The European Union’s Carbon Border Adjustment Mechanism (CBAM) is going to redefine carbon-heavy global trade, and experts advise that CBAM could cost India 0.03% of GDP per year if left unchecked. This policy to restrict “carbon leakage” will tax some imports with a carbon price, impacting Indian steel, aluminium, cement, and other emissions-heavy exporters. For India, which exports about 11% of its total exports to the EU, much is at stake—not only for industry competitiveness but for economic stability.

What CBAM Means for Indian Trade

The CBAM came into effect in October 2023 with an initial reporting-only period until December 2025. From January 2026, importers into the EU will be required to pay for embedded carbon in products. It will cover sectors like steel, cement, aluminium, fertilizers, hydrogen, and electricity initially and increase in scope over time.

For India, the EU is a highly important export market:

• Approximately 14% of India’s steel exports and 25% of its aluminium exports go to the EU.
• The CBAM charge may cost Indian exporters €1.5–2 billion each year once the scheme is implemented in its entirety.
• Volumes of trade in covered products may decline by 5–7% in the absence of countermeasures.
• Economists put the estimate of the cost of CBAM without policy action at 0.03% of GDP, or around $1.3 billion in current terms.

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Domestic Carbon Tax as a Strategic Response

An important policy suggestion from analysts is the imposition of a domestic carbon tax. This would enable Indian exporters to invoke equivalence with the carbon pricing in the EU, thereby nullifying the CBAM’s surcharges.

Modelling indicates that a domestic $35 per tonne of CO₂ tax would reduce the GDP loss from 0.03% to 0.01%, and raise revenue for green infrastructure and renewable energy. It could also make India a leading player in climate policy instead of being a follower.

Today, India depends on energy efficiency schemes, renewable energy capacity addition, and a voluntary carbon credit trading system under the Energy Conservation (Amendment) Act 2022. Yet, the lack of a direct carbon tax exposes exporters to the cost of CBAM.

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Global Context and Industry Concerns

The CBAM is included in the EU’s Fit for 55 package to reduce greenhouse gas emissions by 55% by 2030. Similar mechanisms are being proposed in Canada, the UK, and Japan, potentially tripling the impact on Indian exports.

Indian industry captains caution that the reporting requirements for emissions under CBAM will be particularly onerous for MSMEs, who are a major component of the supply chain but do not have strong carbon accounting systems. There are also demands for temporary export subsidies or tax concessions to buffer the shock.

In a world trade context where sustainability indicators are poised to be as key as cost and quality, the decision is plain: adapt or get left behind. For India, decisive policy intervention may be the difference between CBAM being a costly drag or a driver of greener growth. The figures are stark—CBAM could cost India 0.03% of GDP—but with the proper strategy, the damage can be contained.

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