India’s bid to keep carbon cash home as Europe adds a new trade cost
India’s exporters face new carbon costs under the EU’s CBAM, which took effect in January 2026. For carbon-intensive industries such as steel and aluminium, this could pressure export competitiveness, prompting India to build a domestic carbon mar...
A factory may meet every conventional requirement for exporting a product, but its emissions could still determine how much more that product costs when it reaches a foreign market. (Representational AI Image)
For Indian exporters, the price tag has a new line item: carbon. What once went up the smokestack could soon show up on the export bill, as carbon emissions increasingly become a cost of selling products overseas.
The European Union’s Carbon Border Adjustment Mechanism (CBAM) has entered its definitive phase in January 2026.
CBAM, essentially, puts a carbon cost on imports into the European Union. It requires EU importers to pay for emissions embedded in select carbon-intensive goods (based on carbon emissions during production) they import. The CBAM obligation is linked to the EU carbon price, while any carbon price already effectively paid on those emissions in the country of production can be deducted.
The EU importer pays the border carbon charge, but the economic burden can ultimately be passed back to the Indian exporter through lower margins, higher prices, or reduced competitiveness.
The United Kingdom is also preparing to introduce its own mechanism in January 2027.
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For India, this policy creates a new trade calculation.
A factory may meet every conventional requirement for exporting a product, but its emissions could still determine how much more that product costs when it reaches a foreign market.
New Delhi is, therefore, trying a new route of its own: putting a price on emissions at home and building a domestic carbon market.
The question is whether India can make carbon pricing work as an industrial policy—so that money associated with carbon emissions is invested in cleaner electricity, steel, technology and infrastructure inside the country instead of being collected at the borders of its trading partners.
The border tax mismatch
The stakes are high for India. Carbon-intensive industries such as steel, aluminium, cement and fertiliser are an important part of the country’s export economy. India’s merchandise exports touched $441.78 billion in FY26, with metals remaining a major export category.
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The exposure to the EU’s CBAM, moreover, is concentrated heavily in metals.
The EU’s CBAM currently covers six sectors: iron and steel, aluminium, cement, fertilisers, electricity and hydrogen.
According to NITI Aayog’s Trade Watch Quarterly report released this month, annual metals exports stood at about $34.8 billion in 2025, with iron, steel and aluminium accounting for roughly 78% of that trade.
Steel, in particular, is seeing strong export growth. India exported 6.94 lakh tonnes of finished steel worth ₹5,541.2 crore in August 2026, up 31.3% in volume and 41.5% in value from August 2025. During April-August, finished-steel exports reached 29.86 lakh tonnes worth ₹23,646.6 crore, rising 34.1% in volume and 32% in value.
The challenge is compounded by the carbon intensity of India's metals production.
Indian metals have notably higher carbon intensity than the global average, mostly because primary steel production relies heavily on coal-based Blast Furnace–Basic Oxygen Furnace routes and coal-fired Direct Reduced Iron processes, rather than cleaner gas-based or Electric Arc Furnace routes, according to NITI Aayog’s Trade Watch Quarterly (April–June [Q1] FY27).
The scale of India's exposure to European markets adds another layer.
NITI Aayog estimates that the EU accounts for approximately 22% of India's combined steel and aluminium exports. In the iron and steel sector, India’s trade exposure to the EU stands at 39.3%, meaning nearly two-fifths of its steel exports are destined for the European market.
A June 2026 working paper by the Indian Council for Research on International Economic Relations (ICRIER), titled Carbon Border Adjustment Mechanism (CBAM): Impact on India’s Steel Exports to the EU and Carbon Tax Incidence, estimates that India’s steel exports to the EU could fall by 24% under the CBAM, based on simulations using the ICRIER Samriddhi Model, a GTAP-E-based general-equilibrium model.
For India, therefore, the task at hand would be to ensure that the growth of its manufacturing exports is not undermined by a new cost imposed on the carbon content of those goods.
