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The Carbon Border Adjustment Mechanism (CBAM) is a pivotal initiative introduced by the European Union (EU) to adjust the prices of certain imports based on their embedded carbon emissions. Currently in its transitional phase (1 October 2023 – 31 December 2025), CBAM regulation 2025 will enter its definitive phase on 1 January 2026, imposing financial obligations on importers through CBAM certificates.
This policy aligns with the gradual phase-out of free allowances under the EU Emission Trading Scheme (ETS). Covering products like cement, iron and steel, aluminium, fertiliser, hydrogen, and electricity, CBAM mandates detailed emissions reporting and aims to create a level playing field for EU and non-EU manufacturers. While it promotes global decarbonisation, it also presents significant compliance challenges for exporters, especially those in developing countries like India, where energy-intensive industries play a key economic role.
Since October 2023, EU importers have submitted quarterly reports for CBAM-covered goods using default emissions values. However, starting Q3 2024, importers must shift to reporting actual embedded emissions as per prescribed CBAM methodologies, raising the bar for data accuracy and supplier transparency.
India’s iron, steel, and aluminium sectors are especially vulnerable to CBAM. As of 2024, India exported 44% of its total steel exports (3.3 million tonnes) and 26% of its aluminium exports, valued at USD 1.9 billion, to the EU. These sectors, particularly in flat-rolled products, typically have higher embedded emissions compared to EU benchmarks, making them more susceptible to CBAM-linked cost burdens.
Based on projected energy efficiency improvements under India’s Perform Achieve and Trade (PAT) Scheme, the embedded emissions of Indian flat-rolled steel are expected to decline by 2034. However, even with improvements, CBAM-related obligations could amount to EUR 605 million by 2034, burdening Indian exporters and possibly eroding their EU market share. This pressure could push manufacturers to either absorb additional costs or pass them on, risking a reduction in price competitiveness and demand over time.
Many MSMEs in India lack advanced metering systems and calibrated instruments to accurately track energy and material consumption. Without granular monitoring, generating product-specific emissions data that CBAM reporting demands becomes extremely difficult.
Since CBAM accounts for embedded emissions in precursor inputs, manufacturers rely heavily on suppliers for accurate upstream data. Inconsistent data sharing and a lack of standardisation create gaps in traceability and compliance readiness.
While most Indian corporates follow the GHG Protocol (Scopes 1, 2, and 3), CBAM mandates product-specific accounting. This forces companies to undertake parallel emissions assessments, increasing complexity and administrative load.
Technologies like hydrogen-based DRI or renewable energy integration remain expensive and are not readily available within the Indian industrial ecosystem. The capital required to reconfigure manufacturing processes to meet the EU norms is out of reach for many, especially MSMEs.
As of Q3 2024, EU importers are required to report actual emissions data for CBAM-covered imports. While an equivalent method is temporarily allowed, it must match the precision and coverage of EU-approved standards, creating practical challenges in sourcing reliable data.
Many EU importers are growing frustrated with obtaining emissions data from non-EU suppliers. This has led several importers to insert clauses in supply contracts allowing cancellation in case of non-compliance with Carbon Border Adjustment Mechanism reporting norms, putting pressure on global exporters to comply or risk losing access.
To reduce this friction, some EU buyers are exploring new supplier networks and prioritising those cooperating on emissions disclosures. Default value reporting is still permitted temporarily if importers show genuine attempts to secure actual data, but this window may close post-2025.
Recognising implementation challenges, the EU has proposed further clarifications, including a de minimis threshold for importers handling less than 50 tonnes of CBAM goods annually, and possible extensions to default value usage rules, to provide breathing room during the transition.
Indian industries, particularly exporters, are gradually shifting from using default emission values to calculating product-specific embedded emissions in line with the Carbon Border Adjustment Mechanism requirements. This transition poses challenges, especially for MSMEs, which often lack the technical capacity and must bear the high cost of hiring EU-accredited verifiers. Many smaller players depend on integrated steel manufacturers for accurate emissions data. As a result, exporters increasingly engage consultants and experts to meet the stringent CBAM for industry reporting obligations and avoid potential market access issues.
India is developing its own carbon market, covering both voluntary and CBAM compliance segments. This includes energy-intensive sectors such as iron and steel, aluminium, and cement, aligning with the Paris Agreement and offering a long-term framework for carbon pricing.
The government’s Perform Achieve and Trade (PAT) Scheme promotes reduced energy consumption across industrial sectors. It rewards energy savings through tradable certificates, providing both regulatory pressure and financial incentives for efficiency upgrades.
Amendments to the Energy Conservation Act now mandate renewable energy usage for large consumers. Additionally, support is being extended for biomass pellet usage and related infrastructure to reduce dependence on fossil fuels in manufacturing.
Launched in FY 2024–25, India’s Green Steel Certification recognises steel products emitting less than 2.2 tCO₂e per tonne of finished steel (tfs), verified by BEE-authorised agencies. It uses a star rating: five stars for under 1.6 tCO₂e/tfs, four for 1.6–2.0, and three for 2.0–2.2. Products above 2.2 tCO₂e/tfs are ineligible.
Carbon Border Adjustment Mechanism
