Aananya Atri
Introduction
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a trade policy linked with climate strategies. It deals with the visibility of the carbon content of certain imports and, over time, includes financially consequential provisions. It is structured to prevent ‘carbon leakage’ by aligning the carbon cost of imported goods with that faced by EU producers under the EU Emissions Trading System. For India, CBAM is crucial because the EU is a key market for carbon-intensive manufactured exports, and because of the high embedment of “low-carbon” demand in the procurement sector by European buyers. There is strong vulnerability in the form of higher compliance costs and potential price disadvantages for emissions-intensive products, whereas the opportunity lies in utilising CBAM as a trigger to upgrade measurement systems and promote industrial decarbonisation in the country.
Background
The EU’s wider ‘Fit for 55’ reforms consist of CBAM as one of their parts and are legally established by Regulation (EU) 2023/956. The EU argues that, as long as there are variations in carbon constraints across countries, rigid EU climate policy can shift production abroad or be undercut by more carbon-intensive imports. CBAM is intended to progressively replace the EU’s earlier reliance on free ETS allowances by applying an EU-equivalent carbon price signal at the border. The transition phase of this mechanism began on 1 October 2023, during which only embedded emissions and any foreign carbon price paid were reported by the importers, with no requirement to purchase a certificate through 31 December 2025. In October 2025, the EU adopted simplifications—such as a mass-based de minimis limit—to curtail administrative burden while keeping coverage of most embedded emissions.
Key Features of CBAM
CBAM initially covered the sectors of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. The policy focuses mainly on ‘embedded’ greenhouse gas emissions in goods—primarily direct emissions caused by production and, for certain sectors, indirect emissions resulting from electricity use—using methodologies aligned with EU ETS monitoring rules. The transitional period from 2023 to 2025 required quarterly reporting; however, the first report for Q4 (the quarter of the calendar year from 1 October to 31 December 2023) was due by 31 January 2024. The definitive regime begins in 2026, with importers requiring authorisation along with annual declarations. Certificate prices are charged according to the EU ETS allowance auction prices and can be reduced if a verifiable carbon price has already been paid abroad. The 2025 amendment introduced a 50-tonne annual limit, exempting most small importers while still covering the majority of embedded emissions. The EU is India’s largest partner in goods trade, as in FY 2023–24 bilateral trade in goods between India and the EU was USD 137.41 billion. India–EU services trade reached approximately USD 51.45 billion in 2023, showing that services add a large layer of exposure to the economic relationship. Market dependence on the EU is high, which has led to the EU being India’s second-largest goods export destination in 2023, taking approximately 17.5% of India’s goods exports. The EU’s importance is considerable in absolute terms; therefore, in 2024, the EU recorded €71.4 billion of goods imports from India.
How Does CBAM Function?
EU importers check customs codes to confirm CBAM coverage and identify in-scope goods mentioned in the policy. They gather emissions data, for which importers need to obtain facility-level data on production quantities, direct emissions, and, where applicable, indirect emissions, along with evidence of any carbon price paid in the country of origin. During 2023–2025, importers submit quarterly reports through the CBAM Transitional Registry; deadlines fall one month after quarter-end, starting with the 31 January 2024 deadline for Q4 2023.
The policy highlights a major shift toward authorisation and annual declarations under the definitive regime. Importers exceeding the required limit must become ‘authorised CBAM declarants’ and file annual declarations of quantities and verified embedded emissions. Certificate and settlement rules specify that importers purchase or surrender CBAM certificates priced in line with EU ETS auctions, applying permitted deductions for verified foreign carbon prices. In practice, the 2025 simplification package adjusted operational rules for certificate management and timelines.
The implications for India require ensuring robust export compliance. Although the legal duty is handled by EU importers, the commercial duty falls on Indian exporters to supply auditable emissions data. Exporters unable to submit credible figures risk higher ‘default’ values, tougher and more rigid contract terms, or the loss of EU orders.
