Why the EU’s Carbon Border Tax Is Bad News for Indian Exporters

The year has begun on a difficult note for Indian exporters, with the European Union formally extending its Carbon Border Adjustment Mechanism (CBAM) to imports. From 2026, Indian steel and aluminium exports to the EU will attract a carbon-linked levy, potentially raising costs by 16–22%. While the policy is framed as a climate action tool, its implications for developing economies like India are far more complex — and troubling.

What is the Carbon Border Adjustment Mechanism?

The CBAM is a policy instrument under which the European Union imposes a tax on imports based on the carbon emissions generated during their production. In effect, it mirrors the carbon pricing faced by European producers under the EU’s Emissions Trading System, extending that cost to foreign firms.

The stated objective is to prevent “carbon leakage” — a situation where companies relocate production to countries with looser environmental norms — and to incentivise cleaner production methods globally.

Why Indian steel and aluminium are especially exposed

From 2026, Indian exporters of steel and aluminium will fall squarely within the CBAM’s scope. This matters because the EU accounts for roughly 22% of India’s steel and aluminium exports. Indian firms are likely to face higher levies as domestic production relies more heavily on coal-based processes, which are significantly more carbon-intensive than European alternatives.

The immediate choice before exporters is stark: absorb the tax by cutting profit margins or risk losing market share to producers from countries with cleaner energy mixes.

Climate action or trade protection?

On paper, the CBAM aligns with global efforts to cut emissions and slow climate change. In practice, critics argue that it shifts a disproportionate burden onto developing countries. By applying developed-country carbon prices to poorer economies, the policy overlooks historical responsibility for emissions and vast differences in technological capacity.

Research by the United Nations Conference on Trade and Development suggests that the EU’s carbon border tax would reduce global emissions by barely 0.1%, while significantly constraining exports from developing nations. This has fuelled accusations that CBAM functions less as a climate tool and more as a sophisticated trade barrier.

Steel, aluminium, and the return of protectionism

Steel and aluminium are already among the most protected sectors globally, subject to tariffs, quotas, and anti-dumping duties across markets. CBAM adds a new layer of restriction — one justified on environmental grounds, but operating through trade.

Importantly, this is not confined to two sectors. CBAM currently covers cement, fertilisers, electricity, and hydrogen, with provisions to expand to other commodities. The UK has also announced plans for a similar carbon border tax, signalling that such measures may become a wider trend.

Why this matters beyond Europe

The CBAM reflects a broader global reality: climate policy and trade policy are increasingly intertwined. For export-driven economies like India, this creates new vulnerabilities. Cleaner production requires capital, technology, and time — resources that developing countries often lack at scale.

Without support mechanisms, carbon border taxes risk entrenching global inequalities, penalising countries that are still industrialising while richer nations consolidate their competitive advantage.

What options does India have?

For India, ignoring CBAM is not an option. One route lies in trade diplomacy — seeking carve-outs, transition periods, or exemptions in ongoing free trade agreement negotiations with the EU. Another lies at home: targeted policies that help firms invest in cleaner technologies, greener energy, and better reporting of emissions.

Ultimately, if carbon taxation and trade protectionism are here to stay, India must respond on both fronts. The challenge is to ensure that climate action does not become a new excuse for closing markets — and that the costs of decarbonisation are shared more equitably across the global economy.