CBAM Explained: How EU Carbon Tariffs Affect Indian Exporters

If your company exports steel, cement, aluminium, or fertilizers to the European Union, a regulation called CBAM is about to add a carbon price to every tonne you ship. Not eventually - starting January 2026.

The EU's Carbon Border Adjustment Mechanism is the world's first carbon tariff. It's designed to prevent carbon leakage - where EU producers lose competitiveness to imports from countries without carbon pricing. For Indian exporters, particularly in heavy industry, the financial and operational implications are significant.

This guide breaks down what CBAM is, which products are covered, how the charges are calculated, and what Indian exporters should do to prepare.

What Is CBAM?

The Carbon Border Adjustment Mechanism is an EU regulation (Regulation 2023/956) that requires importers of certain carbon-intensive goods to purchase CBAM certificates corresponding to the embedded emissions in those products. The price of each certificate mirrors the weekly average price of EU Emissions Trading System (EU ETS) allowances.

In simple terms: if an EU steel producer pays EUR 70 per tonne of CO2 under the EU ETS, an Indian steel exporter's product will face the same carbon cost at the EU border. The mechanism levels the playing field - and creates a strong financial incentive for exporters to decarbonize.

The CBAM Timeline

CBAM is being phased in gradually, aligned with the phase-out of free EU ETS allowances to European producers.

The transition period has been critical for building reporting capacity. If your EU importers have already been filing quarterly CBAM reports since late 2023, they will have baseline data on your products' embedded emissions. If not, there is an urgent gap to close before the financial phase kicks in.

Products Covered

CBAM currently covers six categories of carbon-intensive goods. Here is how they map to India's export exposure:

The EU has indicated that the product scope may expand in future reviews to include organic chemicals, polymers, and potentially finished goods containing embedded CBAM materials (like automobiles or machinery with steel components). Indian exporters in these downstream sectors should monitor developments closely.

How CBAM Charges Work

The CBAM liability is calculated using a straightforward formula:

Let's break down each component:

Embedded Emissions

Embedded emissions are the total greenhouse gas emissions released during the production of a good. For CBAM purposes, this includes:

• Direct emissions (Scope 1): Emissions from the production process itself - fuel combustion, chemical reactions, process heat
• Indirect emissions (Scope 2): Emissions from electricity consumed during production (applicable to certain products like aluminium, where electricity is a major input)

The EU specifies default values for embedded emissions by product and country. However, exporters can use actual emissions data from their facilities - which is almost always lower than defaults for well-managed Indian plants. This is a strong incentive to measure and report real data using the GHG Protocol.

EU ETS Price

The certificate price is tied to the EU ETS carbon price, which has traded in the range of EUR 60-80 per tonne of CO2 in recent years. At EUR 70/tCO2, a steel product with embedded emissions of 1.8 tCO2 per tonne would face a CBAM charge of approximately EUR 126 per tonne of steel - a meaningful cost addition.

Carbon Price Deduction

If a carbon price has already been paid in the country of origin, that amount can be deducted from the CBAM liability. This is where India's developing Indian Carbon Market (ICM) becomes strategically important - more on this below.

India's Exposure

India is one of the countries most affected by CBAM globally, primarily because of its large steel exports to the EU and the relatively high carbon intensity of its industrial base.

Key figures that illustrate the scale:

• Steel: India exported approximately USD 5.4 billion worth of iron and steel products to the EU in 2024-25. India's steel sector averages 2.0-2.5 tCO2 per tonne of crude steel - higher than the EU average of roughly 1.3 tCO2. At EUR 70/tCO2, this gap translates to EUR 50-85 per tonne in CBAM charges.
• Aluminium: India's aluminium smelting relies heavily on coal-fired power, resulting in some of the highest emissions intensities globally (12-16 tCO2 per tonne of aluminium vs. 6-8 for EU smelters using cleaner electricity).
• Cement: India's cement industry is relatively efficient by global standards, but clinker production is inherently carbon-intensive (0.6-0.7 tCO2 per tonne of clinker).

According to industry estimates, CBAM could add EUR 1-3 billion in annual costs to Indian exports to the EU once fully implemented in 2034 - unless Indian producers significantly reduce their emissions intensity.

The concern is not just the direct cost. CBAM changes the competitive dynamics of international trade. Countries that decarbonize faster - or establish domestic carbon pricing sooner - will see lower CBAM charges, making their exports more competitive in the EU market.

The Indian Carbon Market Connection

Here is where CBAM intersects with India's own climate policy. Under CBAM rules, any carbon price paid in the country of origin can be deducted from the CBAM certificate obligation. This means that if India's Indian Carbon Market (ICM) establishes a functioning carbon price - say INR 500-1,000 per tonne CO2 (approximately EUR 5-11) - Indian exporters could deduct that amount from their CBAM liability.

This creates a powerful incentive structure:

• For the Indian government: A domestic carbon price means carbon revenue stays in India rather than flowing to the EU treasury through CBAM certificates
• For Indian exporters: Paying a lower domestic carbon price is preferable to paying the full EU ETS price (EUR 60-80) at the European border
• For India's climate targets: A functioning carbon market accelerates decarbonization and supports India's NDC and net-zero 2070 commitments

The Indian Carbon Market is still in early stages, with the Carbon Credit Trading Scheme (CCTS) notified in 2023 and compliance mechanisms being developed. The pace of ICM implementation will directly affect how much Indian exporters pay under CBAM. Monitor developments closely through SEBI and BEE (Bureau of Energy Efficiency) updates.

What Indian Exporters Should Do Now

CBAM + CSRD: The Double Pressure

Indian exporters to the EU face a two-front regulatory challenge. While CBAM imposes a direct carbon tariff on products, the EU's Corporate Sustainability Reporting Directive (CSRD) requires EU companies to report sustainability data across their entire value chain - including data from Indian suppliers.

This means your EU customers will need both:

• CBAM data: Verified embedded emissions per product for certificate calculations
• CSRD data: Broader ESG disclosures including Scope 3 emissions, labor practices, governance, and environmental impact across the ESRS standards

Companies that can provide both sets of data reliably will be preferred suppliers. Those that cannot may find themselves replaced by competitors who can. The overlap is significant - invest in one integrated emissions measurement and reporting system rather than building two separate processes.

If your company has SBTi-validated targets, this serves as a credibility signal to EU buyers that you are taking decarbonization seriously - useful for both CBAM negotiations and CSRD value chain assessments.

Common Mistakes to Avoid

• Relying on EU default emission values. Default values are deliberately conservative and almost always higher than actual emissions from a well-run facility. Invest in measuring your actual embedded emissions - it will directly reduce your CBAM costs.
• Treating CBAM as your EU importer's problem. While the legal obligation sits with the EU importer, they will pass the cost through to you via lower purchase prices or explicit CBAM surcharges. Proactive exporters negotiate better terms by providing verified data.
• Ignoring indirect emissions. For products like aluminium, indirect emissions from electricity consumption can be larger than direct process emissions. If your facility runs on coal-heavy grid power, this significantly inflates your embedded emissions figure.
• Waiting for full implementation in 2034. The financial phase starts in January 2026. While the initial CBAM percentage is small (as free EU ETS allowances still exist), it increases every year. Companies that delay preparation will face steeper cost shocks as the phase-in accelerates.
• Not aligning CBAM and BRSR reporting. Many of the data points overlap. Building separate systems wastes resources. Align your emissions measurement, data collection, and verification processes to serve both CBAM and BRSR requirements from a single source of truth.

Frequently Asked Questions