The CBAM Impact on Indian Exports – How to Navigate the EU's Carbon Border Tax in 2026 and Beyond

Introduction: The Carbon Cost Is Now a Line Item

On January 1, 2026, the European Union's Carbon Border Adjustment Mechanism (CBAM) transitioned from a reporting-only framework to a payment-linked regime, imposing binding financial obligations on EU importers of carbon-intensive goods.

For Indian exporters, this was not a distant threat becoming a future reality. It was the day carbon became a line item in the cost of goods sold.

The mechanism aims to curb carbon leakage, encourage cleaner production globally, and leverage the EU market to influence upstream industrial emissions. For India's metals and mining sector, CBAM has transitioned from a future concern to an operational reality. As of 2026, carbon intensity directly influences export costs, margins, and market access.

The numbers are stark. India's steel and aluminium exports to the European Union (EU) fell 24.4 percent in Financial Year (FY) 2025, with steel alone down 35.1 percent—before any CBAM financial obligation had taken effect.

The decline, which suggests European buyers are already reorienting toward lower-emission producers, underscores what is at stake as India's Carbon Credit Trading Scheme (CCTS) enters its operational phase.

Indian steel and aluminium exporters to the EU market have been forced to cut prices by 15-22 per cent to absorb the tax burden since January 1, 2026, when CBAM entered its payment phase.

This guide provides a comprehensive survival guide for Indian exporters navigating CBAM compliance—what it means, how to prepare, and how to protect your export competitiveness.

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What Is CBAM and How Does It Work?

What Is CBAM?

The Carbon Border Adjustment Mechanism is the European Union's landmark carbon tariff on imported carbon-intensive goods, such as iron, steel, cement, fertilizers, aluminium, electricity, and hydrogen.

It encourages cleaner industrial production in non-EU countries, ensuring imported products face the same carbon costs as goods produced within the EU, preventing "carbon leakage".

The CBAM Transition

Phase	Period	Requirement
Transitional	October 2023 – December 2025	Reporting only, no payment
Definitive	January 1, 2026	Payment phase begins

How CBAM Works

Step	Description
1. Declaration	Importers must declare the embedded emissions of their imports
2. Certificate Purchase	Importers purchase CBAM certificates to cover these emissions
3. Deduction	If a carbon price has already been paid in the country of origin, it can be deducted
4. Compliance	Importers must submit annual reports and compliance declarations

The CBAM Certificate Price

The first quarterly price for CBAM certificates was set at EUR 75.36 per tonne of CO₂ equivalent for Q1 2026.

Sectors Covered (Current)

CBAM currently covers six sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity.

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The Numbers: 24.4% Export Decline Before the Bite

The Data

Metric	Value
Combined steel and aluminium exports decline (FY2025)	24.4%
Steel exports decline (FY2025)	35.1%
Price reduction required to absorb CBAM	15-22%

What These Numbers Mean

• The decline occurred before any CBAM financial obligation had taken effect
• European buyers are already reorienting toward lower-emission producers
• The financial impact of CBAM has not even begun to bite
• The decline will intensify as CBAM costs are fully applied

The Pre-emptive Shift

European buyers are not waiting for CBAM costs to be fully applied. They are already shifting their supply chains toward lower-emission producers. This is a structural shift, not a temporary adjustment.

The Price Pressure

Indian steel and aluminium exporters to the EU market have been forced to cut prices by 15-22 per cent to absorb the tax burden since January 1, 2026.

The IEEFA's Warning

India's steel and aluminium exports to the EU fell 24.4% in FY25, with steel alone down 35.1%, before any financial obligation under CBAM had taken effect. The decline suggests European buyers are already reorienting toward lower-emission producers, underscoring what is at stake as India's CCTS enters its operational phase.

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The CBAM Tax Burden: 20-35% on Indian Steel

The Tax Burden

Under the EU's Carbon Border Adjustment Mechanism, Indian exports of steel, aluminium, and cement to the EU could face tariffs of 20-35 per cent.

The India-Specific Challenge

India's steel emission intensity is significantly higher than the global average. This gap means Indian steel producers face a significant disadvantage in carbon-constrained export markets.

The CBAM Cost Impact

Production Route	Emissions	CBAM Cost
BF-BOF (coal-based)	~2.4 tCO₂/tonne	~$192 per tonne
Gas-based DRI	Lower	Lower
Scrap-based EAF	Lowest	Lowest

The Sectoral Impact

Sector	Tax Burden
Steel	20-35%
Aluminium	20-35%
Cement	20-35%

The Export Frontloading Response

Indian steel exports surged by 36 percent year-on-year in the first 10 months of FY2026, primarily driven by frontloading of shipments to the EU before CBAM took effect. This frontloading is a temporary response, not a sustainable strategy.

