The European Union has activated the world's first carbon border tax, a move set to significantly impact Indian exports of metals like steel and aluminium. The Carbon Border Adjustment Mechanism (CBAM), which became operational on January 1, 2026, imposes a levy on carbon-intensive goods entering the EU from nations with less stringent environmental regulations.
A Direct Blow to Key Indian Industries
This controversial policy directly targets sectors where India is a major exporter, including iron, steel, and aluminium. According to a report by the New Delhi-based think tank Global Trade Research Initiative (GTRI), the financial implications are severe. The GTRI warns that to remain competitive, several Indian exporters may be forced to slash their prices by 15% to 22%. This margin would then be used by EU importers to pay the newly imposed CBAM tax.
"CBAM will hit Indian steel and aluminium exports to the EU hard, with MSMEs bearing the heaviest burden," the GTRI report stated. It highlighted that the mechanism's complex data requirements will sharply increase compliance costs, potentially pushing smaller exporters out of the European market entirely.
Technical Hurdles and Global Backlash
A critical challenge for Indian manufacturers, especially Micro, Small, and Medium Enterprises (MSMEs), is the lack of verified plant-level emissions data. Large producers often do not share this information with smaller firms that source materials from them. Consequently, EU authorities may apply default emission values—typically the highest benchmarks—which would inflate the carbon cost even if the actual emissions are lower.
The move has sparked international controversy. Russia formally disputed the CBAM in May 2025, with other developing nations joining the challenge. International bodies like the United Nations Conference on Trade and Development (UNCTAD) have cautioned that such measures could hinder export-led development in poorer countries. Developing nations, including India, argue that CBAM violates the principle of Common But Differentiated Responsibilities (CBDR), a core tenet of international environmental law recognized by the WTO.
Broader Trade Barriers and India's Response
The EU's carbon tax is part of a widening landscape of trade barriers. It follows steep US tariffs on steel, aluminium, and copper, and a similar regulation is expected from the UK later this year. Indian exporters have sought government assistance to transition to cleaner production methods, like using electric arc furnaces (which use steel scrap) instead of the more common and carbon-intensive blast furnaces.
They have also requested a carve-out for MSMEs in the ongoing India-EU free trade agreement negotiations. However, the EU has maintained that CBAM is not a trade measure and is therefore not on the negotiating table. Indian Finance Minister Nirmala Sitharaman has previously criticized the CBAM as "unilateral, arbitrary, and a barrier to trade."
Analysts question the environmental efficacy of the measure. A 2021 UNCTAD study estimated that CBAM would reduce global carbon emissions by a mere 0.1%, while substantially impeding exports from developing nations. This has led Indian trade experts to argue that regulations like CBAM are less about climate protection and more about advancing the commercial interests of the developed world.
