Impact of the Carbon Border Adjustment Mechanism (CBAM) on Indian Exports
From January 1, Indian steel and aluminium exports to Europe will face additional challenges due to CBAM, leading to increased costs and reduced margins.
CBAM Overview and Implications
- CBAM imposes a carbon tax on imports to the EU, based on production-related emissions.
- This tax can decrease the net prices of Indian exports by 16-22% and necessitate contract renegotiations.
- EU accounts for about 22% of India's steel and aluminium exports; however, exports were already down by 24% in FY2025 due to new EU rules.
Mechanism and Costs of CBAM
- EU's system extends carbon pricing to imports, with the EU carbon price around €80 per tonne of CO2.
- In India, where no nationwide carbon tax exists, exporters pay the full CBAM unless exemptions are negotiated.
- CBAM implementation involves EU importers registering, calculating emissions, and buying certificates, but costs are transferred to Indian exporters.
Production Impact and Exporter Challenges
- Steel production via coal-based methods results in high emissions, translating to substantial CBAM costs.
- Experts predict importers will pass 50-70% of CBAM costs back to exporters.
- Non-compliance or lack of verified emissions data can lead to higher default CBAM values.
Strategic Adjustments for Indian Exporters
- Indian firms must provide verified emissions data and shift to cleaner production methods to reduce CBAM impact.
- Contract restructuring with European buyers will be essential, requiring clauses to manage CBAM costs.
- Exploring alternative production methods like gas-based or scrap-based processes could lower tax burdens.
Broader Implications and Recommendations
- CBAM represents a shift in global trade dynamics, emphasizing emission levels over cost competitiveness.
- India should negotiate CBAM terms within FTA discussions with the EU and bolster domestic carbon accounting and cleaner production frameworks.
- CBAM serves dual roles of climate action and industrial protection, impacting global trade structures and Indian market access.
