Europe’s Carbon Border Adjustment Mechanism came into effect on 1st January 2026. It imposes carbon levies on imports of iron & steel, aluminium, fertilisers and cement. India, alongside Türkiye and China, are expected to be affected the most.
The mechanism, criticised by both China and India as unfair, is expected to have a differentiated impact on the export competitiveness of the three sectors. In addition to emission standards, the EU’s regulations, carbon prices and verification standards will also impact export competitiveness. In this regard, China and India will be entering the CBAM-regulated EU market from very different starting points. And then there is Türkiye, possessing a greater trade advantage with the EU.
It is crucial for India to maintain the competitiveness of its exports to the EU, particularly in steel as the market accounts for two-thirds of India’s steel exports. Both China and Türkiye also hold a dominant position in supplying steel to the EU. Going ahead, factors like a national Emissions Trading System (ETS), greener forms of production and stronger compliance with the EU laws will determine the export competitiveness of the covered products. India lags behind its competitors in all three factors. Although larger players in India like Tata Steel and JSPL have introduced technologies to produce green steel and carbon capture and storage facilities to reduce carbon emissions, the viability of these projects is uncertain. Largely, the brunt will be faced by MSMEs that lack the capital to implement such technologies and an understanding of the required compliance mechanisms.
The Turkish exporters are better placed due to their widespread use of Electric Arc Furnaces and a mandatory MRV system in place since 2015. About two-thirds of steel production in the country is based on Electric arc furnaces and has a higher share of scrap usage. Türkiye implemented a project in cooperation with the German International Development Agency (GIZ) in establishing a nationwide MRV system, and is currently working with the World Bank on its Emissions Trading System. China, on the other hand, can leverage its national ETS to reduce the costs paid by its exporters in addition to rapid improvements in technology.
For Indian exporters, only a handful of large producers are upgrading their facilities with the required systems and will be able to defer the CBAM costs. Due to the lack of data reporting and verification, Indian exporters will be required to pay the tax calculated as per the default emissions value. At current EU carbon prices, this will result in an additional €55–80 per tonne of steel, subject to increase as the EU tightens regulations in the coming years. India saw a 24.4% reduction of its steel and aluminium exports to the EU, declining from USD 7.71 billion in FY24 to USD 5.82 billion in FY25. Meanwhile, iron and steel exports dropped 35.1 per cent to USD 3.05 billion, and aluminium exports declined 9.8 per cent.
While the larger implications of the Carbon Border Adjustment Mechanism (CBAM) are still unclear, India must act now to retain its market share. CBAM-like measures can become an increasing trend going ahead as several countries start working on their respective emission trading systems. In addition to criticism of the resulting trade protectionism, India needs to prepare its industries to be able to maintain the competitiveness of their exports. The decline in Indian exports is a result of the lack of attention paid to this issue during the transition period by both the exporters and the policymakers.
An immediate step in that direction is to guide exporters in fast-tracking the implementation of MRV systems. The implementation involves beginning with emissions audits and quickly establishing and accrediting EU-compatible Monitoring, Reporting, and Verification (MRV) systems, along with third-party verification. These steps are crucial to enhance exporters’ capacity to provide plant-level emissions data and thus avoid the risk of default values being applied. India can emulate Turkey’s approach by simultaneously developing domestic capabilities by partnering with EU members or development agencies.
The implementation of the Carbon Credit Trading Scheme is a critical long-term strategy, but it should be prioritised particularly for emission-intensive sectors vulnerable to protectionist trade policies. This is essential for the country to retain the carbon tax domestically. And this goes without saying but there will be an increasing segregation in the market wherein low-carbon products are reserved for the European market while other exporters are compelled to enhance their diversification efforts. The diversification also needs to be quicker in order to avoid losing markets to Chinese exporters already expanding their footprint.