EU Carbon Border Adjustment Mechanism (CBAM) Enters Definitive Phase from January 2026: Implications for India
The EU Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase on 1 January 2026, requiring EU importers to purchase carbon certificates for embedded emissions in steel, aluminium, cement, fertilisers, electricity, and hydrogen. India — the third-largest exporter of CBAM-covered goods to the EU — faces direct impact on its steel and aluminium exports. India has challenged CBAM at the WTO and, alongside BRICS partners, labelled it a "unilateral, punitive" trade barrier.
At a glance
EU CBAM entered definitive phase 1 January 2026. India — 3rd largest exporter of CBAM-covered goods to EU — faces direct impact on steel, aluminium, fertiliser exports.
EU importers must buy CBAM certificates for embedded carbon in imports (cement, steel, aluminium, fertilisers, electricity, hydrogen). Equalises EU ETS carbon cost between EU and foreign producers.
WTO challenge (GATT Articles I and III). BRICS New Delhi Declaration (Sept 2026) collectively opposed CBAM as 'unilateral, punitive, discriminatory and protectionist.'
Carbon Credit Trading Scheme (CCTS) under Energy Conservation (Amendment) Act, 2022; administered by BEE. A credible CCTS could qualify Indian exporters for CBAM offsets in future.
Timeline
Why in News
The EU Carbon Border Adjustment Mechanism (CBAM) entered its definitive (fully operational) phase on 1 January 2026, transitioning from the reporting-only transitional phase (October 2023 – December 2025). EU importers of CBAM-covered goods are now required to purchase CBAM certificates corresponding to the carbon price equivalent of emissions embedded in their products. India, as the third-largest exporter of CBAM-covered goods to the EU (after Türkiye and China), faces a direct impact on its steel, aluminium, and fertiliser exports to Europe. India has formally challenged CBAM at the World Trade Organization (WTO) and the BRICS New Delhi Declaration (September 2026) collectively opposed it as a "unilateral, punitive, discriminatory and protectionist measure."
Background
The European Union adopted CBAM Regulation (EU) 2023/956 on 10 May 2023 as part of its "Fit for 55" package — the EU's legislative plan to reduce greenhouse gas (GHG) emissions by at least 55% by 2030 (from 1990 levels) under the European Green Deal.
CBAM addresses carbon leakage — the risk that carbon-intensive industries relocate outside the EU to avoid the EU Emissions Trading System (EU ETS) carbon price. By imposing a carbon cost on imports equivalent to that faced by EU producers under the EU ETS, CBAM creates a level playing field and incentivises non-EU producers to reduce embedded carbon.
CBAM Implementation Timeline
| Phase | Period | Obligation |
|---|---|---|
| Transitional Phase | 1 Oct 2023 – 31 Dec 2025 | Quarterly carbon emission reporting only; no financial liability |
| Definitive Phase | 1 Jan 2026 onwards | CBAM authorisation required; must purchase and surrender CBAM certificates |
| EU ETS free allocation phase-out | 2026–2034 | EU producers' free ETS allowances reduced in parallel with CBAM ramp-up |
| Potential sector expansion | 2026 (EU Council review) | EU Council June 2026 moved to explore CBAM extension to new sectors |
Current Developments
- 12,000+ CBAM authorisations submitted by importers to EU national authorities within the first week of the definitive phase (by 7 January 2026)
- EU Council (June 2026): Adopted a position to strengthen CBAM and explore expansion to additional sectors — potentially chemicals, polymers, and select organic products
- BRICS New Delhi Declaration (September 2026): BRICS nations formally opposed CBAM as a "unilateral, punitive, discriminatory and protectionist measure" inconsistent with international trade law
- India's WTO challenge: India has invoked GATT dispute settlement against CBAM, arguing it violates Articles I (most-favoured-nation) and III (national treatment)
- UK–India CCTS recognition: The United Kingdom signalled willingness to recognise India's Carbon Credit Trading Scheme (CCTS) under its own carbon border mechanism — a potential precedent for India-EU discussions
Key Facts
| Parameter | Detail |
|---|---|
| Formal name | Carbon Border Adjustment Mechanism; Regulation (EU) 2023/956 |
| Covered sectors (Annex I) | Cement; Iron & Steel; Aluminium; Fertilisers; Electricity; Hydrogen |
| Definitive phase start | 1 January 2026 |
| India's rank | 3rd largest exporter of CBAM-covered goods to EU (after Türkiye, China) |
| EU ETS carbon price (approx. 2026) | €60–75 per tonne CO₂ equivalent |
| India's annual steel exports to EU | Approximately USD 1.5–2 billion |
| India's CO₂ intensity (steel) | ~2.4–2.6 t CO₂/t steel vs EU average ~1.8 t CO₂/t steel |
| CBAM annual declaration deadline | 31 May each year |
