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What is CBAM and why it may dominate India-EU FTA agenda?
What is CBAM and why it may dominate India-EU FTA agenda? Explained
India and the EU are set to announce the completion of the final negotiations of the Free Trade Agreement. Within the FTA, the most crucial issue for India is CBAM, and India will seek an exemption from it.
European Commission Chief Ursula von der Leyen and European Council President António Luís Santos da Costa were the chief guests at India's 77th Republic Day celebrations. Apart from its ceremonial significance, their visit underscores the importance of January 27, when the 16th India–EU Summit is scheduled to take place. As India and the European Union seek to advance and potentially conclude negotiations on the long-pending India–EU Free Trade Agreement (FTA), the summit is expected to mark major breakthrough in the bilateral ties.
As per several media reports, India and the European Union are set to announce the completion of much awaited negotiations on a free trade agreement on Tuesday.
One of the most critical issues expected to dominate the agenda of the forthcoming FTA negotiations is the Carbon Border Adjustment Mechanism (CBAM). Introduced by the European Union, CBAM is a carbon levy that is likely to affect several major Indian exports. India is therefore expected to seek concessions on CBAM, as it could have a substantial impact on exports of steel, aluminium, cement, and fertilisers. However, it remains uncertain whether the EU will be willing to grant any such concessions.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is an EU policy designed to put a fair price on carbon emitted during the production of carbon-intensive goods entering the EU. It aims to prevent "carbon leakage," ensuring imported products face equivalent carbon costs to EU-produced goods, thereby encouraging cleaner global production. A transitional phase for the CBAM started on October 1, 2023. CBAM successfully entered into force on 1 January 2026 and is likely to result in a 20-35% levy on selected imports.
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How it will impact India's export to EU?
Although the CBAM covers sectors such as cement, iron and steel, aluminium, fertilisers, electricity and hydrogen, India's iron and steel, aluminium, and cement industries are likely to be the most impacted by the EU's carbon tax.
India is world's second largest steel producer. It became the world's second-largest steel producer in 2018 surpassing Japan and remained so since then. Similarly, India is also a second largest producer of aluminium.
According to some reports, nearly 40% of India's steel exports go to four EU countries. With the EU's Carbon Border Adjustment Mechanism (CBAM) now in force, competitiveness will increasingly hinge on carbon intensity rather than price alone. For Indian steel producers, CBAM is likely to translate into higher compliance costs, reduced export demand, and mounting pressure to decarbonise operations.
In conversation with Zee News, Sustainability and CBAM experts Shubham Thakur and Nilesh Bhattad (CleanCarbon.ai CEO) discuss key questions surrounding CBAM, its impact on Indian exports, and how India needs to prepare to mitigate the effects of this new carbon tax.
Question: How much will CBAM raise the cost of India's steel and aluminium exports to the EU, and what share of these exports could be affected by 2030?
Ans: With CBAM reporting mandatory from January 2026, Indian exports of iron, steel, and aluminium to the EU will face higher costs due to carbon-based taxation. As these are highly carbon-intensive sectors, studies estimate an additional tax burden of 20–35%, likely to rise further by 2030, eroding trade competitiveness. The impact is significant, as 38% of India's steel exports and 27% of aluminium exports are destined for the EU, putting substantial pressure on both sectors.
Question: How could CBAM reduce the competitiveness of Indian exporters compared to countries like China or Russia, which face similar tariffs but operate under different carbon pricing systems?
Ans: India's iron and steel sector is among the most carbon-intensive globally due to heavy reliance on coal-based, emission-intensive processes. The challenge is compounded by gaps in accurate emissions measurement, lack of credible data, and weak emissions data management compared to countries like China and Russia. China, with an existing ETS, is largely prepared for CBAM, while Indian exporters may struggle to remain competitive in the EU market. Although platforms such as CleanCarbon.ai are helping exporters improve compliance and protect market share, greater focus on accurate emissions data collection remains critical to avoiding higher CBAM taxes.
Question: What ripple effects could CBAM have on India's domestic industries, including higher costs and shifts in supply chains away from the EU?
Ans: Several industry is already witnessing pressure. Suppliers are being asked to be ready for CBAM tax if their importers are levied upon in the near future. The EU buyers have been saying that they will pass on the CBAm tax on to them and are advised to ensure accurate CBAM compliance. Some players are changing their exporters from the EU to other regions and markets globally. CBAM will for sure cause major changes in suppliers and EU buyers. Some will leave the EU market, will the CBAM-compliant ones expand the market share.
Question: What steps is the Indian government taking to mitigate CBAM's impact, such as a domestic carbon tax or exemptions through the EU–India FTA?
Ans: India is building a domestic compliance framework through the Carbon Credit Trading Scheme (CCTS) and the Indian Carbon Market, which can help exporters offset or adjust CBAM-related costs by recognising domestic carbon pricing. Alongside this, industry bodies like FICCI and SEPC, with platforms such as CleanCarbon.ai, have launched IndiaCBAMRegistry.org to create a CBAM-ready ecosystem supporting trade continuity, reducing MSME uncertainty, and safeguarding India's export competitiveness as CBAM enforcement tightens.
Source: ZeeNews
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