Opinion Between India and EU, a carbon gap and an FTA bridge

The strain is already visible. In FY2025, India exported $5.8 billion worth of steel and aluminium to the EU — 24 per cent lower than the previous year — despite no carbon tax. The decline began after new EU rules took effect in October 2023, requiring exporters to report plant-level carbon emissions under CBAM’s transition phase. Compliance costs, data gaps, and verification hurdles forced many Indian firms to scale back exports well before CBAM formally became a tax.

CBAM extends the EU’s carbon pricing system to imports. In Europe, companies pay for their emissions under the EU Emissions Trading System. CBAM imposes a similar cost on foreign producers to prevent companies from shifting production to countries with weaker climate rules. It covers steel, aluminium, cement, fertilisers, electricity, and hydrogen, with more sectors likely to be added over time. The UK also plans to introduce a similar system.

CBAM liability is calculated using two factors: The amount of carbon emissions generated during production and the EU carbon price, currently around €80 per tonne of CO2. If a country already charges companies for their emissions, the EU reduces the tax. But since India does not have a nationwide carbon tax, Indian exporters must pay the full CBAM charge unless special exemptions are agreed later.

Indian exporters do not pay the carbon tax directly at the EU border. The EU importer pays it by registering under CBAM, calculating emissions, and buying CBAM certificates. In reality, however, the cost is passed on to Indian exporters. EU buyers demand lower prices to cover the CBAM costs. This means Indian producers earn less, face tougher contracts, and lose bargaining power, even though they are not the ones officially paying the tax.

Although EU importers are required to submit CBAM certificates only in 2027 and not in 2026, this delay reflects only administrative timelines. It does not reduce the tax burden. Every shipment entering the EU from January 1, 2026, will carry a CBAM cost, and buyers will price it in from day one.

The numbers explain why CBAM hits so hard. Producing one tonne of steel using the coal-based Blast Furnace–Basic Oxygen Furnace (BF-BOF) route emits about 2.4 tonnes of carbon. At an EU carbon price of €80, this equals €192 per tonne in CBAM costs. Buyers are unlikely to fully absorb this. Experts estimate that importers will push 50–70 per cent of the cost back to exporters. This means exporters could lose €95–€133 per tonne, reducing a €600 sale price to about €467–€505 — a margin loss of 16–22 per cent.

CBAM is not about ESG statements or sustainability reports. It is a strict, factory-level accounting system. Only Scope 1 emissions (direct fuel use) and Scope 2 emissions (electricity use) are counted. Emissions from mining, transport, or product use are excluded. Company-wide averages do not matter — only emissions from the exact plant supplying the product count.

If Indian exporters do not provide verified data, EU importers will use default CBAM values set 30–80 per cent above actual emissions, and sometimes nearly double them. Importers will not absorb this cost. They will demand deeper price cuts from Indian exporters or shift suppliers. Avoiding default values is therefore critical to protecting margins.

From 2026, emissions data must be verified by auditors approved under ISO 14065 or EU rules. Not all Indian auditors qualify, making early preparation essential.

CBAM will also force the rewriting of export contracts. European buyers will likely add clauses that allow CBAM costs to be deducted from prices, demand verified plant-level data, and reopen pricing negotiations if EU carbon prices change. Some suppliers are already quoting two prices — a base price and a CBAM-adjusted price — to stay competitive.

Production routes will matter more than ever. Coal-based BF-BOF steel will face the highest CBAM burden. Gas-based DRI steel will face lower costs. Scrap-based or electric arc furnace (EAF) steel will face the lowest burden. In effect, CBAM rewards cleaner production methods.

Indian firms that accurately measure emissions, verify data early, and adjust their production and pricing strategies can still protect their margins and maintain market access. Those who delay risk losing the European market.

Under CBAM, the EU will charge about €80 per tonne of CO2, even on imports from developing countries. By comparison, China’s carbon price is only about 10 per cent of the EU level, and India’s future price will also be much lower. While rich countries can afford higher climate costs, poorer economies cannot. Applying rich-country carbon prices to countries like India raises production costs, hurts exports, and slows industrial growth, with almost no impact on global emissions.

The irony is: Steel and aluminium, which account for about 10 per cent of global carbon emissions, are now the most protected sectors in the developed world. The US already imposes a 50 per cent import tariff, and the EU will soon add a new carbon tax. What is presented as climate action is also a tool for industrial protection and revenue generation.

India must find a resolution for CBAM under the ongoing FTA negotiation with the EU. Domestically, India should strengthen carbon accounting frameworks and support cleaner production.

CBAM marks a structural shift in global trade, not a temporary compliance hurdle. For Indian exporters, survival in the EU market will depend on how quickly they adapt to carbon pricing, data discipline and contract restructuring. As carbon becomes a trade currency, competitiveness will increasingly be measured not just in cost, but in emission levels.

The writer is founder, Global Trade Research Institute