India’s Dilemma: Navigating CBAM in a Changing Climate Economy

The CBAM Challenge: India's Trade-Climate Balance

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Visualise this - On a humid morning in Odisha, the manager of a medium-sized steel plant logs into an EU online auction for carbon certificates for the first time. Every ton of steel he exports now carries an additional price based on the carbon dioxide (CO₂) emitted during its production. He realizes that to maintain sales to Europe, his plant must reduce emissions—expeditiously.

1.The EU's Carbon Border Adjustment Mechanism (CBAM)

The European Union (EU) has established an ambitious target to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Achieving this significant objective relies heavily on the reform and expansion of the EU Emissions Trading System (ETS), which operates by auctioning or allocating a limited volume of emission permits that are subsequently traded.

As a core component of its "Fit for 55" policy package, the EU plans to progressively replace free allowances under the ETS with a Carbon Border Adjustment Mechanism (CBAM). This mechanism will apply the prevailing price of emission allowances within the EU ETS to the emissions generated during the production of commodities imported into the EU, unless a comparable carbon price is already enforced in the exporting country. Export rebates are also under consideration to refund allowance costs for products exported from the EU, aimed at maintaining the competitiveness of EU production in the global market. The primary objective of CBAM is to level the playing field for EU industries by ensuring that producers along supply chains in third countries also bear the cost of upstream emissions.

The CBAM is designed to impose a tax on six carbon-intensive products—including iron and steel, aluminium, fertilizers, and cement—based on the carbon emitted during their production. While the reporting requirement commenced in 2023, the carbon taxes are scheduled to be levied from January 1, 2026.

2.Scepticism Around the Intent of CBAM

Despite the EU's stated environmental goals, sceptics argue that the CBAM is a punitive measure that masks underlying trade protectionism, drawing parallels to "colonialism and domestic protectionism" simply repackaged with new rhetoric centered around economic security and decarbonization. They highlight that the unilateral implementation of CBAM, without sufficient consultation, threatens to exacerbate existing power imbalances, with industrialized nations (which have largely depleted the carbon budget) exerting influence over emerging economies such as India, which have yet to reach their peak emissions.

Practical challenges also arise from inadequate data systems in many countries, potentially leading to the use of default emission data and higher costs for importers due to mark-ups from the European Council. Data privacy concerns related to sharing potentially sensitive and confidential information also loom large.

3.Impact of CBAM on Developing Countries

Studies demonstrate that CBAM negatively impacts low- to medium-income countries' trade and GDP, despite achieving only minor emission reductions. Analysis of the "CBAM exposure index" by the World Bank indicates that the most affected countries are expected to be Zimbabwe, Ukraine, Georgia, India, Belarus, Trinidad and Tobago, the Arab Republic of Egypt, the Russian Federation, Venezuela, and South Africa. Besides Europe, the continent most represented is Africa (Zimbabwe, Arab Republic of Egypt, South Africa). Steel, iron, and aluminum industries are most severely affected. For example, Pleeck and Mitchell (2023) project that Africa's EU exports could fall significantly: 14% for aluminum, 8% for steel/iron, 4% for fertilizers, and 3% for cement, with GDP declining by 0.5%. UNCTAD (2021) confirms CBAM's significant trade impact on carbon-intensive developing countries.

4.Impact on India

The CBAM is expected to have a significant economic impact on India, particularly on its energy-intensive export sectors, due to increased costs and reduced competitiveness. According to a report from the research body GTRI, the CBAM and EUDR are projected to impact $9.5 billion of India's exports to the EU. This figure represents 9% of India's total exports to the world or 12.9% of India's exports specifically to the EU. The share of CBAM-affected exports in total Indian exports to the EU has witnessed a notable increase, rising from 6.3% in 2014 to 10.5% in 2023, indicating India's growing exposure.

4.1. Competitiveness of Indian Industries

Who Feels It Most?

A study by the Centre for Science and Environment (CSE) estimates that CBAM could cost India 0.05% of its GDP, particularly impacting the following sectors. The Iron and Steel Sector is expected to be the most affected, given its heavy reliance on coal in India. Profits from Indian steel exports to the EU could fall by US$65-160 per metric ton between 2026 and 2036. Tariffs under CBAM could reach 20-35% for steel, aluminum, and cement, significantly higher than the current import duty of less than 3%.

The Aluminum Industry faces significant challenges, with nearly 27% of India's aluminum exports currently destined for the EU, where the new carbon tax could lead to increased production costs. Similarly, the Cement Industry confronts substantial pressure as the EU's carbon tax on cement imports is expected to reduce profit margins by $65-160 per metric ton between 2026 and 2036, potentially leading to job losses and plant closures.

The high carbon intensity of Indian production, especially in steel and aluminum, due to reliance on coal, renders imports from India significantly more costly under CBAM. While India has a domestic carbon pricing mechanism, its rate of USD 1.6 per tonne of CO₂ is among the lowest globally and cannot match the EU's carbon price levels. These affected sectors are often dominated by MSMEs, which typically lack the financial and technical capacity to comply with stringent reporting and carbon accounting norms.

