Introduction
The European Union’s Carbon Border Adjustment Mechanism (CBAM) marks a transformative shift in climate-linked trade policy. Enforced via Regulation (EU) 2023/956, CBAM is intended to counter carbon leakage—the risk of carbon-intensive production moving to countries with weaker climate rules. Countries exporting carbon-intensive goods to the EU will be required to pay a charge matching the EU Emissions Trading System (ETS) carbon price, thereby leveling the playing field with EU producers The Times+15Wikipedia+15The Tribune+15.
CBAM entered force on 17 May 2023, entered a transitional phase from October 2023 to December 2025 (requiring quarterly emissions reporting but no charges), and moves into full implementation from January 2026, when importers must purchase CBAM certificates tied to EU ETS carbon prices Wikipedia+1astrealegal.com+1.
How CBAM Works
Scope and Cover
CBAM initially applies to six priority sectors:
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Iron & steel
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Aluminium
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Cement
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Fertilisers
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Hydrogen
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Electricity
With scope expected to expand by 2026–2030 to match the full ETS coverage and broaden sector inclusion trade.ec.europa.euWikipediaMondaq.
Reporting & Certification
During the transitional phase, importers must register in the CBAM Registry and file quarterly emissions reports (direct and indirect) under EU oversight—though no financial settlement is required until 2026 The Tribune+15Taxation and Customs Union+15trade.ec.europa.eu+15.
From 2026 onwards, importers must purchase CBAM certificates aligned to EU ETS prices and surrender them annually to offset embedded emissions; failure incurs fines of €100 per CO₂ tonne Financial Times+3SRL+3astrealegal.com+3.
Simplified Rules for Small Traders
To reduce administrative burden, proposed reforms include a 50 ton de‑minimis exemption threshold, exempting approximately 90% of importers, while still covering about 99% of emissions, and streamlining reporting and declaration procedures Taxation and Customs Union.
Implications for India
Export Exposure
India is among the top eight countries most affected. CBAM goods make up about 9.6–10 % of Indian exports to the EU, notably steel and aluminium. UNCTAD estimates export value losses of USD 1–1.7 billion in covered goods; a tax of €30/tCO₂ could slash profits by 20% WIRED+15Mondaq+15neufin.co+15.
In particular, 38% of steel and 27% of aluminium exports go to the EU, making Indian exporters vulnerable to both direct and developing indirect emissions charges. The impact could range from 7–10% duty on aluminium (direct emissions only) to over 70% when indirect emissions are included, given reliance on coal-fired power in production mint.
Administrative Burden
Indian exporters currently lack standardized frameworks to measure, verify and report emissions per EU criteria. The administrative and technological gap could force reliance on default emissions values—raising costs or risking non-compliance astrealegal.comCNBC TV18Osborne Clarke.
Domestic Policy Response
India has advocated before the WTO and EU that CBAM may contravene principles such as Common but Differentiated Responsibility (CBDR) and may act as unjust trade barriers for developing countries Financial Times+3cseindia.org+3astrealegal.com+3.
Domestically, India is accelerating:
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Development of a domestic carbon pricing or credit trading mechanism
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Renewables expansion, carbon capture tech, and ESG frameworks for emissions monitoring
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A planned tax on high-carbon exports to offset CBAM costs and fund cleaner production channels neufin.co+6SRL+6Financial Times+6.
Global and Equity Concerns
Critics, especially think tanks like India’s CSE, argue CBAM disproportionately burdens the Global South, shifting decarbonisation costs onto countries with limited financial and technological means. They view it as violating climate justice principles under the Paris Agreement cseindia.org.
African nations exporting carbon-intensive goods such as aluminium, cement, and fertiliser may see economic contraction unless supported by subsidised decarbonisation technology or equitable decarbonisation funds financed by CBAM revenues astrealegal.com+13Financial Times+13cseindia.org+13.
EU’s Internal Balance: Compensation and Reform
To soften blow to domestic industries while preserving carbon goals, the EU plans to use CBAM revenue to compensate EU export industries losing free ETS allowances—estimated €70 million in 2026, rising toward €2.1 billion by 2030 Osborne Clarke+2Reuters+2Wikipedia+2.
Some member states—such as Italy and France—are calling for CBAM simplification to reduce administrative load and preserve EU competitiveness. Proposed exemptions or thresholds aim to balance climate goals with trade pragmatism RedditReddit.
What Lies Ahead: Challenges and Path Forward
Trade Diplomacy
India is expected to press CBAM-related concerns in the India–EU FTA negotiations, seeking carve-outs or transitional relief for affected exporters, particularly SMEs The Economic Times.
Climate Cooperation
India is pushing for CBAM revenue to fund a decarbonisation fund or technical assistance to help developing partners build low-carbon capacity—upholding the Paris principle of financial and technological support cseindia.orgFinancial Times.
Domestic Industrial Transformation
Indian firms will need to upgrade measurement, reporting, and verification (MRV) capabilities while adopting cleaner energy (renewables, hydrogen, carbon‑capture technologies) to remain competitive in the EU market and beyond CNBC TV18SRLETEnergyworld.comneufin.co.
Regional Precedent
With the EU forging ahead, other economies (UK, US, Japan) are considering similar border carbon taxes or ETS linkage—making compliance relevant not just to EU trade but global industrial competitiveness Osborne Clarkeastrealegal.com.
Conclusion
The EU’s Carbon Border Adjustment Mechanism is not merely a trade tariff—it is a powerful intersection of trade, climate policy, and global equity. As India—among the most affected exporters—navigates CBAM’s complexities, it faces a dual challenge: mitigating export losses while accelerating domestic industrial decarbonisation and negotiating climate-sensitive trade diplomacy.
Success will depend on:
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Effective domestic policy reforms (carbon pricing, MRV, clean technologies)
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Strategic diplomacy in WTO and EU-India FTA frameworks
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Advocacy for equitable use of CBAM revenues through development funds
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Building industrial resilience and trade competitiveness via green transition
CBAM’s rollout in 2026 will pose critical tests for global climate governance. How well India and other developing nations adapt could reshape not only bilateral trade, but the future framework of climate‑aligned global commerce.