The EU's Carbon Border Adjustment Mechanism (CBAM) represents a fundamental change in the way international trade will increasingly be conducted. What began as an environmental measure is becoming an important determinant of market access and competitiveness. Indian exporters should not view it merely as another European compliance requirement, but as an early indication of how carbon intensity will influence global trade over the coming decade.
The definitive phase of EU CBAM commenced on January 1. It covers 6 carbon-intensive sectors - iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen. EU importers above the prescribed threshold must account for embedded emissions and surrender CBAM certificates linked to the EU Emissions Trading System carbon price. Importantly, a carbon price effectively paid in the country of production can be deducted from the CBAM liability.
For India, the immediate exposure is relevant to iron and steel and aluminium. But we shouldn't look at CBAM only through the prism of its coverage. The direction of travel is much wider.
The EU is moving towards extending CBAM to selected downstream products containing substantial quantities of iron, steel and aluminium, while further examination of additional sectors, indirect emissions and downstream products is envisaged. Organic chemicals and polymers have also figured in the review framework.
Thus, engineering goods, fabricated metal products and, eventually, several products further down manufacturing value chains could face increasing carbon-related compliance. The issue is consequently much larger than exports presently falling under CBAM.
India must prepare for this transition now, particularly keeping MSMEs at the centre of its response. Large companies have greater capacity to measure emissions, engage accredited verifiers, procure RE and invest in cleaner tech. For a small exporter, however, measurement, reporting, verification and certification can become significant costs even before any carbon levy is imposed.
International practice also recognises need for proportionality. The EU has introduced a 50-tonne threshold that exempts many smaller importers while retaining more than 99% of emissions within CBAM. The UK CBAM, scheduled from 2027, provides a registration threshold intended to reduce disproportionate administrative burdens on smaller businesses.
India should follow the same principle while supporting its exporters. GoI has moved in the right direction by assisting MSMEs in meeting emerging quality, sustainability and compliance requirements under TRACE (Trade Regulations, Accreditation and Compliance Enablement) scheme. This support should now be expanded, with substantially higher financial ceilings, for exporters affected by CBAM and similar environmental measures.
Assistance should cover carbon accounting, audits, accredited verification and certification, RE adoption, energy efficiency, cleaner production processes, and technology upgradation. More importantly, support should incentivise actual reductions in carbon emissions, rather than merely reimbursing the cost of consultancy and certification. A dedicated Green Export Transition Fund, with a strong MSME window, merits consideration.
Within Europe, revenues from emissions trading support low-carbon technologies and industrial decarbonisation. India should similarly ensure that resources generated through its evolving domestic carbon market are substantially channelled back into industrial decarbonisation.
The principle that an eligible carbon price already paid in the country of production should be recognised, while determining the border carbon liability is critical. Where an Indian producer has paid a recognised domestic carbon price, it should reduce the corresponding CBAM liability in Europe. Economically, it would be far preferable that the carbon value attributable to Indian production is collected in India and used to finance its own green transition rather than the entire amount accruing overseas.
CBAM-type measures are unlikely to remain confined to the EU. Carbon competitiveness is, therefore, rapidly becoming an integral part of export competitiveness.
India should respond not defensively but strategically. It needs internationally credible domestic carbon measurement, recognised certification and verification systems, affordable green finance, RE access, and tech support for MSMEs. It should also negotiate mutual recognition of credible Indian systems, wherever possible, so that exporters are not subjected to repetitive and expensive overseas certification.
CBAM is a challenge. But it can also become a catalyst. If India uses this period to green its manufacturing, strengthen domestic carbon markets, secure recognition of carbon costs paid in India, and recycle carbon revenues into MSME decarbonisation, it can turn an emerging trade barrier into an opportunity to build a cleaner, more efficient and globally competitive export sector.
