CHENNAI: The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), which is set to roll out from 2026, will have far-reaching implications for global trade. Particularly for developing countries, such as India, the CBAM poses both a challenge and an opportunity. While it aims to reduce global carbon emissions and prevent “carbon leakage” the relocation of industries to countries with less stringent climate policiesit has triggered concerns over its impact on economies that are still industrialising.
CBAM is a key component of the EU’s broader climate plan, known as the “Fit for 55” package, which seeks to reduce greenhouse gas emissions by 55% by 2030 and achieve net-zero emissions by 2050. This mechanism imposes carbon tariffs on imported goods, specifically high-carbon products such as steel, iron, cement, aluminum, fertilizers, and electricity. The goal is to align the carbon price of imports with that of domestically produced goods, ensuring a level playing field for European industries that are already subject to carbon taxes under the EU’s Emissions Trading System (ETS).
However, as CBAM enters its transitional phase, developing countries like India and regions like Africa are raising concerns. The mechanism’s potential to disrupt trade flows and impose significant costs on exporters has triggered debates on global trade fairness, climate justice, and the principle of “Common But Differentiated Responsibilities” (CBDR), which recognises that developed nations have greater responsibilities for addressing climate change due to their historical emissions.
What CBAM entails?
CBAM is designed to address carbon emissions by placing a tariff on imports based on their embedded carbon content. During the initial phase from October 2023 to December 2025, exporters to the EU will be required to report the carbon content of their products. However, no actual carbon tax will be levied during this transition period. From January 2026 onward, importers will begin paying the carbon tariffs, with the scheme gradually expanding until 2034.
For countries like India, where industries such as steel, aluminum, and cement play a crucial role in exports to the EU, CBAM poses a direct threat to competitiveness. These sectors are energy-intensive, and India’s reliance on coal-based energy makes its carbon footprint particularly high. As a result, Indian exporters will either have to absorb the cost of the carbon tax or invest in decarbonization technologies—both of which could erode profit margins and hinder growth.
India’s vulnerability
India is one of the world’s largest exporters of steel, iron, and aluminum to the EU. According to a recent report by the Global Trade Research Initiative (GTRI), the implementation of the CBAM is expected to pose a significant challenge to India’s metal sector. In 2022, 27% of India’s exports of iron, steel, and aluminum products worth US$8.2 billion went to the EU. Starting January 1, 2026, the EU will begin collecting carbon tax on each consignment of steel and aluminum, which will result in Indian firms paying an amount equivalent to 20-35% of tariffs. The impact of CBAM on Indian exports could be severe, especially in industries where the carbon footprint is substantial,” said a senior executive at JSW Steel. “We are expecting a significant loss of competitiveness in the European market.”
A report by the Boston Consulting Group (BCG) estimates that CBAM could cost Indian exporters around $1.2 billion annually by 2030. This financial burden, coupled with the cost of investing in cleaner technologies, has raised alarms across India’s industrial sector.
EU’s perspective
From the EU’s standpoint, CBAM is seen as an essential tool in the fight against climate change. Claudia Azevedo, a policy analyst at the Jacques Delors Institute in Europe, explained that while the mechanism has sparked concerns among developing nations, it is primarily a climate policy tool. “CBAM is intended to cut global emissions and prevent carbon leakage. However, it’s important to recognise the historical emissions of developed nations, which are responsible for the current climate crisis. This brings climate justice and CBDR into the conversation,” Azevedo said.
India’s response
India has been vocal in its criticism of CBAM, viewing it as a form of trade protectionism in the guise of climate policy. Indian officials have argued that the mechanism violates the spirit of international climate agreements, particularly the principle of CBDR.
CBAM Rollout Roadmap
Phase 1
October 1, 2023
It will be a 27-month transition period starting October 1, 2023
Exporters won’t need to pay any tax but share details of carbon content of steel and aluminum with EU importers
Phase 2
January 2026
Exporters will start paying carbon border tax on aluminum, steel, and other covered products
Phase 3
2026-2034
CBAM will be extended from 2026 to 2034, where new products will be gradually brought under the CBT ambit
Phase 4
2034 onwards
Starting 2034, all the goods and materials imported into the EU will be taxed under the CBAM
At the COP29 in Azerbaijan this year, the discussions on CBAM, seen as a unilateral trade policy impacting global free trade systems, are expected to also raise questions on the need for the G7 nations to abide by the principles of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) under UNFCCC and the Paris Agreement
(The carbon border tax will be implemented in four phases)
