What Happened
- The European Union is expanding its Carbon Border Adjustment Mechanism (CBAM) to cover approximately 180 additional product categories from January 1, 2028, including fabricated metal products, machinery parts, automobile components, aluminium containers, and other downstream engineering goods.
- According to analysis by the Global Trade Research Initiative (GTRI), this expansion will impact an additional USD 1.1 billion worth of Indian exports to the EU annually.
- Phase 1 of CBAM (currently in force) covers six sectors: steel, cement, aluminium, fertilizers, electricity, and hydrogen. Phase 2 (from 2028) extends this to downstream manufactured goods — products made from Phase 1 materials.
- Indian exporters of engineering goods, auto parts, cooling towers, motors, wires, and machinery face potential carbon tax surcharges under Phase 2, based on the embedded carbon emissions in production.
- India has challenged CBAM at the WTO, arguing it functions as a discriminatory trade barrier that disproportionately harms developing nations which cannot afford rapid industrial decarbonisation.
Static Topic Bridges
What is the Carbon Border Adjustment Mechanism (CBAM)?
CBAM is a carbon pricing instrument introduced by the European Union as part of its "Fit for 55" climate package and European Green Deal. It was designed to prevent "carbon leakage" — the risk that EU industries would relocate to countries with weaker carbon pricing, or that cheaper carbon-intensive imports would undercut EU products whose producers pay the EU Emissions Trading System (ETS) carbon price.
- Legal basis: EU Regulation (EU) 2023/956, adopted April 2023
- Transitional Phase: October 1, 2023 – December 31, 2025 (reporting only; no financial obligation)
- Full implementation: January 1, 2026 onwards (EU importers must purchase CBAM certificates)
- CBAM certificate price = EU ETS carbon price (~€50–70 per tonne of CO2)
- How it works: EU importers declare the embedded carbon in imported goods and surrender CBAM certificates proportional to those emissions; if the exporter's home country already prices carbon, that amount is deducted
- Phase 1 sectors: Steel, Cement, Aluminium, Fertilizers, Electricity, Hydrogen
- Phase 2 (from 2028): Downstream products — articles of steel/aluminium, machinery, auto parts, electrical equipment
Connection to this news: India's steel and aluminium sectors were already affected in Phase 1. Phase 2 hits the downstream — finished and semi-finished goods made from those materials — which form a significant part of India's engineering exports to Europe.
India's Vulnerability: Carbon-Intensive Manufacturing Base
India's industrial production remains heavily dependent on coal-based electricity and conventional blast furnace steelmaking — both carbon-intensive processes that generate higher embedded emissions per tonne of output compared to EU counterparts using renewables or hydrogen-based processes.
- India's electricity mix (2024-25): ~68% coal-based generation (thermal power); renewable share growing but still minority
- Indian steelmaking: ~45% Electric Arc Furnace (EAF) + 55% Basic Oxygen Furnace (BOF)/Blast Furnace; BF-BOF is ~2× more carbon-intensive than EAF using scrap
- CBAM impact on Indian steel: India exports ~2–3 million tonnes of steel to EU annually; CBAM carbon costs could add €50–100 per tonne, reducing price competitiveness
- Aluminium: India produces ~4 million tonnes/year; secondary (recycled) aluminium accounts for ~30–40% of output — lower carbon intensity, but primary aluminium from coal-powered smelters is highly carbon-intensive
- Engineering goods: India's engineering exports to EU ~$40 billion (all destinations); EU-specific engineering exports ~€8–10 billion; Phase 2 CBAM coverage brings new compliance burden
- GTRI assessment: By 2030, most industrial products entering the EU could face some form of carbon tax exposure
Connection to this news: The expansion of CBAM to downstream goods — cooling towers, auto parts, motors, wires — targets precisely the value-added manufacturing sector India is trying to grow under "Make in India" and PLI schemes. The additional carbon cost burden could neutralise the price advantage Indian manufacturers currently enjoy.
India's Position on CBAM: WTO Challenge and Climate Equity
India has been one of the most vocal critics of CBAM, arguing it violates both WTO non-discrimination principles and the UNFCCC principle of "Common But Differentiated Responsibilities and Respective Capabilities" (CBDR-RC).
- WTO challenge: India has raised CBAM at the WTO Committee on Trade and Environment, arguing it is inconsistent with GATT Article I (most-favoured-nation), Article III (national treatment), and Article XI (no quantitative restrictions)
- CBDR-RC: Under the Paris Agreement and UNFCCC, developed nations agreed to lead decarbonisation and support developing nations with finance and technology; CBAM — a mechanism that punishes developing nation exporters for not moving fast enough — is seen as reversing this principle
- India's key demand: CBAM should account for the development status of exporting countries; alternatively, EU should provide technology transfer or capacity-building support to help Indian industries decarbonise
- Competing view: EU argues CBAM is WTO-compatible as it is a domestic carbon pricing border adjustment, not a discriminatory tariff; GATT Article XX (environmental exceptions) may provide legal cover
- India's domestic carbon pricing: India has the Perform, Achieve and Trade (PAT) scheme (energy efficiency trading) and is developing a Carbon Credit Trading Scheme (CCTS) — but these do not produce a carbon price equivalent to the EU ETS, so India cannot claim a full CBAM deduction
Connection to this news: India's strategic response to CBAM will need to address both trade policy (WTO dispute) and industrial policy (accelerating decarbonisation in steel, aluminium, and downstream manufacturing) — particularly as Phase 2 threatens to hit export-oriented PLI-scheme beneficiaries.
India's Engineering Exports and the EU Market
Engineering goods are India's largest merchandise export category. The EU is India's largest trading partner (as a bloc).
- India's total merchandise exports (FY2025): ~$435 billion
- Engineering goods share: ~25% of total merchandise exports (~$108 billion)
- India-EU bilateral trade (goods + services): ~€130 billion
- India-EU FTA: Negotiations resumed in 2022; ongoing; an FTA could provide tariff relief but CBAM is a separate mechanism (not addressable through tariff negotiations alone)
- Sectors most exposed to CBAM Phase 2: auto ancillaries (gearboxes, pumps, cooling systems), structural steel components, aluminium containers and enclosures, industrial machinery, electrical motors
Connection to this news: The CBAM Phase 2 expansion adds a carbon compliance cost layer on top of existing EU regulatory requirements (CE marking, REACH chemicals regulation, product safety directives) — compounding the administrative burden for Indian SME exporters who already struggle with non-tariff barriers in EU market access.
Key Facts & Data
- CBAM Phase 1 sectors: Steel, Cement, Aluminium, Fertilizers, Electricity, Hydrogen
- CBAM Phase 2 expansion: ~180 additional product categories; effective January 1, 2028
- Additional Indian exports at risk from Phase 2: USD 1.1 billion (GTRI estimate)
- EU ETS carbon price (reference): ~€50–70 per tonne CO2
- India's coal-based electricity share: ~68% (2024-25)
- India's steel exports to EU: ~2–3 million tonnes/year
- India's engineering exports: ~$108 billion (FY2025, all destinations)
- India's WTO challenge: Raised at Committee on Trade and Environment
- GTRI projection: By 2030, most industrial goods entering EU could face carbon tax
- India's Carbon Credit Trading Scheme (CCTS): Under development; not yet equivalent to EU ETS pricing
- India-EU FTA: Negotiations ongoing (resumed 2022; not expected to cover CBAM directly)