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Sectors Covered: Current and Expanding

Sectors Currently Covered

CBAM currently covers six sectors:

Sector	Products
Iron and Steel	Iron, steel, and related products
Aluminium	Aluminium and related products
Cement	Cement and related products
Fertilisers	Fertilisers and related products
Hydrogen	Hydrogen and related products
Electricity	Electricity

The 2028 Expansion

The EU has announced plans to expand CBAM coverage to additional products. The EU Council agreed to strengthen CBAM, expanding it to more products.

The Downstream Effect

The expansion to processed goods means that even exporters who do not produce raw materials will be affected. If you use steel, aluminium, cement, or fertilisers in your manufacturing process, your products may soon face CBAM costs.

Products Likely to Be Added

Category	Examples
Steel Products	Tubes, pipes, wire, fasteners
Aluminium Products	Foils, plates, sheets, profiles
Cement Products	Precast concrete, cement-based building materials
Fertiliser Products	Processed fertilisers and blends

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The CBAM Certificate Price: EUR 75.36 per Tonne

The Price

The first quarterly price for CBAM certificates was set at EUR 75.36 per tonne of CO₂ equivalent for Q1 2026.

What This Means

This is no longer a compliance exercise on paper. For any exporter of iron, steel, aluminium, cement, fertilisers, hydrogen, or electricity into the EU, carbon cost is now a line item in the cost of goods sold, not a future risk.

The Connection to CCTS

A functioning national carbon market gives Indian producers a documented basis for demonstrating carbon costs already paid, which is directly relevant to CBAM exposure.

The Price Trajectory

Year	Expected CBAM Price
2026	€75-80 per tonne
2027	€80-90 per tonne (projected)
2028	€90-100 per tonne (projected)

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The Production Route Factor: Why Some Producers Are More Exposed

The Production Route Matters

The production method significantly affects CBAM exposure:

Production Route	CBAM Exposure	Explanation
Blast Furnace-Basic Oxygen Furnace (BF-BOF)	Highest	Relies on coal; highest emissions
Gas-based Direct Reduced Iron (DRI)	Lower	Uses natural gas; lower emissions
Scrap-based Electric Arc Furnace (EAF)	Lowest	Uses recycled scrap; lowest emissions

The India-Specific Challenge

India's steel sector is dominated by BF-BOF and coal-based DRI production, which have the highest emission intensities. This means Indian steel producers face the highest CBAM exposure.

The Competitive Disadvantage

Factor	Impact
Higher emissions intensity	Higher CBAM costs
Coal-based production	Higher carbon footprint
Limited gas infrastructure	Limited fuel switching
Scrap shortage	Limited EAF capacity

The Path Forward

Action	Impact
Increase scrap usage	Lower emissions, lower CBAM
Adopt gas-based DRI	Lower emissions, lower CBAM
Invest in CCUS	Lower emissions, lower CBAM
Participate in CCTS	Demonstrate carbon costs paid

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The India-EU FTA CBAM Annexure: A Framework for Protection

What Is the CBAM Annexure?

India has secured an Annex on Carbon Border Measures in the India-EU FTA which aims to strengthen cooperation and support between the two to enhance efforts to reduce greenhouse gas emissions.

The Technical Dialogue

The Annex establishes a Technical Dialogue wherein India and EU will engage on technical exchanges on implementation of carbon border adjustment measures, including:

• Product scope and embedded emissions coverage
• Monitoring, reporting and verification processes
• The possibility to take into account the carbon price effectively paid
• Exchanges of information to facilitate default values
• Exploring mutual recognition of accreditation bodies

The No-Exemption Reality

The FTA does not provide for any exemption to the bloc's carbon border adjustment mechanism. There is no commitment on the part of the EU to change obligations with regard to CBAM or grant India more favourable treatment.

The Carbon Price Offset

The agreement provides for engagement between India and EU authorities to account for the carbon price paid in India and adjust it against the final carbon tax liability payable in the EU.

The SME Protection

To protect small exporters, negotiators secured a dedicated annexure in the FTA. The bilateral work plan guarantees parity with future flexibilities granted by the EU and creates channels to credit domestic carbon taxes paid in India against European levies.

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The €500 Million EU Climate Platform

The Commitment

The EU and India commit to launching, in the first half of 2026, a platform on climate action.

