CBAM and India's Export Crisis – Why 2026 Is the Year Carbon Costs Became a Line Item in Your Cost of Goods Sold

Introduction: The Day Carbon Became a Cost of Doing Business

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.

This guide provides a comprehensive analysis of CBAM's impact on Indian exports, what the India-EU FTA's CBAM annexure means for exporters, and what every exporter must do to protect their business.

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What Is CBAM and Why Does It Matter?

What Is CBAM?

The Carbon Border Adjustment Mechanism is the European Union's carbon tariff on imported carbon-intensive goods. It encourages cleaner industrial production in non-EU countries, ensuring imported products face the same carbon costs as goods produced within the EU.

The CBAM Transition

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

Sectors Covered

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

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.

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The Numbers That Should Terrify Every Exporter

The Export Decline

Metric	Value
Combined steel and aluminium exports decline (FY2025)	24.4%
Steel exports decline (FY2025)	35.1%

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 IEEFA's Warning

Over the next two to five years, choices made by regulators, policymakers and market participants on market architecture, compliance obligations and price formation will shape how far the CCTS develops into a market capable of guiding capital-intensive industrial investment over 15- to 30-year horizons.

The CBAM Tax Burden

Vinod Gupta, Senior Member of FICCI's Steel Committee, highlighted the sector's predicament: "CBAM could add a 20 to 35% tax burden on Indian steel exports to the EU".

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The 24.4% Export Decline – Before CBAM Even Bites

The Data

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 Carbon Border Adjustment Mechanism (CBAM) financial obligation had taken effect.

Why This Matters

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

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 Implication for Exporters

Implication	Action Required
Lost Market Share	European buyers are moving away
Price Pressure	Exporters may need to absorb price cuts
Competitive Disadvantage	Higher-emission producers are losing out
Urgent Action	The decline will accelerate

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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%.

The India-Specific Challenge

India's steel emission intensity is significantly higher than the global average. As of 2023-24, the average emission intensity per tonne of crude steel produced in India was 2.54 tonnes of CO₂, while the global average stands at 1.9 tonnes of CO₂.

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%

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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?

The India-European Union Free Trade Agreement (FTA) includes a dedicated annexure on CBAM. The annexure is built around multiple pillars aimed at reducing compliance burdens for Indian exporters, particularly small and medium enterprises (SMEs).

The EU Support

The EU and India commit to launching, in the first half of 2026, a platform on climate action. And €500 million ($599 million) in EU support is "envisaged", over the next two years, to help India's greenhouse gas (GHG) mitigation efforts.

Key Provisions

Provision	Description
Dedicated work plan	Comprehensive framework to help India navigate the EU's carbon tax regime
SME support	Provisions to ease compliance for small and medium enterprises
Carbon price recognition	Framework for recognising carbon prices paid domestically
Verification support	Help with measuring embedded carbon and getting it verified

The Carbon Price Offset

CBAM allows deductions if exporters can prove they have already paid a domestic carbon price equivalent to the EU ETS. In practical terms, that means Indian exporters cannot meaningfully offset CBAM liabilities with domestic carbon payments.

However, the India-EU FTA includes provisions to engage with EU authorities on taking into account the carbon price paid in India. 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.

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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 Default Values Risk

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.

The Government's Response

The Commerce Ministry is rolling out a nationwide district-level outreach initiative to help MSMEs adapt to the EU CBAM. The campaign targets MSME exporters to ensure smooth compliance with the framework.

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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. Reports indicate that the EU is planning to expand CBAM to cover around 180 additional steel- and aluminium-based manufactured products from January 1, 2028.

Key Changes

Change	Impact
Expansion to additional products	More Indian exports affected
Timeline	2028 onwards

What This Means for Exporters

• CBAM coverage will expand significantly
• More Indian products will face carbon border taxes
• Preparation is essential

The Strategic Imperative

The expansion means that even exporters who are not currently affected by CBAM may be affected in the future. Preparation must start now.

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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 Cost (BF-BOF)	~$192 per tonne
EU Support	€500 million for GHG mitigation
CBAM Expansion	Additional products from 2028

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