Why the EU’s carbon border tax has angered India and the developing world

On January 1, the European Union began implementing the world’s first carbon border tax under the Carbon Border Adjustment Mechanism (CBAM), marking a decisive moment in the fusion of climate policy and global trade. While the EU describes CBAM as a climate action tool, much of the developing world — including India — sees it as a trade barrier that could shrink export opportunities, undermine industrial growth, and dilute a core principle of international environmental law.

What is CBAM and why is it controversial?

CBAM extends the EU’s internal carbon pricing system to imports. European companies already pay for their emissions under the EU Emissions Trading System. CBAM seeks to “level the playing field” by charging imported goods an equivalent carbon cost, so that production does not shift to countries with weaker climate regulations.

In its current form, CBAM applies to carbon-intensive goods from the power sector and energy-heavy industries such as steel, aluminium, cement, fertilisers, chemicals, oil refining, paper and glass. The EU has also kept the door open to expand this list in future. For India, the immediate concern lies with aluminium, iron and steel — its principal exports to the EU that now face carbon-linked levies.

Why developing countries see CBAM as unfair

Developing nations argue that CBAM violates the principle of common but differentiated responsibilities (CBDR), which recognises that while all countries must address climate change, their obligations differ based on development levels, historical emissions and capacity. CBDR is embedded in international environmental law and acknowledged under the World Trade Organization framework.

Institutions such as the United Nations Conference on Trade and Development have warned that CBAM could hurt poorer countries by curbing export-led development, especially if countries with existing carbon taxes and cleaner production methods are effectively exempted. Russia has already initiated a formal dispute, joined by other developing nations, signalling that CBAM could become a flashpoint in global trade governance.

Steel production routes and why they matter under CBAM

CBAM sharply exposes differences in how steel is produced. Emissions are highest for coal-based blast furnace–basic oxygen furnace (BF–BOF) routes, lower for gas-based direct reduced iron (DRI), and lowest for scrap-based electric arc furnace (EAF) routes.

Indian manufacturers largely rely on BF–BOF technology, while the US, EU and UK increasingly use EAFs, supported by abundant steel scrap. Indian exporters have flagged that EU regulations restricting scrap exports further disadvantage them, even as CBAM effectively rewards cleaner production routes dominant in developed economies. The result is a structural tilt in favour of producers within the EU and its allies.

Why MSMEs are likely to be hit the hardest

To cope with CBAM, Indian exporters have sought government support for compliance and a carve-out for MSMEs during India–EU free trade negotiations. The EU, however, has said CBAM is not negotiable since it is not a trade measure.

Think tanks such as the Global Trade Research Initiative warn that from January 1, 2026, Indian exporters may need to cut prices by 15–22% to remain competitive, as EU importers pass on CBAM costs. MSMEs face an additional hurdle: they often lack access to plant-level emissions data from large producers supplying them steel or aluminium. Without verified data, EU authorities may apply default emission values — often the highest benchmarks — inflating carbon costs even when actual emissions are lower.

Compliance, verification and the data problem

CBAM’s complexity lies not just in the tax, but in its data and verification demands. Exporters must provide verified, plant-specific emissions data. If they cannot, EU authorities apply punitive default values. Indian experts have suggested that mutual recognition agreements could allow Indian institutions to certify emissions data accepted by the EU, but such frameworks are still absent.

Arpita Mukherjee of ICRIER has cautioned that if competitors like China manage CBAM compliance more effectively, Indian exporters risk losing market share even faster.

Climate action or industrial protection?

Indian trade experts increasingly argue that CBAM is less about climate mitigation and more about protecting domestic industry in developed economies. A 2021 UNCTAD study estimated that CBAM would reduce global CO₂ emissions by just 0.1%, while significantly restricting exports from developing countries.

The irony is stark: steel and aluminium — together responsible for about 10% of global emissions — are now among the most protected sectors in the developed world. The US has imposed steep tariffs on these metals, while the EU adds a carbon levy, compounding the pressure on exporters from poorer economies.

India’s response and the road ahead

Finance Minister Nirmala Sitharaman has described CBAM as unilateral, arbitrary and a barrier to trade, arguing that such measures do not support countries investing in energy transition. India has formally raised concerns with the EU, but the broader challenge remains unresolved.

As climate policy increasingly reshapes trade rules, CBAM signals a structural shift rather than a temporary disruption. For India and other developing countries, the debate is no longer just about emissions, but about preserving policy space for development in a world where carbon has become a currency of trade.