The Carbon Border Adjustment Mechanism charges EU importers for the carbon emitted making imported steel, aluminium, cement, fertiliser, hydrogen and electricity. The definitive phase began on 1 January 2026. The payable share of embedded emissions is 2.5% in 2026 and rises every year to 100% in 2034, while the certificate price follows EU ETS auction averages (European Commission).
Consider an Odisha aluminium producer exporting 5,000 tonnes a year to Italy at 16 tonnes of CO₂ per tonne, or 80,000 tonnes embedded. At an illustrative €70 per tonne the full carbon bill is about ₹56 crore. At the 2026 share of 2.5% it is about ₹1.4 crore, before free-allocation adjustments. The GTRI has warned Indian exporters may need to absorb price cuts of 15 to 22% once fully priced.
CBAM exists to stop carbon leakage, where production moves to countries with weaker carbon rules. India has no equivalent border price, and its Carbon Credit Trading Scheme is priced well below the EU allowance price. Exporters therefore compete on measured emissions intensity, which makes plant-level data and energy efficiency a commercial issue rather than a reporting formality. Exporters with lower measured emissions per tonne pay less, so efficiency upgrades now carry a direct export-price benefit.
CBAM is the EU’s border carbon levy on imported steel, aluminium, cement, fertiliser, hydrogen and electricity. It has applied in its definitive phase since 1 January 2026. Importers must cover a rising share of embedded emissions, from 2.5% in 2026 to 100% in 2034, so Indian exporters face growing price pressure.
The Impact of Global Trade on Carbon Emissions
Global trade has become an integral part of the modern economy, enabling countries to specialize in the production of certain goods and services and to access a wider range of products at lower costs. However, the expansion of global trade has also led to an increase in carbon emissions, as goods are transported across long distances and production processes become more complex. This has raised concerns about the environmental impact of global trade and the need to address the carbon footprint of imported goods.
The rise of global supply chains has made it increasingly difficult to attribute carbon emissions to specific countries, as products often contain components that have been manufactured in different parts of the world. This has created challenges for policymakers seeking to reduce carbon emissions while maintaining open and fair trade relations. The CBAM is one potential solution to this problem, as it seeks to internalize the carbon costs associated with imported goods and to create a more level playing field for domestic industries. By addressing the carbon footprint of imported goods, the CBAM aims to reduce the incentive for companies to relocate their production to countries with lower environmental standards, ultimately leading to a reduction in global carbon emissions.
How the Carbon Border Adjustment Mechanism Works
The Carbon Border Adjustment Mechanism works by imposing a carbon price on imported goods based on their carbon content. This is intended to create a level playing field for domestic industries that are subject to domestic carbon pricing policies, while also incentivizing other countries to adopt similar measures. The CBAM can take different forms, such as a tax on the carbon content of imported goods or a requirement for importers to purchase emissions allowances at a price equivalent to the domestic carbon price.
One of the key challenges in implementing a CBAM is determining the carbon content of imported goods, as this requires accurate data on the emissions associated with the production of those goods. This can be particularly challenging for products with complex supply chains and components sourced from multiple countries. To address this issue, the EU has proposed using benchmarks based on average emissions for specific product categories, which would be gradually phased in over time. This approach aims to provide a simple and transparent method for calculating the carbon content of imported goods, while also allowing for adjustments based on actual emissions data where available.
Potential Benefits of the Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism has the potential to deliver several benefits for both domestic industries and global climate action. For domestic industries, the CBAM can help to protect them from unfair competition by ensuring that imported goods are subject to the same carbon pricing policies as domestically produced goods. This can help to prevent carbon leakage and encourage companies to invest in cleaner technologies and practices, ultimately leading to a reduction in domestic emissions.
From a global perspective, the CBAM can also incentivize other countries to take more ambitious action on climate change by creating a financial incentive for them to adopt similar carbon pricing policies. This can help to level the playing field for countries that have already implemented carbon pricing measures and can encourage others to follow suit. By addressing the carbon footprint of imported goods, the CBAM aims to reduce the incentive for companies to relocate their production to countries with lower environmental standards, ultimately leading to a reduction in global carbon emissions.
Challenges and Criticisms of the Carbon Border Adjustment Mechanism
While the Carbon Border Adjustment Mechanism has the potential to deliver significant benefits, it also faces several challenges and criticisms that need to be addressed. One of the key challenges is determining the carbon content of imported goods, particularly for products with complex supply chains and components sourced from multiple countries. This requires accurate data on the emissions associated with the production of those goods, which can be difficult to obtain and verify.
