India, the world’s second-largest steel manufacturer, faces a watershed moment in 2025 with the EU’s Carbon Border Tax implementation at its Carbon Border Adjustment Mechanism (CBAM), a radical policy aimed at attaining carbon neutrality. Europe accounts for nearly 25% of India’s steel exports, therefore the stakes are considerable. The CBAM, which is scheduled to be fully implemented by 2034 but will begin its transitional phase in 2025, imposes a carbon cost on imported items, including steel, depending on the inherent carbon emissions. For India, a country reliant on carbon-intensive steel manufacturing, this shift threatens to impose large financial penalties—up to $397 per tonne by 2034, according to Rystad Energy—unless it rapidly embraces greener technology. As global markets increasingly prioritise sustainability, India’s steel business must strike a careful balance between sustaining competitiveness, meeting local economic aspirations, and adhering to severe environmental regulations.

The EU’s Carbon Border Adjustment Mechanism: A Game Changer

The CBAM represents a seismic shift in global trade dynamics aimed at levelling the playing field for EU producers subject to carbon charges under the Emissions Trading System (ETS) while preventing “carbon leakage”—the movement of industry to countries with laxer environmental regulations. Importers into the EU’s Carbon Border Tax implementation must report emissions buried in steel and other carbon-intensive items beginning in 2025, with financial charges kicking in in 2026 and gradually increasing to full effect by 2034. For India, this presents a significant challenge. The EU’s Joint Research Centre (JRC) notes that India’s steel production, which is primarily coal-based, emits more carbon per tonne than most worldwide competitors, exposing it to greater CBAM-related costs.

According to estimates, if considerable decarbonization is not achieved, Indian steel exports may face surcharges of up to $80 per tonne by 2030, with further increases expected over time. This financial burden may undermine India’s price advantage in the European market, where its steel has previously been competitive due to reduced production costs. Countries like South Korea and Turkey, which have less carbon-intensive steel industries, may gain an advantage, potentially overtaking India as the leading exporter. Beyond compliance, the CBAM represents a larger trend: Worldwide purchasers are increasingly preferring low-carbon steel, making decarbonization a competitive necessity rather than a legislative requirement.

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Economic and Trade Implications for India

Europe’s 25% share of India’s steel exports amounts to billions of dollars in commerce each year. According to government data, basic metals, including steel, accounted for approximately 9.6% of India’s total exports to the EU between 2022 and 2023. The CBAM levies, estimated at €173.8 per tonne (roughly ₹15,394) by some studies, could reduce profit margins by $65 to $160 per tonne between 2026 and 2036, according to ICRA projections. This squeeze threatens not only exporters but also the Indian economy as a whole, which relies on steel for infrastructure, industry, and employment.

Small and medium-sized firms (SMEs), which make up a large share of India’s steel sector, confront disproportionate obstacles. Unlike major companies, SMEs may lack the cash and technical competence to rapidly migrate to low-carbon technologies. The compliance load, which includes quarterly emissions reporting and eventual certificate purchasing, adds to the pressure and may price them out of the EU market. Meanwhile, larger businesses with more resources, such as Tata Steel and JSW Steel, are better positioned to react, demonstrating an uneven impact across the industry.

India’s Response: Policy and Industrial Action

Recognizing the urgency, the Indian government and steel industry have launched steps to reduce the effects of CBAM while also aligning with global environmental trends. The government implemented a green steel classification system as part of the Production-Linked Incentive (PLI) scheme in December 2024. Steel emitting less than 2.2 tonnes of CO₂ per tonne of final product is considered “green,” with emissions below 1.6 tonnes earning a five-star grade. This system encourages cleaner production through financial incentives and is supplemented by ideas about mandating green steel in public-sector projects, which might enhance domestic demand for sustainable products.

India’s top five steel producers—Tata Steel, JSW Steel, Jindal Steel & Power (JSPL), Steel Authority of India (SAIL), and AM/NS India—account for more than half of the national output and are driving decarbonization efforts. Tata Steel, for example, plans to complete a 0.75 million tonne per year (Mtpa) electric arc furnace (EAF) in Ludhiana by March 2025, marking a transition from traditional blast furnaces to a lower-emission technology. The business has also established a carbon capture plant in Jamshedpur and obtained 379 megawatts of captive renewable energy. JSW Steel, which aims to be net-zero by 2050, has collected $500 million through sustainability bonds and committed $1 billion to decarbonization, including the integration of biomass and hydrogen into its processes. These efforts demonstrate a proactive approach, but expanding such technology across the sector remains a daunting task.

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Challenges of Decarbonization

India’s steel industry relies significantly on coal, with the blast furnace-basic oxygen furnace (BF-BOF) process dominating production. Transitioning to alternatives such as hydrogen-based direct reduced iron (DRI) or scrap-based EAFs, which can reduce emissions by up to 97% and 88%, respectively, needs significant investment and infrastructure. Green hydrogen, a promising fuel, is still expensive, and renewable energy capacity, while increasing, is insufficient to drive widespread EAF use. Limited scrap availability hinders the transition, as India’s recycling ecosystem lags behind that of developed countries.

The predicted increase in India’s steel production to 189 Mtpa by 2035 adds another degree of complexity. While the industry intends to reduce emissions by 43% over the next decade, this falls short of the reductions required to avoid CBAM penalties altogether. Balancing this expansion with decarbonization necessitates a strategic roadmap that combines legislative support, technological innovation, and financial instruments such as green bonds or carbon credits.

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Global Context and Strategic Options

The CBAM isn’t an isolated action. The United Kingdom intends to implement its own carbon border tax by 2027, while nations such as Canada and the United States are considering similar measures. This global trend puts additional pressure on India to decarbonise or risk losing several export markets. India intends to challenge CBAM in the World Trade Organization, claiming that it violates trade norms by unfairly burdening underdeveloped countries. However, legal battles may only provide short-term relief; long-term competitiveness is dependent on adapting.

To counter export losses, India might expand its export markets, focusing on Asia and Africa, or accelerate domestic green steel demand. Carbon capture, utilisation, and storage (CCUS) investments might close the gap for current BF-BOF facilities, while a national hydrogen policy could reduce the cost of cleaner steelmaking. Collaboration with the EU, possibly through technological transfers or decarbonization financing, could potentially help ease the transition.

Conclusion

The EU’s Carbon Border Tax implementation presents a severe challenge to India’s steel industry, threatening its European market share with steep financial penalties and shifting consumer preferences. While initial reactions from government and industry indicate promise (green steel standards, renewable energy adoption, and aggressive net-zero ambitions), the path ahead is filled with challenges. Coal reliance, infrastructure deficiencies, and SME vulnerabilities highlight the importance of a coordinated, well-funded approach. As global commerce aligns with climate goals, India’s ability to decarbonise its steel industry will decide not only its export competitiveness but also its role in a sustainable future. The pressure is on, and the clock is ticking.

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