A major competitiveness shock awaits India's steel and aluminium exporters targeting the European Union market starting 1 January 2026. This is when the EU's Carbon Border Adjustment Mechanism (CBAM) transitions from a mere reporting exercise to a full-fledged payment regime, a new report warns.
The Looming Price Shock and Supply Chain Squeeze
According to a detailed analysis by the Global Trade Research Initiative (GTRI), authored by former Indian Trade Service officer Ajay Srivastava, the formal levy will be paid by EU importers. However, the economic burden will inevitably be passed back to Indian suppliers through lower negotiated prices, stricter contracts, and more rigorous supplier selection. The report estimates that to stay competitive, many Indian exporters may have to absorb price reductions ranging from 15% to 22%.
This stark warning arrives as India and the EU are in advanced negotiations, with expectations of signing a comprehensive trade agreement in the coming months, potentially by end-January or early February 2025. The CBAM challenge adds a critical layer of complexity to these trade talks.
MSMEs Face the Greatest Risk from Data Gap
A central problem identified in the report is the acute data disparity hurting Micro, Small, and Medium Enterprises (MSMEs). Large producers often do not share plant-level carbon emissions data with the smaller firms that source steel or aluminium from them. This leaves MSMEs without the verified carbon information mandated under CBAM rules.
In the absence of this data, EU authorities are likely to apply default emission values, which are typically set at the highest benchmarks. This can inflate carbon costs by 30–80% above actual emissions, devastating profit margins overnight. "This gap risks hitting MSMEs harder than larger players and could push many of them out of EU supply chains unless corrective steps are taken," Srivastava cautioned.
Industry voices echo this concern. Vinod Kumar, President of the SME Forum, stated that CBAM could become a severe barrier for small exporters not due to product quality or price, but purely because of inaccessible emissions data. He stressed the need for a supply chain mechanism to ensure data transparency to prevent a large segment of MSMEs from losing EU market access.
Production Methods and Compliance Overhaul
The carbon cost impact will vary significantly based on production technology. For steel, the traditional blast furnace–basic oxygen furnace route will carry the heaviest carbon burden. In contrast, gas-based direct reduced iron and scrap-based electric arc furnace methods will face progressively lower CBAM exposure.
For aluminium, the source of electricity is critical, with coal-based power generation dramatically increasing the product's carbon footprint and consequent tax liability.
From 2026, independent verification of emissions will become mandatory, requiring audits by EU-recognised or ISO 14065–complied verifiers. The GTRI report advises exporters to proactively build internal CBAM pricing models, incorporating a "shadow carbon price" aligned with EU benchmarks. They must also prepare standardised CBAM data packs for each manufacturing plant, detailing production routes, per-tonne emissions, verification statements, and auditor contacts.
Contracts will also evolve to include standard CBAM clauses covering cost pass-through, verification duties, and renegotiation terms linked to fluctuations in the EU carbon price.
The report's findings are set against India's current steel trade dynamics. For the first eight months of the financial year (April–November), India was a net importer of steel. Government data shows finished steel imports at 4.190 million tonnes (down 36.3%), while exports rose 32.6% to 4.183 million tonnes. Domestic consumption increased by 7.3% to 105.045 million tonnes.