The Funding

€500 million ($599 million) in EU support is "envisaged," over the next two years, to help India's greenhouse gas (GHG) mitigation efforts.

The Significance

Aspect	Implication
Financial Support	€500 million for GHG mitigation
Technical Support	Platform for climate action
Policy Dialogue	Engagement on carbon pricing
Capacity Building	Support for Indian institutions

What This Means for Exporters

Implication	Action Required
Access to Support	Leverage EU-funded programmes
Technical Assistance	Access to verification and MRV support
Policy Engagement	Input into carbon price recognition

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The Verification Challenge: Who Verifies the Verifiers?

The Verification Problem

Currently, EU authorities may not recognise Indian verifiers for CBAM purposes. This forces Indian exporters to hire expensive EU auditors, adding to compliance costs.

The FTA Provision

The CBAM annexure includes provisions for verification and recognition of verifiers, aimed at:

• Recognising Indian verification agencies
• Reducing compliance costs for Indian exporters
• Building Indian capacity for carbon verification

What This Means for Exporters

Aspect	Current Situation	With FTA
Verifiers	Must hire EU-recognised auditors	Indian verifiers may be recognised
Cost	High	Lower
Capacity	Limited Indian capacity	Indian capacity built over time

The MSME Impact

SMEs, which are the most vulnerable to verification costs, stand to benefit significantly from recognition of Indian verifiers.

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The MSME Data Gap: A Critical Vulnerability

The Fundamental Problem

The fundamental problem is the supply chain data gap, and it hits MSMEs disproportionately hard. CBAM requires plant-level, verified emissions data from every part of the production chain.

Why MSMEs Can't Provide Actual Data

Reason	Explanation
No access to supplier data	Large producers often do not share plant-level emissions data
No verification capacity	MSMEs cannot afford third-party verification agencies
No digital reporting systems	Lack of carbon accounting software and trained personnel
No technical expertise	Cannot calculate embedded emissions accurately

The Compliance Cost Burden

Meeting the requirement under the carbon tax alone could cost an MSME unit between ₹15 lakh and ₹20 lakh. These are largely fixed compliance costs, which means they do not reduce in proportion to the size of the business or export volumes.

The Export Viability Question

If these costs are not addressed through targeted policy support, smaller exporters may find continued access to the EU market commercially unviable despite having competitive products.

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The Default Values Trap: Why MSMEs Are Most Vulnerable

What Are Default Values?

Default values are emission factors provided by the European Commission for use when actual emissions data is not available. They are set at conservative, high benchmarks.

The Mark-Up Schedule

Year	Mark-Up Percentage
2026	10%
2027	20%
2028 onwards	30%

The MSME Trap

The default values create a vicious cycle for MSMEs:

Step	Description
1. No Data	MSME cannot provide actual emissions data
2. Default Values	EU authorities apply default values (set at highest benchmarks)
3. Inflated Costs	Default values inflate carbon costs
4. Price Disadvantage	MSME loses price competitiveness
5. Lost Business	MSME loses export business

The Default Value Penalty

If exporters are unable to provide actual data, importers must use default values provided by the European Commission. These default values are set at the highest benchmarks and can sharply inflate carbon costs even when actual emissions are lower.

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The CBAM Expansion: 180 Additional Products by 2028

The Proposed Expansion

The EU has announced plans to expand CBAM coverage to additional products. The EU Council agreed to strengthen CBAM, expanding it to more products.

Key Changes

Change	Impact
Expansion to processed goods	More Indian products affected
Timeline	2028 onwards
Anti-Circumvention Measures	Stricter rules to prevent bypassing the tax

What This Means for Exporters

Implication	Description
More Products Covered	Finished and semi-finished goods will be affected
More Sectors Affected	Beyond raw materials to manufacturing
More Compliance Required	More products require emissions data
More Urgency	Preparation must start now

The Downstream Effect

The expansion to processed goods means that even exporters who do not produce raw materials will be affected. If you use steel, aluminium, cement, or fertilisers in your manufacturing process, your products may soon face CBAM costs.

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The Anti-Circumvention Framework: Closing the Loopholes

What Is Anti-Circumvention?

The Council introduced a new "anti-circumvention" framework designed to prevent exporters from bypassing the tax by making slight modifications to their products or rerouting trade through third countries.

