Why the EU’s carbon border tax is squeezing Indian steel and aluminium exports

From January 1, Indian steel and aluminium exports to Europe enter a far more punitive trade regime. The European Union’s Carbon Border Adjustment Mechanism (CBAM) will impose a carbon-linked cost on imports, sharply reducing margins and weakening India’s competitiveness in a market that absorbs about 22% of its steel and aluminium exports. What is unfolding is not a routine compliance issue, but a structural shift in how carbon emissions are priced in global trade.

What exactly is CBAM and why has it kicked in now?

The Carbon Border Adjustment Mechanism is the European Union’s attempt to extend its domestic carbon pricing system to imports. Within Europe, companies pay for their emissions under the EU Emissions Trading System. CBAM applies an equivalent cost on foreign producers to prevent “carbon leakage” — the relocation of production to countries with weaker climate rules.

CBAM currently covers steel, aluminium, cement, fertilisers, electricity and hydrogen, with more sectors expected to be added. A transition phase began in October 2023, requiring exporters to report detailed, plant-level emissions. From January 2026, this reporting translates into an actual tax, even though EU importers will formally submit CBAM certificates only in 2027.

Why Indian exporters are feeling the pain even before the tax

The damage began well before CBAM became a payable levy. In FY2025, India’s steel and aluminium exports to the EU fell to $5.8 billion — a 24% drop from the previous year — despite no carbon tax being collected yet. The decline followed new reporting rules that exposed deep compliance gaps: missing emissions data, lack of plant-level measurement, and limited access to recognised verifiers.

Many exporters scaled back shipments rather than risk penalties or default emission values, which the EU sets 30–80% higher than actual emissions when verified data is unavailable. In some cases, default values can nearly double the carbon footprint used for tax calculations.

How CBAM costs are calculated — and passed on

CBAM liability depends on two numbers: the carbon emissions generated during production and the EU carbon price, currently around €80 per tonne of CO₂. If the exporting country already prices carbon domestically, the EU deducts that amount. Since India does not have a nationwide carbon tax, Indian producers face the full CBAM charge.

Legally, the tax is paid by the EU importer, who must register under CBAM and buy certificates. In practice, the cost is pushed back onto Indian exporters through lower prices and tougher contracts. Buyers simply demand discounts to cover their CBAM exposure.

For coal-based blast furnace–basic oxygen furnace (BF–BOF) steel, emissions are about 2.4 tonnes of CO₂ per tonne of steel. At €80 per tonne, this implies a CBAM cost of roughly €192 per tonne. If importers pass on even 50–70% of this burden, exporters lose €95–€133 per tonne — slashing realised prices by 16–22%.

Why production routes and data discipline now decide competitiveness

CBAM is not about corporate sustainability narratives. It is a factory-level accounting system. Only Scope 1 emissions (direct fuel use) and Scope 2 emissions (electricity use) count. Mining, transport and downstream use are excluded. Company-wide averages are irrelevant — only emissions from the specific supplying plant matter.

This makes production routes decisive. Coal-based BF–BOF steel faces the highest burden, gas-based direct reduced iron (DRI) steel lower costs, and scrap-based or electric arc furnace (EAF) steel the least. In effect, CBAM rewards cleaner technologies with direct price advantages.

From 2026, emissions data must be verified by auditors accredited under ISO 14065 or EU rules. Many Indian auditors do not yet qualify, making early preparation critical.

How CBAM is reshaping contracts and trade behaviour

European buyers are already rewriting contracts. New clauses allow CBAM costs to be deducted from prices, require verified emissions data, and permit renegotiation if EU carbon prices rise. Some exporters are quoting two prices — a base price and a CBAM-adjusted price — to remain competitive.

Although the EU’s administrative timeline delays certificate submission to 2027, buyers are pricing CBAM into contracts from the first shipment in 2026. The delay changes paperwork, not economics.

Is CBAM climate action — or industrial protection?

The political economy is hard to ignore. Under CBAM, the EU applies a carbon price of about €80 per tonne even to imports from developing countries. By contrast, China’s carbon price is roughly one-tenth of this level, and any future Indian price will likely be far lower.

Steel and aluminium account for around 10% of global emissions, yet they are now among the most protected sectors in the developed world. The US already imposes a 50% import tariff on steel; the EU is adding a carbon tax. What is framed as climate action also functions as industrial protection and revenue generation.

What India needs to do — at home and at the negotiating table

CBAM marks a permanent shift, not a temporary hurdle. India must seek a negotiated resolution under its ongoing free trade agreement talks with the European Union, including transitional relief, recognition of alternative climate efforts, or credit for cleaner production pathways.

Domestically, India needs robust carbon accounting systems, accredited verification capacity, and policy support for low-carbon steel and aluminium. Without this, Indian exporters risk being priced out of one of their most important markets.

As carbon becomes a trade currency, competitiveness will no longer be measured only in cost and quality, but increasingly in tonnes of CO₂ per tonne of product.