Current Progress and Impact on India
CBAM reporting has been mandatory since 1 October 2023. It is being used to assess the quality of the data, methodologies, and registry operations during the learning phase. The EU has since issued operational guidance for the 2026 start of the definitive regime and has begun publishing implementation materials and timelines on its CBAM portal. The October 2025 Omnibus amendment introduced a mass-based limit and other simplifications, clearly showing the EU’s desire to enforce CBAM while decreasing friction for low-volume traders. In India, government and research discussions indicate that steel and aluminium are among the most highly exposed sectors, and that preparedness depends on MRV capability and cleaner energy and production methods. In the Union Budget 2024–25, a reduction of Basic Customs Duty (BCD) from 2.5% to nil on raw materials required for steel manufacturing, such as ferro-nickel and molybdenum ores, was observed. The impact of CBAM was also visible in the implementation of the Production Linked Incentive (PLI) Scheme to promote the manufacturing of ‘specialty steel’, and it also focused on reducing imports by attracting special investments. The Indian government also implemented the Domestically Manufactured Iron & Steel Products Policy, which promotes ‘Made in India’ steel for government procurement. However, there is a clear presence of unequal sectoral aid provided by the government, which merely focuses on selected industries such as steel.
The figure below notes the impact of CBAM on the Indian steel industry (Figure 1.1).
Figure-1.1: Source:https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2085233®=3&lang=2
Figure- 1.2: India Significantly Exports I&S Products Globally and to EU
Source:https://csep.org/wp-content/uploads/2025/02/Indias-Carbon-Border-Adjustment-Mechanism-CBAM-Challenge-1.pdf
Challenges for India’s Export Competitiveness
CBAM transforms emissions intensity into an additional cost for EU-bound goods when Indian production is more carbon-intensive than EU benchmarks, curtailing margins or shifting demand to other cleaner suppliers. This clearly highlights the cost pressure and pricing challenges ahead for the country.
Many exporters, such as MSMEs dealing with downstream metal products, lack plant-level MRV (Monitoring, Reporting, and Verification) systems, digital traceability, and access to accredited verification, raising compliance costs and the risk of higher unfavourable default values. This clearly defines the MRV and verification gap in the country.
CBAM-exposed production of steel, aluminium, or cement is concentrated notably in eastern mineral states; therefore, compliance and cost shocks are going to be regionally uneven. Plants’ ability to shift to renewables differs by region because CBAM reporting includes embedded emissions, such as electricity-related components for some goods, making cleaner power access a regional advantage.
Emissions intensity depends on the selection of production technology, whether blast furnace or steelmaking, and the electricity mix. Shifting to higher scrap use, renewable power, low-carbon DRI, or green hydrogen requires more capital, infrastructure, and policy certainty, which clearly explains the technology and energy constraints.
The policy involves distributional impacts and legitimacy concerns for a developing country like India. The distinct nature of firms leads to uneven adaptive approaches; larger firms can adapt faster, whereas smaller suppliers may be excluded from EU value chains. Developing-country perspectives also warn that CBAM can shift trade away from countries with carbon-intensive developing exporters unless it is merged with support for technology diffusion and green investment.
Way Forward
- Scale CBAM-supporting MRV systems — Create sectoral MRV protocols supporting EU methods and procedures, build a pipeline of accredited verifiers, and develop secure digital systems so that exporters can share verified embedded-emissions data with EU customers efficiently.
- Decarbonise the ‘big carbon exposure’ sectors — Prima facie measures include energy-efficiency upgrades, quick renewable power procurement, and stronger scrap and recycling ecosystems for metals; medium-term pilots must focus on low-carbon DRI, green hydrogen, and other route changes, supported by blended finance and risk-sharing.
- Make the domestic carbon market structure export-aware — A credible domestic carbon pricing and crediting framework with robust MRV can reduce the carbon price gap and strongly support CBAM deductions where EU rules allow, improving predictability for exporters.
- Strengthen EU–India cooperation — Adopt technical cooperation on MRV equivalence, recognition of verified data, and access to decarbonisation finance and technology. International studies point towards ‘flanking’ measures, along with support for cleaner technology uptake in developing countries, which can improve fairness and environmental outcomes.
CBAM emphasises a structural change in which carbon intensity and data credibility are becoming central determinants of export competitiveness globally. India’s exposed sectors face near-term risks from added compliance burdens and possible price disadvantages, but the same mechanism presents a powerful opportunity to modernise plants, green electricity, strengthen MRV, and build an internationally legible carbon market structure. A coordinated outlook for credible MRV, intended industrial decarbonisation, export-aware carbon pricing, and pragmatic engagement with the EU would provide an excellent direction to maintain EU market access and compete in a globally decarbonising economy.
About The Contributor
Aananya Atri, MA and UGC-NET in Political Science and working as Research and editorial intern at IMPRI. She is passionate about public policy, research and academic writing.
Reviewers
Harshini S
Vyomini Nathwani
Acknowledgement
The author extends her sincere gratitude to the IMPRI team for their invaluable guidance throughout the process.
Disclaimer
All views expressed in the article belong solely to the author and not necessarily to the organisation.
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