Another challenge is ensuring that the CBAM complies with international trade rules and does not lead to disputes with trading partners. The World Trade Organization (WTO) has strict rules governing trade measures that could potentially discriminate against foreign products, and any CBAM would need to be carefully designed to avoid running afoul of these rules. There are also concerns that the CBAM could lead to higher costs for consumers and businesses, particularly in countries that rely heavily on imports for certain goods and services.
The Role of the Carbon Border Adjustment Mechanism in International Climate Policy
The Carbon Border Adjustment Mechanism is expected to play a significant role in international climate policy by addressing the issue of carbon leakage and incentivizing other countries to take more ambitious action on climate change. The EU has been a strong advocate for the implementation of a CBAM as part of its broader climate policy agenda, and other countries are also considering similar measures as they seek to reduce their carbon emissions while maintaining open and fair trade relations.
The CBAM is seen as a way to create a level playing field for domestic industries and to ensure that global trade does not undermine efforts to reduce greenhouse gas emissions. By internalizing the carbon costs associated with imported goods, the CBAM aims to reduce the incentive for companies to relocate their production to countries with lower environmental standards, ultimately leading to a reduction in global carbon emissions. As discussions around the CBAM continue to evolve, it will be important for countries to work together to address the challenges and criticisms associated with this policy tool and to ensure that it is implemented in a way that is fair, transparent, and effective.
The Future of the Carbon Border Adjustment Mechanism and Its Implications for Global Climate Action
The future of the Carbon Border Adjustment Mechanism will depend on how it is implemented and how it interacts with other climate policies at both domestic and international levels. As discussions around the CBAM continue, it will be important for countries to work together to address the challenges and criticisms associated with this policy tool and to ensure that it is implemented in a way that is fair, transparent, and effective.
The implications of the CBAM for global climate action are significant, as it has the potential to incentivize other countries to take more ambitious action on climate change by creating a financial incentive for them to adopt similar carbon pricing policies. By addressing the carbon footprint of imported goods, the CBAM aims to reduce the incentive for companies to relocate their production to countries with lower environmental standards, ultimately leading to a reduction in global carbon emissions.
In conclusion, the Carbon Border Adjustment Mechanism has emerged as an important policy tool in international efforts to combat climate change. While it faces several challenges and criticisms, it also has the potential to deliver significant benefits for both domestic industries and global climate action. As discussions around the CBAM continue, it will be important for countries to work together to address these challenges and criticisms and to ensure that it is implemented in a way that is fair, transparent, and effective. The future of the CBAM will depend on how it is implemented and how it interacts with other climate policies at both domestic and international levels, but it has the potential to play a significant role in shaping global efforts to reduce greenhouse gas emissions.
FAQs
Q1: How much will CBAM add to the cost of Indian steel and aluminium exports?
Illustratively, 80,000 tonnes of embedded CO₂ at €70 is about ₹56 crore at a 100% payable share, or about ₹1.4 crore at the 2026 share of 2.5%, before free-allocation adjustments. GTRI has estimated that Indian exporters may face price cuts of 15% to 22% at full pricing.
Q2: Who pays CBAM, the exporter or the EU importer?
The authorised EU importer is legally responsible for buying and surrendering CBAM certificates. In practice, however, buyers may pass the cost back to exporters through lower purchase prices or by requiring verified emissions data, meaning Indian exporters can still feel the financial impact.
Q3: When did CBAM start charging money?
The definitive CBAM phase began on 1 January 2026. Certificates go on sale from 1 February 2027, while the first annual declaration and certificate surrender for 2026 imports are due on 30 September 2027.
Q4: How is CBAM different from a carbon tax?
A carbon tax is generally imposed domestically on emissions or carbon-intensive activities. CBAM applies a carbon cost to certain imports based on their embedded emissions and the EU carbon price. It can also account for an eligible carbon price already paid in the country of origin, making it different from a conventional domestic carbon tax.
Q5: Does a carbon price paid in India reduce the CBAM bill?
The CBAM regulation allows a deduction for eligible carbon prices paid in the country of origin, subject to the applicable EU rules. Based on the information provided, a draft implementing regulation reported in May 2026 named the UK, China and California but not India. Therefore, exporters should not assume a deduction for an Indian carbon price when budgeting for CBAM.