
Fertilisers: Products such as urea, ammonium nitrate, and ammonia
Electricity: Imports of electricity from non-EU countries
Hydrogen: Specifically gaseous hydrogen, including grey hydrogen
Future Expansion (Post-Review in 2026)
The EU plans to explore expanding CBAM’s coverage to include:
Downstream products (e.g., screws, pipes, auto parts made from steel or aluminium)
Organic chemicals and polymers
Indirect emissions (emissions from electricity used during production)
Other high-risk sectors, depending on decarbonisation trends and carbon leakage risks
Compliance and Technical Implementation
Transitional Phase (2023–2025):
Importers submit quarterly reports on embedded emissions
No financial penalties or certificate purchases during this phase
Helps businesses prepare for full compliance in 2026
From 2026 Onward:
Importers must register as “authorised CBAM declarants”
Annual reporting of embedded direct emissions, verified by independent third parties
Purchase CBAM certificates at the weekly EU ETS average price
Keep supporting documentation for up to four years
Administrative and Technical Burden: This involves setting up monitoring, reporting, and verification (MRV) systems that align with EU guidelines. Non-compliance may lead to penalties or rejection of imports.
Impact on India: Risks and Challenges
Export Dependence: India exports significant volumes of iron, steel, aluminium, and fertilisers to the EU:
Over 27% of India’s aluminium and steel exports go to the EU
These sectors rely heavily on coal-based energy, making their carbon footprints higher
Estimated Cost Impact:
CBAM could result in tariff-equivalent costs of 20–35% for Indian exporters
For steel exports, the cost could be €173.8 per tonne, amounting to 16% of export value
Structural Challenges for India:
Absence of a national carbon pricing mechanism
Lack of standardised MRV infrastructure
High dependency on fossil fuels
MSMEs may struggle to comply due to limited financial and technical capacity
Trade and Diplomatic Concerns: India has criticized CBAM as discriminatory and possibly WTO-inconsistent. However, the EU maintains that CBAM is a climate measure and not a trade barrier.
Opportunities and Strategic Benefits
Policy Momentum:
Accelerated development of a domestic carbon market or ETS
Launch of a green steel certification scheme
Improved focus on clean hydrogen, electrification, and renewables
Technological Shifts:
Promotion of electric arc furnaces (EAFs)
Recycling and scrap-based production
Incentives for low-carbon fertiliser technologies
Market Differentiation:
Early movers can gain preferential access to climate-conscious markets
Potential to leverage green branding and supply chain leadership
Recommendations for Stakeholders
For Indian Industry:
Begin carbon accounting and lifecycle assessments
Upgrade production systems to lower emissions
Work with EU buyers on aligning data and verification standards
For Policymakers:
Finalise India’s carbon credit trading framework
Develop MRV standards aligned with international norms
Provide fiscal support to MSMEs
For Trade Associations and Think Tanks:
Launch awareness campaigns and training programs
Foster EU–India climate tech collaboration
Monitor trade competitiveness impacts
Conclusion
CBAM is more than a trade measure; it signals a shift to climate-conscious global commerce. For India, it brings challenges but also opportunities for green transformation and innovation. Proactive action across industry, policy, and diplomacy is crucial.
