Introduction: The End of Free Trade as We Knew It
India’s ₹3 lakh crore export engine to the European Union has long benefitted from low-tariff access and stable demand. From steel coils and aluminium ingots to fertilisers and ceramics, Indian industry has leveraged trade deals to power growth.
But that age of “free trade” is over.
The EU’s Carbon Border Adjustment Mechanism (CBAM) changes everything. It transforms climate policy into trade policy, putting a price on the embedded carbon in every tonne of exported goods. Suddenly, carbon is the new customs duty.
What Is CBAM and Why Should Exporters Care?
CBAM is the EU’s tool to level the playing field between its domestic producers (who pay for their carbon under EU ETS) and foreign exporters (who currently don’t). Starting 2026, Indian companies exporting to the EU in carbon-intensive sectors will have to:
- Report embedded CO₂ emissions per tonne
- Purchase CBAM certificates priced at EU carbon market rates (~€45/tCO₂)
- Bear an increasing burden as free allowances phase out by 2034
This isn’t hypothetical. It’s already in transitional phase since 2023, and mandatory payments begin in less than 18 months.
EU: India’s Most Valuable and Vulnerable Export Market
The EU is India’s second-largest export destination after the US. For CBAM-covered goods alone, India’s annual exports to the EU top ₹35,000 crore, including:
| Sector | Avg. Annual Exports to EU (₹ Cr) |
| Iron & Steel | ₹11,000 |
| Aluminium | ₹6,500 |
| Fertilisers | ₹1,800 |
| Hydrogen-derived chemicals | ₹1,200+ |
Source: CMIE, NIPFP WP_408_2024
But this exposure comes with risk: India’s production methods—largely fossil-fuel reliant—make its exports carbon-heavy and CBAM-costly.
The Carbon Cost Curve: Free Trade No More
The EU has committed to zero free allowances by 2034. That means the carbon cost of Indian exports will rise sharply:
Estimated CBAM Liability (INR Cr)
| Year | Free Allowance (%) | CBAM Liability |
| 2026 | 97.5% | ₹190 Cr |
| 2028 | 90.0% | ₹794 Cr |
| 2030 | 51.5% | ₹4,019 Cr |
| 2034 | 0.0% | ₹9,048 Cr |
CBAM isn’t a future threat—it’s a present price tag. For Indian exporters, the “free trade” era is over. Now, each tonne of CO₂ comes with a bill.
Sectoral Fallout: Who’s Most at Risk?
Steel
- India’s BF-BOF route emits ~2.5 tCO₂/tonne
- Each tonne exported = €110 in CBAM surcharge
- Estimated exposure: ₹5,000+ crore by 2030
Aluminium
- Emissions depend on electricity source (coal = high)
- Indian aluminium is largely coal-powered
- Risk of EU customers shifting to low-carbon suppliers (e.g. Canada, Norway)
MSMEs & Cluster-based Exports
- Ceramic, tiles, chemicals: rarely have MRV (monitoring, reporting, verification) systems
- Lack of transparency = default CBAM values = maximum cost
The WTO Dilemma: Legal, but Is It Fair?
While CBAM is designed to be WTO-compliant, it still raises red flags for developing countries:
- National Treatment: Are Indian exporters being unfairly burdened by default values?
- Most Favoured Nation: Does CBAM disproportionately affect certain partners?
- CBDR Principle (Common But Differentiated Responsibilities): Are historical emitters shifting climate costs onto the Global South?
India has already flagged these issues at WTO and G20 forums. But until global consensus emerges, compliance is cheaper than complaint.
What Indian Exporters Must Do—Now
- Implement MRV Systems
Document actual carbon intensity to avoid costly default CBAM values. - Shift to Low-Carbon Inputs
Use renewable electricity, green hydrogen, recycled scrap. - Engage in CCTS (Carbon Credit Trading Scheme)
India’s domestic carbon market can become a compliance bridge to CBAM. - Seek Transitional Support
Advocate for WTO-safe carbon equalisation subsidies for exporters.
Final Word: Carbon Is the New Currency of Trade
In the new global economy, trade flows will follow carbon flows. CBAM is just the beginning. Other countries—USA, Canada, Japan—are watching closely.
For India’s exporters, this is a wake-up call:
Carbon transparency is no longer optional. It’s the price of entry.