Why This Matters

Mechanism	How It Works
Product Modification	Preventing slight modifications to avoid CBAM
Trade Rerouting	Preventing rerouting through third countries
Leakage Prevention	Ensuring CBAM achieves its climate goals

The EU's Rationale

"The EU remains committed to reducing climate emissions both within the Union and globally. Strengthening the CBAM and closing loopholes that can circumvent our rules is a key part in fulfilling that goal."

What This Means for Exporters

Implication	Action Required
No Easy Shortcuts	Product modifications won't avoid CBAM
No Trade Rerouting	Third-country transhipment won't avoid CBAM
Full Compliance	Only genuine decarbonisation works

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The UK CBAM: A Second Front

The UK's Plans

The UK is preparing to introduce its own CBAM in 2027. This means Indian exporters will face carbon border taxes in both the EU and the UK.

The Implications

Implication	Description
Two Markets	CBAM in both EU and UK
Two Compliance Regimes	Different requirements may apply
Increased Costs	Compliance costs in multiple jurisdictions
Strategic Importance	Preparation for both markets is essential

The Broader Trend

Similar mechanisms are under consideration elsewhere, meaning carbon border taxes could become a global phenomenon.

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The CCTS Connection: How Domestic Carbon Compliance Reduces CBAM Exposure

The Mechanism

CBAM allows for the deduction of a carbon price already paid in the country of origin. CCTS compliance certificates can serve as evidence of this carbon price.

India's Carbon Pricing Mechanism

India is developing its own carbon pricing mechanism. The India-EU FTA includes provisions to offset what is paid in India from what is paid in Europe.

What This Means

Aspect	Implication
CCTS recognition	EU may recognise carbon prices paid through India's CCTS
CBAM deduction	CCTS compliance could reduce CBAM liability
Export competitiveness	Indian exporters could remain competitive in EU markets
Value retention	Carbon value stays within India

The India-EU FTA CBAM Annexure

The agreement provides for engagement between India and EU authorities to account for the carbon price paid in India and adjust it against the final carbon tax liability payable in the EU.

The Strategic Imperative

A credible domestic carbon market can strengthen India's long-term industrial competitiveness. International experience points to the design choices—from benchmark calibration to the eventual role of auctioning—that shape how much carbon value is recognised and retained at home.

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What Exporters Must Do Now

Recommendation 1: Participate in the CCTS

Action	Why It Matters
Register your entity	Start the CCTS compliance process
Understand your target	Know your emission intensity target
Develop a compliance strategy	Meet your target or procure CCCs
Document compliance	Maintain records for verification

Recommendation 2: Reduce Emissions

Action	Why It Matters
Invest in energy efficiency	Reduce emissions and costs
Adopt cleaner production routes	Move toward lower-carbon technologies
Use renewable energy	Reduce Scope 2 emissions
Process optimisation	Improve efficiency

Recommendation 3: Address the MSME Data Gap

Action	Why It Matters
Request verified emissions data	From large domestic producers
Conduct independent verification	Using accredited agencies
Maintain documentation	For CBAM declarations

Recommendation 4: Prepare CBAM Data Packs

Exporters should develop internal CBAM pricing strategies and prepare standardised CBAM data packs for each manufacturing facility, detailing production routes, emissions intensity, verification status, and audit contacts.

Recommendation 5: Engage with the FTA

Action	Why It Matters
Monitor FTA developments	Understand CBAM annexure provisions
Leverage SME support	Access compliance support
Engage with government outreach	Benefit from support programmes

Recommendation 6: Seek Professional Advice

Action	Why It Matters
Engage a carbon advisory firm	Get expert guidance
Develop a comprehensive strategy	Address all aspects of compliance
Stay informed	Monitor regulatory developments

Conclusion: The Carbon Cost Is Now a Line Item

CBAM is not a distant threat. It is already hurting Indian exports. Steel and aluminium exports to the EU fell 24.4% in FY 2025, with steel alone down 35.1%, before any CBAM financial obligation had taken effect. The decline will intensify as CBAM costs are fully applied.

Key Takeaways

Aspect	What You Need to Know
Export Decline	Steel/aluminium exports down 24.4% in FY 2025
Steel Decline	Down 35.1%
CBAM Tax Burden	20-35% on steel exports
CBAM Certificate Price	EUR 75.36 per tonne
EU Support	€500 million for GHG mitigation
CBAM Expansion	180+ additional products from 2028
UK CBAM	Coming in 2027
Price Cut Required	15-22% to absorb CBAM

The Choice Is Yours

Option	Outcome
Act now	Protect export competitiveness, maintain market access, reduce costs
Wait and see	Face higher costs, lose market share, suffer reputational damage