The European Union on Thursday (January 1) began implementing the world’s first carbon tax under the carbon border adjustment mechanism (CBAM), which has antagonised much of the developing world, including India, as the controversial trade-environment measure will impose a levy on carbon-intensive goods entering the EU. A similar regulation is expected to be implemented by the UK this year, adding to the already widening barriers after the US imposed steep tariffs on steel, aluminium, and copper, hurting exports from developing countries.
In its current form, CBAM would apply a carbon-related charge to the import of goods from the power sector and energy-intensive industrial sectors, such as cement, steel, aluminium, oil refinery, paper, glass, chemical and fertilisers from countries with lower environmental ambitions and regulations than the European Union. However, it has provisions for the bloc’s lawmakers to expand the list of items that will bear a levy.
India largely exports aluminium, iron and steel to the EU, which are expected to be impacted due to the regulation.
While a formal dispute has already been launched by Russia in May last year and joined by other developing nations, United Nations Conference on Trade and Development (UNCTAD) has warned that the application of a CBAM could impact the development of poorer countries and reduce their opportunities for export-led development, particularly if countries with carbon taxes and greener production processes are exempted from the CBAM.
While developed nations argue that CBAM barely extends the similar standards that the EU imposes on domestic industry to the rest of the world, developing nations have said that it violates Common But Differentiated Responsibilities (CBDR) – a core principle in international environmental law recognised by the WTO. CBDR entails that while all countries share responsibility for addressing global environmental challenges, their obligations and policy space may differ according to their levels of development, historical contributions to environmental degradation, and capacity to respond.
Blast furnace vs Arc furnace
To tackle CBAM, Indian exporters have sought assistance from the government for compliance with CBAM, which will necessitate the use of arc furnaces, a cleaner method for iron production using steel scrap compared to blast furnaces that are commonly used in India. They have also asked the government to seek a carve-out for MSMEs during the ongoing India-EU trade deal negotiations, which are expected to be concluded early this year. However, the EU has said that CBAM is not on the negotiating table as it is not a trade measure.
Steel production, emissions are highest for 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 mostly use the blast furnace route, and exporters have informed the commerce and industry ministry that the EU is regulating the exports of steel scrap to boost domestic capacity. Notably, the US and EU are the largest producers of steel scrap. The US, EU and UK also prominently use arc furnaces that would benefit steel production in the region after CBAM and could hurt Indian manufacturers.
‘Indian exporters may need to cut prices by 15–22%’
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New Delhi-based think tank Global Trade Research Initiative (GTRI) said that from January 1 2026, every shipment of Indian steel and aluminium entering the EU will carry a carbon cost and several Indian exporters may have to “cut prices by 15–22 per cent so EU importers can use that margin to pay the CBAM tax”.
“CBAM will hit Indian steel and aluminium exports to the EU hard, with MSMEs bearing the heaviest burden. The CBAM’s complex data and verification requirements will sharply raise compliance costs, pushing many smaller exporters out of the EU market altogether,” GTRI said in its report.
A critical challenge is that large producers often do not share plant-level emissions data with MSMEs that source steel or aluminium from them. As a result, MSMEs lack the verified carbon information required under CBAM. In such cases, EU authorities may apply default emission values—typically the highest benchmarks—rather than actual emissions, sharply inflating the carbon cost even when real emissions are lower, the think tank said.
“The government and exporters need to find ways to reduce the CBAM’s compliance cost. Through mutual recognition agreements (MRAs) an Indian institution can give carbon emission certification that can be recognised by the EU. If other competitors such as China manage to get compliances in order, the rest of the suppliers will be at a loss,” Arpita Mukherjee, professor at Indian Council for Research on International Economic Relations (ICRIER) said.
More about cutting imports than climate change
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Indian trade experts have warned that trade-climate linkage through regulations such as CBAM is less about protecting the environment, but more about promoting the commercial interests of the developed world. A study released by the United Nations Conference on Trade and Development (UNCTAD) in 2021 had also estimated that the EU’s controversial carbon tax would reduce global carbon emissions by merely 0.1 per cent, but would substantially impede exports of the developing countries.
The report said that CBAM’s value in mitigating climate change is limited as the mechanism would cut only 0.1 per cent of global CO2 emissions. Amid developing countries’ concerns that CBAM breaches key WTO norms, the UNCTAD report said: “The EU could consider using some of the revenue generated by the CBAM to accelerate the diffusion and uptake of cleaner production technologies in developing countries”.
Finance Minister Nirmala Sitharaman last year said that the EU’s CBAM is unilateral, arbitrary, and a barrier to trade for the Indian industry. The minister stated that unilateral steps such as CBAM and the EU deforestation law do not support countries investing in energy transition, and that India has expressed its concerns to the EU on the matter.
