India Faces Highest CBAM Levy Among EU Trade Partners

India’s €301 Million CBAM Liability: A Wake-Up Call or a Trade Barrier?

€301 million. That’s the estimated annual levy Indian iron and steel exports will face under the European Union’s Carbon Border Adjustment Mechanism (CBAM), starting January 1, 2026. According to the European think tank Sandberg, this is the highest CBAM fee imposed on any non-EU trade partner. The figure is not just a technical calculation; it’s a sharp financial signal of how trade and climate policy are converging into contested terrain. With India’s steel exports to the EU valued at nearly $4.25 billion in 2024, CBAM’s impact will reverberate across industries, climate policy, and even diplomatic negotiations.

CBAM’s Policy Design: Carrot or Stick?

At its core, the CBAM is the EU’s answer to carbon leakage — an economic phenomenon where industries relocate carbon-intensive production to countries with less stringent environmental regulations. By pegging carbon prices on imported goods to the auction prices in the EU’s Emissions Trading System (ETS), CBAM monetizes emissions in sectors with high carbon intensity, such as iron and steel, cement, aluminium, and electricity. The starting list is limited to products most prone to leakage but could expand to cover more industries over time.

The mechanism grants a certain flexibility: non-EU exporters like Indian steel firms can offset CBAM costs if they demonstrate that carbon pricing has already been applied in their home country. For now, the scale of India’s liability reflects two hard truths: first, the sheer size of its steel exports to the EU, and second, the emissions intensity of its production methods. Indian steel emits roughly 2.6 tonnes of CO₂ per tonne, far above the global average of 1.9–2.0 tonnes, primarily due to heavy reliance on blast furnaces (BF-BOF) and coal-based technologies.

The Case for CBAM: A Necessary Climate Tool

Supporters of CBAM argue that it levels the playing field. EU industries already pay a carbon price under ETS, and exempting imports from similar costs undermines both the integrity of climate goals and local competitiveness. In sectors like iron and steel, where production is inherently carbon-intensive, CBAM incentivizes exporters to adopt cleaner technologies.

Seen as aligned with the EU Green Deal — which targets a reduction in greenhouse gas emissions by 55% by 2030 — CBAM could push energy-intensive economies like India toward structural decarbonization. Sandberg estimates that Indian firms could cut CBAM liabilities by €180 million and even increase revenues by €510 million if they transition to greener technologies like electric arc furnaces (EAF) or hydrogen-based production. Additionally, EU officials maintain that CBAM is not punitive but corrective: countries that already impose robust domestic carbon pricing, such as Switzerland, are exempt.

The Indian Critique: Discrimination by Design?

India views CBAM through an entirely different lens. For Indian policymakers, CBAM represents a non-tariff barrier disguised in climate-friendly rhetoric. The Ministry of Commerce and Industry has argued that such mechanisms ignore principles of common but differentiated responsibilities (CBDR). Developing economies like India, which have historically contributed less to global emissions, now face disproportionate costs for adapting to trade rules imposed by historically high emitters such as the EU.

Moreover, there’s institutional skepticism about whether CBAM achieves its stated goals. What the technocratic framing obscures is that CBAM might incentivize cost compliance rather than actual decarbonization. Indian exporters could simply absorb CBAM costs or engage in "creative accounting" to claim offsets, undermining the environmental rationale. Without effective global carbon markets, the mechanism risks penalizing developing economies without meaningfully reducing emissions.

Then comes the political economy dimension. CBAM may complicate ongoing negotiations over an India–EU Free Trade Agreement (FTA). Climate provisions in trade agreements are increasingly contentious, and CBAM adds another wedge by making energy-intensive goods less viable in EU markets.

Lessons From South Korea: Managing the CBAM Risk

South Korea presents an instructive comparison. Faced with potential CBAM penalties, it quickly expanded its domestic emissions trading system (ETS), ensuring its carbon pricing was linked to EU benchmarks. As a result, Korean exports bear minimal CBAM liability and remain competitive in EU markets. The contrast with India is stark: despite plans for a domestic carbon market, Indian ETS reforms remain nascent and fragmented. South Korea’s proactive strategy underscores one critical insight — mitigating CBAM risk requires regulatory speed and coherence, not just long-term plans.

Where Things Stand

India’s CBAM liability of €301 million is an economic reality but also a wake-up call. Given the trajectory of global trade and climate policy, the bigger risk isn’t CBAM itself but India’s delayed response in building carbon markets and greening its industrial base. Some progress exists — the planned tripling of renewable energy capacity by 2030 and domestic carbon credit systems are steps in the right direction. However, much depends on how quickly India can shift core industries like steel toward cleaner production technologies and ensure its regulatory infrastructure matches international benchmarks.

India is right to push back diplomatically, but time is running out. As carbon metrics increasingly shape trade policy, the CBAM debate highlights a structural tension between economic competitiveness and environmental responsibility. Whether India capitalizes on this challenge or lets it snowball into a trade barrier may define its industrial future.

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