State Hotspots

Maharashtra and Gujarat face elevated challenges due to their large steel clusters, with grid emissions around 0.85 kg CO₂ per kWh driving up their CBAM obligations. Odisha confronts particularly severe impacts, as its coal-heavy electricity generation at 0.90 kg CO₂/kWh is among India's highest, resulting in certificate costs approximately 10% above EU averages. Tamil Nadu, as a major exporter of cement, faces similar additional charges that threaten its industrial competitiveness.

4.2. MSME Vulnerability and Transition Costs

Micro, Small, and Medium Enterprises (MSMEs) are businesses with limited staff and turnover, and over 80% of India's MSMEs operate informally, lack dedicated sustainability teams, and cannot easily afford new reporting systems. Measurement, Reporting, and Verification (MRV) is the process of tracking CO₂ emissions, reporting those figures, and having them verified by an authority.

The costs associated with CBAM compliance are substantial for MSMEs. Software and training requirements, including a basic carbon-reporting tool plus staff training, can cost ₹200,000–500,000, which is equivalent to several years' profit for many MSMEs. Equipment upgrades, such as installing energy meters or cleaner furnaces, can require 3–5 years to achieve payback, creating significant financial strain.

However, a cost-saving approach through clusters demonstrates promise. When small firms pool resources into one shared MRV facility, they can reduce individual costs by approximately 40%. Some state governments are already piloting this approach, demonstrating its potential for widespread adoption.

Case Study: Gujarat Foundry Cluster

Small foundries around Rajkot struggled with high costs and delays for essential services, including energy audits, quality testing, and Bureau of Indian Standards (BIS) certification. Without centralized support, each unit faced duplicative expenses, with individual energy meters and laboratory tests costing each firm lakhs of rupees annually. Long lead times meant BIS certification required up to 45 days, slowing exports, while limited MRV capacity left firms unprepared for carbon-pricing mechanisms such as CBAM.

The Common Facility Centre (CFC) intervention addressed these challenges by centralizing technical services to reduce per-unit costs and build MRV expertise. The project involved collaborators including TERI, Rajkot Engineering Association, and Swiss SDC, with a total cost of ₹7.2 crore funded through industry contribution (10%), Central Government (53%), and State Government (34%). Core services included shared energy audits with precision metering, materials testing and fast-track BIS certification, and data analytics support for MRV.

The outcomes were significant. Energy savings resulted from retrofitting energy-efficient motors and pumps, reducing electricity consumption by 12–15% and saving approximately 0.2 tonnes CO₂ per tonne of output. CBAM cost reduction was achieved through pooling MRV resources, which lowered per-unit CBAM certificate requirements by 35%, saving approximately ₹300,000 in one quarter. Faster certifications were realized as BIS approvals decreased from 45 days to 15 days, accelerating export timelines.

Key lessons for replication include the importance of blended funding, wherein sharing costs across industry, central, and state governments makes large-scale infrastructure viable for MSMEs. Shared infrastructure through a common facility center dramatically lowers entry barriers to expensive testing and MRV services. The model demonstrates scalability, as the CFC approach can be adapted to other manufacturing hubs, while early investment in energy efficiency and MRV frameworks positions firms to meet carbon-pricing requirements seamlessly.

4.3. Implications for Climate and Industrial Policy

A national carbon tax, which is a fee per tonne of CO₂ emitted, can assist Indian businesses in adapting to CBAM requirements. India's draft tax is ₹400–800 per tonne, while CBAM certificates could cost the equivalent of US $50–75 (around ₹4,000–6,000) per tonne by 2030. Closer alignment between these rates would level the playing field for Indian exporters.

Clean-tech incentives represent another crucial policy instrument. Production-Linked Incentive (PLI) schemes could provide grants or tax breaks for purchasing low-carbon equipment such as green hydrogen plants or waste-heat recovery systems. Renewable Purchase Obligations (RPOs) are regulations requiring electricity producers to procure a certain share of power from renewable sources. A national RPO of 25% by 2026 would lower overall grid emissions and thus reduce CBAM costs across affected sectors.

4.4. Compliance Burden and Legislative Alignment

Extending the PAT Scheme represents a key opportunity for building compliance capacity. The Perform, Achieve and Trade (PAT) scheme currently covers approximately 300 large factories. By incorporating 1,200 medium-sized units, India can build broader MRV expertise and digital record-keeping capabilities across its industrial base.

Digital registries offer technological solutions to compliance challenges. Pilot projects in Karnataka are utilizing blockchain, a secure digital ledger, to track CBAM certificates, ensuring transparency and reducing paperwork burdens for exporters and regulators alike.

