CBAM explained: Why Europe's carbon tax matters for India's exporters
New Delhi, Jun 30, 2026
As carbon border taxes gain traction globally, India's MSME exporters face higher compliance costs and competitiveness risks in key markets such as the European Union
The central government is working on a scheme to bear 90 per cent of the Carbon Border Adjustment Mechanism (CBAM) compliance costs for micro, small and medium enterprises (MSMEs), as exporters grapple with the European Union's new carbon border tax that came into force this year, according to a report by The Indian Express.
However, the tax concern is no longer limited to the EU. The United Kingdom has already confirmed its own carbon border tax, which comes into effect from January 1, 2027. Countries such as Australia, Canada and the United States are considering similar border carbon measures.
As carbon border taxes gain traction globally, they are set to reshape the way countries trade, particularly for carbon-intensive exports. Here's a look at what CBAM is, why more countries are adopting it, and what it could mean for India's exporters.
What is CBAM and how does it work?
The CBAM is the EU’s carbon border tax designed to put a price on the carbon emitted during the production of carbon-intensive goods that are entering the bloc and to encourage cleaner industrial production in non-EU countries.
Currently, the CBAM covers six sectors: iron and steel, aluminium, cement, fertilisers, hydrogen and electricity. The mechanism started with a two-year transition period from October 2023 to December 2025, during which EU importers of these goods from non-EU countries were required to report the embedded emissions associated with their imports, but were not required to pay the carbon levy.
The mechanism became fully operational from January 1, 2026. Importers are now required to purchase CBAM certificates corresponding to those emissions, unless an equivalent carbon price has already been paid in the country of origin.
In practice, EU importers sourcing products such as steel, aluminium or fertilisers from India will have to factor in this additional carbon cost. While the levy is paid by the importer, it is expected to increase the cost of Indian exports in the EU market, making carbon-intensive products less competitive unless exporters reduce their emissions or absorb part of the additional cost.
Who else is moving in this direction?
• The UK has already announced its own CBAM, and the mechanism comes into effect from January 1, 2027.
• Norway, which is a part of the European Economic Area (EEA), is actively preparing to implement its own carbon mechanism in 2027.
• United States lawmakers have introduced the 'Foreign Pollution Fee Act (FPFA)', a bill aimed at imposing tariffs on imported products manufactured in countries with higher carbon intensities than US baselines.
• Canada has explored the possibility of introducing a carbon border adjustment mechanism, but it has not yet taken any concrete steps toward implementation.
• Australia has examined whether additional measures are needed to address carbon leakage, but has not announced plans to introduce a CBAM.
• Taiwan is developing its own version of CBAM to align with international regulations like the EU's. The country already operates a carbon fee system, under which major manufacturers are required to pay a fee on greenhouse gas emissions exceeding 25,000 metric tonnes annually.
Why this matters for India
India is among the countries expected to be significantly affected by the EU's CBAM as it exports a range of products covered under the mechanism, including iron and steel, aluminium and fertilisers. These sectors are carbon-intensive and rely heavily on fossil fuel-based production, making them more vulnerable to carbon-related trade measures.
The EU is India's third-largest trading partner, with trade in goods worth €118 billion in 2025, accounting for 11.1 per cent of India's total trade. Early signs of the impact are already emerging. Government data showed that India's iron and steel exports to the EU declined 13 per cent in the four months through April following the rollout of CBAM. Furthermore, a study published last week by the Indian Council for Research on International Economic Relations (ICRIER) estimated that the EU's CBAM could reduce India's steel exports to the bloc by 24 per cent, with fertilisers and aluminium products also expected to be significantly affected.
Besides the carbon levy, CBAM requires exporters to establish systems for measuring, reporting and verifying product-level emissions. The compliance burden is expected to be particularly significant for MSMEs, which has prompted the Centre to mull a scheme to cover 90 per cent of their compliance costs.
[The Business Standard]