Constitutional Provisions (India)
- Article 253: Parliament may legislate to implement international treaties — applies to India implementing Paris Agreement carbon market provisions
- Seventh Schedule, List I, Entry 83: Duties of customs, including export duties — Union subject; tariff responses to CBAM are a central government prerogative
- Article 51(c): Fundamental Duty — foster respect for international law and treaty obligations; India's WTO challenges invoke multilateral trade law
Legal Framework
- CBAM Regulation (EU) 2023/956: Primary EU legislation establishing CBAM
- Energy Conservation (Amendment) Act, 2022 (India): Legal basis for India's Carbon Credit Trading Scheme (CCTS) and domestic carbon market
- GATT (General Agreement on Tariffs and Trade) 1994: India's WTO challenge tests CBAM's consistency with GATT Articles I, III, and XX(b)/(g) [environment exceptions]
- Paris Agreement, Article 6: Governs international transfer of mitigation outcomes (ITMOs); a bilateral carbon equivalence arrangement with the EU could reduce CBAM liability for India
- Bureau of Energy Efficiency (BEE) under Energy Conservation Act, 2001: Administers India's Perform, Achieve and Trade (PAT) scheme and CCTS
Institutional Framework
- European Commission — DG TAXUD: Administers CBAM; operates the CBAM registry
- Bureau of Energy Efficiency (BEE), India: Administers CCTS under Ministry of Power
- Ministry of Steel / Ministry of Commerce, India: Coordinate India's response to CBAM impact on exports
- World Trade Organization (WTO): Forum for India's dispute settlement challenge against CBAM
- BRICS: Multilateral platform for opposing unilateral trade-related climate measures
- G20: Platform for India-EU dialogue on carbon pricing equivalence and sustainable trade
Economic Dimensions
India's iron and steel exports to the EU amount to approximately USD 1.5–2 billion annually. Indian steel producers currently operate at approximately 2.4–2.6 tonnes of CO₂ per tonne of steel — above the EU average of ~1.8 tonnes — implying significant CBAM cost exposure. CBAM may add 15–25% to the cost of Indian steel entering the EU, reducing competitiveness. Aluminium (~USD 400 million to EU) and fertiliser exports also face exposure.
Banking and financial angle: CBAM compliance is now a material financial risk for India's steel, aluminium, and chemical companies with EU exposure. SEBI's Business Responsibility and Sustainability Reporting (BRSR) framework mandates Scope 1 and Scope 2 emission disclosures for the top 1,000 listed companies — a tool for assessing CBAM liability. Banks and lenders will increasingly price CBAM risk into credit assessments of export-oriented heavy industry. NABARD green bonds and green finance instruments for decarbonising steel could reduce long-term CBAM exposure.
Environmental Dimensions
CBAM is designed to reduce global carbon leakage rather than penalise developing economies. However, environmentalists note it creates a unilateral price signal without sufficient technology transfer to developing countries. India's position — shared by most developing countries — is that climate finance and technology transfer (not trade barriers) are the appropriate instruments for carbon transition. India's domestic Green Steel Mission and green hydrogen investments are long-term routes to reducing CBAM exposure. Relevant frameworks: UNFCCC common but differentiated responsibilities and respective capabilities (CBDR-RC); SDG 17 (Partnerships for the Goals) — multilateral over unilateral approaches.
Social Dimensions
India's iron and steel sector employs approximately 25 lakh (2.5 million) workers directly and an estimated 2 crore (20 million) indirectly. Any reduction in EU exports caused by CBAM cost escalation could affect employment in steel clusters in Jharkhand, Odisha, Chhattisgarh, West Bengal, and Gujarat. MSME-linked downstream sectors are particularly vulnerable. CBAM's equity dimension — that it is a developed-country instrument disproportionately burdening developing exporters — has been central to India's diplomatic opposition at the WTO, G20, and BRICS.
International Relations
CBAM has become a significant EU–India trade friction point. India was among the loudest opponents in the WTO, alongside China, Brazil, South Africa, and Indonesia. The BRICS New Delhi Declaration (September 2026) provided multilateral cover for opposing CBAM as discriminatory. India and the EU are simultaneously negotiating the India-EU Free Trade Agreement (FTA) where climate and sustainability chapters — including carbon pricing equivalence — are contested. If India's CCTS develops credibly, the EU may grant India partial CBAM offset credit, mirroring the UK–India arrangement. The UK recognition of India's CCTS sets a potential precedent for EU-India engagement.
