The new year has brought a significant challenge for India's export sector. The European Union has officially extended its Carbon Border Adjustment Mechanism (CBAM), a pivotal climate policy, to cover imports entering the EU market. This move directly impacts key Indian industries, casting a shadow over trade prospects for 2026 and beyond.
What is CBAM and How Does It Impact India?
The Carbon Border Adjustment Mechanism is essentially a levy imposed on companies based on the carbon emissions generated during their production processes. Under this system, firms utilizing cleaner and more energy-efficient technologies gain a competitive advantage, while those reliant on carbon-intensive methods face financial penalties.
Starting from January 2026, Indian exporters of steel and aluminium will fall under the scope of this regulation. Given that many Indian manufacturing processes currently have a higher carbon footprint, experts warn this will translate into a substantial additional cost. Estimates suggest Indian firms could face a hefty tax liability ranging between 16 per cent and 22 per cent on these exports to the EU.
The stakes are high because the European Union is a major destination for these Indian goods, accounting for a significant 22 per cent of India's overall exports in steel and aluminium. The immediate consequence is a stark choice for exporters: absorb the new tax burden and suffer reduced profit margins, or risk losing market share to competitors from other nations who may be better positioned to comply.
A Climate Goal or a Disguised Trade Barrier?
On the surface, the CBAM is presented as a tool to incentivise global adoption of cleaner production systems, thereby cutting emissions and combating climate change—an undeniably worthy objective. However, critics argue that the mechanism places an inordinate and unfair burden on developing economies like India.
The tax effectively applies the stringent carbon taxation standards of wealthy, developed nations onto poorer countries that are still navigating their industrial growth paths. Many analysts contend that the primary function of the CBAM is less about environmental salvation and more about acting as a sophisticated trade barrier. This perspective finds support in studies from independent bodies like the United Nations Conference on Trade and Development (UNCTAD), which estimate the EU's carbon tax will reduce global carbon emissions by a mere 0.1 per cent, while simultaneously creating substantial obstacles for exports from the developing world.
It is notable that steel and aluminium are among the most protected sectors globally. The CBAM's reach, however, extends beyond these metals. The current rules also cover cement, fertilisers, electricity, and hydrogen, with provisions to include more sectors in the future. Furthermore, the United Kingdom plans to introduce a similar carbon taxation system, indicating a growing trend that India cannot ignore.
The Urgent Need for Government Intervention
This issue transcends two specific sectors or a single trading partner. It sits at the complex intersection of global climate policy and trade protectionism—both realities of the modern economic landscape. The Indian government, therefore, must act swiftly and strategically to support its export community.
Assistance could take multiple forms. Diplomatically, India can push for favourable terms or carve-outs during the ongoing negotiations for a free trade agreement with the EU. Domestically, the focus must be on policies that accelerate the transition to greener technologies. This could involve financial incentives, grants for technology upgrades, and initiatives that help Indian manufacturers measure, report, and reduce their carbon intensity to remain competitive in the new global order.
The launch of CBAM in 2026 is a clear signal. To safeguard its economic interests and ensure its industries are not unfairly penalised, proactive and robust government support for exporters is not just an option—it is an imperative.
