Bridging Carbon Costs in the India–EU Trade Corridor

DIPAK KURMI

From January 1, Indian steel and aluminum exports to Europe enter a far harsher commercial climate. The European Union’s Carbon Border Adjustment Mechanism, or CBAM, transforms carbon emissions into a direct trade cost, altering price structures, contracts, and competitiveness. Under this mechanism, imports are taxed according to the carbon dioxide emitted during their production, effectively extending the EU’s domestic carbon pricing regime to foreign producers. For India, this shift is not abstract or distant; it translates into higher costs, shrinking margins, and a tangible risk of losing ground in one of its most important export destinations. The European market absorbs roughly 22 per cent of India’s steel and aluminium exports, making CBAM a systemic challenge rather than a marginal regulatory irritant.

The financial impact is potentially severe. Industry estimates suggest that CBAM could erode 16–22 per cent of the actual prices Indian exporters receive. This margin compression threatens to force contract renegotiations and weaken the long-term presence of Indian products in the EU. Signs of strain were already visible well before CBAM formally becomes a tax. In FY2025, India exported steel and aluminum worth $5.8 billion to the EU, a decline of 24 per cent from the previous year despite the absence of any direct carbon levy. This downturn began after October 2023, when the EU launched CBAM’s transition phase, requiring exporters to submit detailed, plant-level emissions data. Compliance costs, incomplete emissions records, and difficulties in verification pushed many Indian firms to scale back exports pre-emptively, illustrating how regulatory design alone can reshape trade flows.

At its core, CBAM is an extension of the EU Emissions Trading System. Within Europe, companies must purchase allowances for the carbon they emit, creating a price on pollution. CBAM applies a comparable cost to imports to prevent what the EU terms carbon leakage, where production shifts to countries with looser climate regulations. Initially, the mechanism covers steel, aluminum, cement, fertilisers, electricity, and hydrogen, but more sectors are expected to be added over time. The United Kingdom has already announced plans for a similar regime, signalling that carbon-linked trade barriers may soon proliferate across developed markets. For exporting nations, this marks a structural transformation in global commerce rather than a temporary regulatory experiment

CBAM liability is determined by two variables: the quantity of carbon emissions generated during production and the prevailing EU carbon price, which currently hovers around €80 per tonne of carbon dioxide. If an exporting country already imposes a domestic carbon price, the EU reduces the CBAM charge accordingly. India, however, lacks a nationwide carbon tax, leaving its exporters exposed to the full burden unless specific exemptions are negotiated in the future. Although Indian producers do not pay the tax directly at the border, the distinction is largely academic. EU importers register under CBAM, calculate emissions, and purchase certificates, but they pass the cost back to suppliers by demanding lower prices. The result is diminished earnings, tighter contracts, and weakened bargaining power for Indian firms.

The timing of CBAM implementation adds another layer of complexity. While EU importers are required to surrender CBAM certificates only from 2027, this delay reflects administrative sequencing rather than a reprieve from costs. Every shipment entering the EU from January 1, 2026, will carry an implicit carbon price, and buyers will factor this into negotiations from the outset. Markets move on expectations, not paperwork deadlines. As a result, Indian exporters face immediate commercial pressure, regardless of when the formal accounting cycle begins.

The arithmetic behind CBAM explains why its impact is so pronounced. Producing one tonne of steel through the coal-based Blast Furnace–Basic Oxygen Furnace route emits roughly 2.4 tonnes of carbon dioxide. At an EU carbon price of €80, this translates into a CBAM cost of about €192 per tonne of steel. European buyers are unlikely to absorb this fully. Analysts estimate that 50–70 per cent of the burden will be pushed back onto exporters, implying a loss of €95–€133 per tonne. On a notional sale price of €600 per tonne, this reduces realised revenue to approximately €467–€505, aligning precisely with the projected 16–22 per cent margin erosion. For an industry operating on thin margins, such losses are existential.

CBAM is also uncompromising in its methodology. It is not concerned with corporate sustainability pledges or aggregated ESG disclosures, but with precise, factory-level accounting. Only Scope 1 emissions from direct fuel use and Scope 2 emissions from electricity consumption are counted. Emissions from mining, transportation, or downstream product use are excluded, but this narrow focus makes accurate data non-negotiable. Company-wide averages are irrelevant; only the emissions of the specific plant supplying the EU market matter. This design places a premium on measurement discipline and exposes firms with weak data systems to disproportionate penalties.

The risks of inadequate reporting are considerable. If exporters fail to provide verified emissions data, EU importers must rely on default CBAM values set significantly above typical actual emissions, often 30–80 per cent higher and in some cases nearly double. Importers will not shoulder this inflated cost. They will demand deeper price cuts or switch suppliers altogether. Avoiding default values thus becomes critical for preserving competitiveness. From 2026 onward, emissions data must be verified by auditors accredited under ISO 14065 or equivalent EU rules. Many Indian auditing firms do not yet meet these criteria, making early preparation and capacity-building essential.

Contractual relationships are also set to change fundamentally. European buyers are expected to introduce clauses allowing CBAM costs to be deducted directly from agreed prices, requiring verified plant-level emissions data, and permitting price revisions if EU carbon prices fluctuate. Some suppliers have already begun quoting dual prices, separating base product value from CBAM-adjusted costs, in an effort to remain transparent and competitive. These shifts mark a departure from traditional commodity contracts towards arrangements in which carbon exposure is explicitly monetised and shared.

Production technology will increasingly determine market access. Coal-based BF-BOF steel attracts the highest CBAM charges, while gas-based direct reduced iron routes face lower costs. Scrap-based or electric arc furnace steel incurs the least burden, effectively rewarding cleaner production methods. CBAM thus functions as an industrial signal, nudging exporters towards lower-emission pathways. Indian firms that invest in cleaner technologies, accurate emissions measurement, and early verification can still defend margins and retain EU customers. Those that delay risk being priced out of the market.

The broader equity implications of CBAM are contentious. The EU will impose a carbon price of around €80 per tonne even on imports from developing countries. By contrast, China’s domestic carbon price is roughly one-tenth of this level, and any future Indian price is likely to be similarly modest. Wealthy economies can absorb high climate costs more easily than poorer ones. Applying rich-country carbon prices to developing economies raises production costs, undermines exports, and slows industrialisation, while delivering negligible reductions in global emissions. The burden shifts geographically without materially altering the climate trajectory.

There is also an undeniable element of protectionism embedded within this framework. Steel and aluminium account for about 10 per cent of global carbon emissions, yet they are among the most shielded sectors in the developed world. The United States already imposes a 50 per cent import tariff on steel, and the EU is now layering a carbon tax on top. What is framed as climate action also functions as industrial protection and revenue generation, blurring the line between environmental policy and trade defence.

For India, the response must be strategic and multifaceted. Securing a resolution on CBAM through the ongoing free trade agreement negotiations with the EU is essential, whether through transitional relief, mutual recognition of carbon accounting systems, or credit for future domestic pricing mechanisms. At home, India needs to strengthen carbon measurement frameworks, expand accredited verification capacity, and support cleaner production through targeted incentives. CBAM represents a structural shift in global trade, not a passing compliance hurdle. As carbon becomes a tradable currency, competitiveness will increasingly be measured not only in cost efficiency, but in emission intensity. For Indian exporters, survival in the European market will depend on how quickly they adapt to this new reality. 

(dipakkurmiglpltd@gmail.com)