Challenges
- India's immature carbon market: CCTS is still nascent; no CBAM offset credit currently available to Indian exporters
- Data quality: Indian SME steel producers lack systems to accurately measure and report embedded carbon per tonne
- High capex for decarbonisation: Green hydrogen-based DRI (direct reduced iron) technology is expensive; smaller plants cannot afford it
- WTO dispute timeline: Dispute resolution is slow — any favourable ruling may take 3–5 years
- Sector expansion risk: EU Council's June 2026 initiative could extend CBAM to chemicals and polymers, affecting India's petrochemical and pharmaceutical export chains
- Competitive displacement: Vietnam, Bangladesh, and other competitors with lower embedded carbon may displace Indian exporters in the EU market
Government Initiatives
- Carbon Credit Trading Scheme (CCTS), 2023: Administered by BEE; India's domestic carbon market framework
- Green Steel Mission: Policy for decarbonising India's steel sector through hydrogen-based steelmaking and scrap utilisation
- Perform, Achieve and Trade (PAT) Scheme: Energy efficiency certificates for industrial units; predecessor to CCTS
- India's NDC Update (2022): Target to achieve 50% of cumulative electric power installed capacity from non-fossil fuels by 2030
- India's WTO challenge against CBAM
- India-EU FTA negotiations: India seeking climate chapter provisions recognising CCTS for CBAM offset
Way Forward
- Accelerate CCTS: A credible, internationally recognised CCTS with robust MRV (Measurement, Reporting, Verification) would qualify Indian exporters for CBAM offsets
- Green Steel PLI: NITI Aayog and Ministry of Steel should fast-track PLI-linked incentives for green steel production
- G20 climate-trade framework: India should use G20 to push for a multilateral agreement on carbon border measures under UNFCCC/WTO rather than unilateral CBAM-type instruments
- Paris Agreement Article 6 bilaterals: India-EU Article 6 bilateral arrangement for ITMO transfer could provide partial CBAM relief while advancing India's NDC targets
- Economic Survey 2025–26: Flagged CBAM as a "carbon colonialism" risk; recommended creating a Sovereign Carbon Neutrality Fund to finance decarbonisation in exposed sectors
- Finance Commission: Allocate green transition grants to CBAM-exposed states (Jharkhand, Odisha, Chhattisgarh)
Possible Mains Questions
- The EU Carbon Border Adjustment Mechanism (CBAM) has been characterised as both a climate policy tool and a form of carbon colonialism. Critically analyse CBAM from India's perspective, covering trade, economic, and diplomatic implications. (GS Paper II — International Relations / GS Paper III — Economy, 250 words)
- India's Carbon Credit Trading Scheme (CCTS) is nascent, while the EU's CBAM is now fully operational. Evaluate the adequacy of India's domestic carbon pricing architecture to meet both climate commitments and trade competitiveness requirements. (GS Paper III — Environment and Economy, 250 words)
Possible Prelims MCQs
- The EU CBAM entered its definitive (fully operational) phase from: (A) 1 January 2024 (B) 1 October 2023 (C) 1 January 2026 (D) 1 July 2025 — Answer: C
- Which of the following is NOT covered under CBAM's initial scope? (A) Cement (B) Iron and Steel (C) Automobiles (D) Aluminium — Answer: C
- India's CCTS has its legal basis in: (A) Environment Protection Act, 1986 (B) Energy Conservation (Amendment) Act, 2022 (C) National Green Tribunal Act, 2010 (D) Wildlife Protection Act, 1972 — Answer: B
- Carbon leakage refers to: (A) CO₂ escaping from carbon capture storage (B) Relocation of carbon-intensive industries from jurisdictions with carbon pricing to those without (C) Methane leakage from natural gas pipelines (D) Illegal trade of carbon credits — Answer: B
Essay Dimensions
- Carbon colonialism or climate responsibility: the CBAM dilemma for developing economies
- Green trade barriers and the WTO: can environmental exceptions coexist with free trade?
- India's decarbonisation journey: balancing industrial growth, climate commitments, and trade competitiveness
- The race to carbon neutrality: will carbon pricing unify or fracture the global trade order?
- Beyond COP: the emerging architecture of the climate-trade nexus in a multipolar world
Interview Questions
- How does CBAM differ from a carbon tariff? Is the distinction legally significant at the WTO?
- What is carbon leakage and why is it a concern for EU climate policy? Does CBAM effectively address it?
- How can India use Paris Agreement Article 6 bilateral arrangements to reduce CBAM exposure?
- What is the CCTS and what needs to happen for it to gain international recognition for CBAM offset purposes?
- Some argue CBAM is "carbon colonialism." Others argue it is an incentive for India to decarbonise faster. What is your view?
FAQ
- Q: What is CBAM and how does it work?
- CBAM (Carbon Border Adjustment Mechanism) requires EU importers to purchase CBAM certificates corresponding to the carbon price equivalent of emissions embedded in imported goods. This equalises the carbon cost between EU producers (who pay under the EU ETS) and foreign producers, preventing carbon leakage.
- Q: Which Indian sectors are most exposed to CBAM?
- Iron and steel, aluminium, and fertilisers are the primary exposed sectors. India's steel exports to the EU face the largest direct financial impact in the near term, potentially adding 15–25% to export costs.
- Q: What is India doing to respond to CBAM?
- India has challenged CBAM at the WTO, raised objections in BRICS and G20, and is developing its domestic Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022. A credible CCTS could qualify Indian exporters for CBAM offsets in future.
- Q: What is carbon leakage?
- Carbon leakage is the relocation of carbon-intensive industries from jurisdictions with carbon pricing (like the EU) to countries without it, undermining the environmental effectiveness of domestic carbon policies. CBAM is designed to prevent this by equalising the carbon cost on imports.