CBAM Is Here: Can India's Steel and Manufacturing Sector Survive the New Green Trade Rules?

Aspiro Living | UPSC Current Affairs | 10 min read

The EU just made climate policy into trade policy. And India is in the crosshairs.

The Carbon Border Adjustment Mechanism - CBAM - is the European Union's instrument for ensuring that its domestic carbon pricing system is not undermined by imports from countries that do not price carbon equivalently. It is now live in its transitional phase, covering steel, aluminium, cement, fertilisers, hydrogen, and electricity, as reported in The Indian Express. Full implementation begins in 2026.

For India, this is a GS-III question that connects environment, economy, and international trade simultaneously. It is also a genuine policy challenge with significant consequences for Indian exporters. Let's go through every layer.

What Is CBAM and Why Was It Created

The EU has operated an Emissions Trading System (EU ETS) since 2005. Under the ETS, European manufacturers must buy carbon allowances for every tonne of CO2 they emit above their free allocation. The price of these allowances - currently in the range of 50 to 80 euros per tonne - represents a significant production cost.

The carbon leakage problem arises because a European steelmaker paying 60 euros per tonne of CO2 competes with an Indian steelmaker who pays nothing for carbon emissions. The European producer is disadvantaged not because they are less efficient but because they face a regulatory cost their competitor does not. This creates an incentive to relocate production outside the EU - 'leakage' of both production and emissions.

CBAM addresses this by requiring importers of covered goods to purchase CBAM certificates corresponding to the carbon embedded in their imports, calculated at the EU ETS price. If the exporting country already levies a carbon price on these goods, that amount is deducted.

Carbon Pricing: The Conceptual Framework

Carbon Tax

A government levied tax on carbon emissions, typically per tonne of CO2 equivalent. Simple to administer. Price is certain but quantity of emissions is not. Sweden, Canada, and Singapore have carbon taxes. India does not have a direct carbon tax, though the coal cess and the Clean Environment Cess function partially as carbon pricing instruments.

Emissions Trading System (Cap and Trade)

A market mechanism where a government sets a cap on total emissions and issues tradeable allowances up to that cap. Emitters who reduce below their allocation can sell surplus allowances; those who exceed must buy. The EU ETS is the world's largest. Quantity of emissions is certain; price is not.

India's Carbon Market

India launched the Indian Carbon Credit Trading Scheme (ICCTS) under the Energy Conservation (Amendment) Act, 2022. The Bureau of Energy Efficiency (BEE) oversees it. It is currently in early implementation. Unlike the EU ETS, ICCTS is performance-based - entities that exceed energy efficiency targets can earn certificates; those that fall short must buy them. It is not a cap-and-trade system in the EU sense.

CBAM's deduction provision requires India to demonstrate a 'carbon price' equivalent. Whether ICCTS qualifies for this deduction is a live negotiation between India and the EU. If it does not qualify, Indian exporters pay the full CBAM charge.

Impact on Indian Exports: Sector by Sector

Steel

India is the world's second-largest steel producer and a significant exporter. The EU is one of India's major steel export destinations. Indian steel production is energy and carbon-intensive relative to European production - partly because of the fuel mix used in blast furnaces and partly because Indian steelmakers have invested less in decarbonisation. CBAM charges on Indian steel exports to the EU could add 15 to 30 euros per tonne to the effective cost of Indian steel in the European market, per estimates from the Indian Steel Association and research by the Council on Energy, Environment and Water (CEEW).

Aluminium

India exports aluminium to the EU. The carbon intensity depends heavily on the electricity source for smelting. Indian aluminium production is coal-heavy, making it more carbon-intensive than aluminium produced with hydropower or nuclear electricity. CBAM impact is significant.

Fertilisers

Ammonia-based fertilisers are carbon-intensive to produce. India's fertiliser sector exports are currently smaller, but the inclusion of fertilisers in CBAM coverage creates a long-term constraint on export expansion.

MSMEs

The compliance burden of CBAM - calculating embedded emissions, obtaining third-party verification, reporting to EU importers - is manageable for large integrated steel and aluminium producers. For MSMEs that export components or semi-finished goods that end up in CBAM-covered products, the indirect exposure and compliance cost is disproportionate.

The WTO Compatibility Question

India, China, Brazil, and several other countries have raised concerns at the WTO about CBAM's compatibility with international trade law. The core arguments:

• Most Favoured Nation (MFN) principle: CBAM applies differently to exporters from different countries based on their domestic carbon policy. Countries with equivalent carbon pricing get a deduction; others do not. India argues this discriminates against developing countries that have not yet established ETS-equivalent systems.
• National Treatment: CBAM effectively imposes a cost on imports that domestic EU producers do not face on the same basis, since EU producers receive free allowances during the transition.
• Common But Differentiated Responsibilities (CBDR): The UNFCCC principle that developed countries should bear greater responsibility for climate action because of their historical emissions. India argues CBAM violates CBDR by imposing European carbon prices on Indian exporters without recognising India's development stage or historical emission responsibility.

The EU's response is that CBAM is a domestic environmental measure, not a trade measure, and is therefore outside WTO disciplines on tariffs and trade restrictions. The legal question is unresolved and will likely reach WTO dispute settlement.

What India Needs to Do

The strategic imperative for India is to accelerate the credibility of its own carbon market before full CBAM implementation. If the ICCTS is recognised as an equivalent carbon pricing system, Indian exporters receive a deduction from CBAM charges. If it is not, they pay the full price.

This creates an interesting policy alignment: India's domestic decarbonisation interests and its export competitiveness interests now both point toward building a credible carbon price. The 2023 UPSC question on India's carbon market was ahead of the public conversation. The 2026 context makes it urgent.

Mains framing: 'Climate policy is increasingly becoming trade policy.' Examine with reference to CBAM and India's exports. A strong answer covers: CBAM mechanism, EU ETS, India's ICCTS, sector-specific impact, CBDR principle, WTO compatibility, and India's strategic response.

UPSC Mapping

Prelims MCQ Practice

1. CBAM currently covers which of the following sectors? (a) Steel, aluminium, cement, fertilisers, hydrogen (b) Textiles, electronics, pharmaceuticals (c) Software, financial services (d) Tourism and hospitality | Answer: (a)
2. The EU Emissions Trading System operates on which principle? (a) Carbon tax on all emissions (b) Cap and trade with tradeable allowances (c) Voluntary carbon offsetting (d) Sector-specific emission bans | Answer: (b)
3. India's Carbon Credit Trading Scheme is overseen by: (a) Ministry of Environment (b) RBI (c) Bureau of Energy Efficiency (d) SEBI | Answer: (c)
4. The CBDR principle in climate negotiations means: (a) All countries have equal responsibilities (b) Developed countries bear greater responsibility for climate action (c) Developing countries are exempt from all climate commitments (d) Carbon markets must be global | Answer: (b)
5. Carbon leakage refers to: (a) Actual physical leakage of CO2 from storage (b) Relocation of production to jurisdictions with lower carbon costs (c) Leakage of carbon pricing revenue (d) Cross-border atmospheric CO2 movement | Answer: (b)

Mains GS-III Question

'Climate policy is increasingly becoming trade policy.' Examine this statement with reference to the EU's Carbon Border Adjustment Mechanism and its implications for India's steel, aluminium, and fertiliser exports.

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