Updating legislation is essential for effective CBAM integration. The National Emission Trading Scheme (NETS) Bill should recognize CBAM certificates as valid domestic allowances to avoid double-charging exporters. Corporate Social Responsibility (CSR) Rules could require major exporters to disclose Scope-3 emissions, which are indirect emissions throughout their supply chain, thereby building comprehensive carbon accounting capabilities across Indian industry.

5.Global Response to CBAM

The global response to the EU's CBAM is varied. The UK and US are developing similar carbon border taxes, while Canada is already cooperating. Australia is exploring its own CBAM. Developing nations such as China and India, however, view it as an unfair trade measure. The African Development Bank argues for exemptions, citing potential high costs. Singapore emphasizes WTO compliance and non-discriminatory implementation. Regardless of their stance, countries globally are actively preparing for a future with border carbon adjustments.

6.India's Response

India has expressed strong opposition to CBAM, viewing it as discriminatory and incompatible with the principles of equity and Common But Differentiated Responsibilities and Respective Capabilities (CBDRRC). Commerce and Industry Minister Piyush Goyal has stated that India is prepared to impose retaliatory duties if the EU proceeds with its carbon tax plan. He criticized CBAM and emphasized that developed nations should instead share climate technologies and financing. India has also raised concerns at the World Trade Organization (WTO) and is exploring legal options to challenge CBAM if it is found to be discriminatory or protectionist.

India is proactively pursuing domestic measures to safeguard its interests and promote sustainable development, including:

• Tripling its renewable energy capacity by 2030.

• Establishing a Carbon Credit Trading System (CCTS), India's first national carbon market, launched in 2023.

• Considering conversion of existing energy taxes into carbon price equivalents for export carbon calculation.

• Incorporating provisions addressing CBAM-related concerns in its FTA with the EU.

7.Policy Recommendations for India

To support Indian industries in adapting to the Carbon Border Adjustment Mechanism (CBAM), the government must adopt a comprehensive, structured policy approach. First, strengthening the domestic clean energy ecosystem is essential. This includes promoting renewable energy through mandatory renewable energy obligations and scaling up alternative fuels such as green hydrogen and biochar with the assistance of institutions such as the IITs. Supporting clean energy developers through mechanisms like International Renewable Energy Certificates (I-RECs) and Peace RECs can provide additional revenue streams and help reduce indirect emissions, thereby lowering CBAM-related fees.

Second, enhancing access to sustainable raw materials is crucial. The government should increase the availability of scrap by developing dedicated recycling facilities and negotiating FTAs that enable the free flow of scrap from key partner countries such as the EU, UK, US, and Australia. This would ensure a more circular and sustainable supply chain for energy-intensive industries.

Third, financial and technical support should be provided to Micro, Small, and Medium Enterprises (MSMEs), which are especially vulnerable to CBAM-related trade costs. India can also negotiate FTA exemptions specifically for MSMEs and consider repatriation of CBAM duties to mitigate the economic impact on small exporters.

8.A Delicate Balance Ahead

India recognizes the imperative to decarbonize but insists that this transition must occur on equitable terms. While CBAM could serve as an instrument for global climate action, its current design risks disproportionately penalizing countries such as India, which have contributed significantly less to historical emissions, are still industrializing, and face resource and infrastructure constraints. The fundamental challenge for India lies in balancing trade competitiveness, development goals, and climate commitments. A fair and cooperative global framework around CBAM is essential to ensure a just transition for all nations.

Meet The Thought Leader

Karan Patel is a mentor at GGI an undergraduate from IIT Madras. He is currently employed with Teach mint, an ed-tech start-up in their strategy team. Prior to Teach mint, he worked at Dalberg Advisors as an analyst where he worked with multi-laterals and international foundations on gender, education and energy sectors. He has also interned in MIT Sloan, Qualcomm and IIM Ahmedabad giving him a plethora of experience in the corporate and academic world. He also started his own venture in hyperlocal air-quality monitoring. Karan is an avid sport-person and masala chai fanatic.

Meet The Authors (GGI Fellows)

Shreya Bhadoria holds a Bachelor’s degree in Commerce from R.A. Podar College of Commerce and Economics. She works in the Founder’s Office at NAVIC Learn, driving business growth and strategic initiatives. She is also a co-owner of a bakery, bringing together entrepreneurial experience and a creative, problem-solving approach to business.

Harsh Vardhan is an Electronics and Communication Engineer with prior experience as a Technology Consultant at PwC. In addition to his professional background, he is an accomplished athlete, having competed at the national level in athletics and at the state level in both football and basketball. He holds a keen interest in public policy and aims to leverage his diverse skills to drive impactful societal change.

Kapil Tyagi holds a degree in Electrical Engineering from NIT Allahabad and an MA in Political Science. He has a keen interest in public policy, development, and sustainability. A banjo player who has performed in state-level music competitions, he brings a unique blend of analytical rigor and creative perspective to public problem-solving.

If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.

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Bibliography

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