The country has stepped up preparations for the EU's CBAM, including the creation of a Committee on Export Preparedness for EU CBAM. Indian verifiers—independent, accredited third-party verifying bodies empanelled under the Bureau of Energy Efficiency (BEE)—have begun aligning plant auditing protocols with the EU's carbon registry, ahead of the first annual CBAM declarations due by September 2027 for emissions embedded in 2026 exports.
At the same time, Britain has agreed to recognise India's Carbon Credit Trading Scheme (CCTS), meaning qualifying carbon payments made in India can be taken into account under the UK's CBAM.
The recognition reduces the risk of exporters paying twice, but it does not eliminate the problem: the amount of relief depends on the carbon price actually paid in India.
That distinction gets to the heart of India's challenge.
Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), warned that India's carbon price is likely to remain much lower than the price faced by exporters in Europe.
“The EU carbon price is currently about €75 per tonne of CO₂, compared with roughly $10 in China (which operates a similar domestic compliance Emissions Trading Scheme), and India’s emissions-trading system will take time to become fully operational,” Srivastava said.
Even if India's system is recognised overseas, he added that it “will not remove the border charge...Even after implementation, a large price gap is likely to remain, leaving Indian exporters liable for substantial CBAM payments in the EU and UK.”
This creates the central tension for India: a domestic carbon price can keep some carbon-related revenue inside the country, but only rapid decarbonisation can ultimately reduce the carbon bill itself.
To build a domestic response to carbon taxes abroad, the Central government had notified the Carbon Credit Trading Scheme in June 2023 under the Energy Conservation (Amendment) Act.
The scheme is overseen by the Bureau of Energy Efficiency (BEE) and works by rewarding industries that reduce the amount of carbon they emit for each unit of production.
Rather than putting a limit on how much an industry can produce, emissions-intensity targets have been set for participating companies.
These targets become stricter each year and are applied in two-year compliance cycles, starting in FY 2025–26. The system currently covers over 700 industrial units across seven of India’s most emissions-intensive sectors such as steel, aluminium and refining, according to a PIB release.
Companies that perform better than their assigned targets can earn tradeable Carbon Credit Certificates (CCCs). Each certificate represents one tonne of carbon dioxide equivalent reduction.
Companies that fail to meet their targets can face penalties.
Turning carbon cost into investments
For India, the case for an early action is straightforward: instead of allowing carbon-related costs to leave the country through foreign border taxes, India could channel domestic carbon revenues into cleaner technologies and industries. Over time, that could help lower the emissions linked to Indian exports while reducing the economic impact of overseas carbon charges.
India has already begun expanding its carbon market. It has expanded the CCTS system to cover more industries, including petroleum refineries, petrochemicals, textiles and secondary aluminium, with the compliance framework now covering hundreds of obligated entities.
But the carbon market alone cannot make Indian exports cleaner.
According to Trishant Dev, Climate, Trade & Green Industrial Policy expert in Carbon Markets at the Centre for Science and Environment (CSE), India's carbon revenues should be used to build the infrastructure that allows industry to decarbonise.
“At its core, it isn’t really a choice between greening the grid and decarbonising steelmaking,” Dev said. “Decarbonising hard-to-abate sectors ultimately depends on affordable clean power.”
That means investment in transmission, energy storage and renewable power could become as important to India's carbon strategy as the carbon market itself.
“A share of this could also support coal and steel regions that are most affected by the transition. If India generates carbon revenues, they should be reinvested in India’s own transition rather than allowing that value to be captured through carbon charges at the border of another country,” Dev said.
The emerging strategy is, therefore, a kind of two-part shield: price carbon domestically, then use the transition to reduce the amount of carbon embedded in Indian exports.
The way ahead
New Delhi has spent years arguing that developing countries should not carry the same climate burden as wealthy economies with much higher historical emissions—a position rooted in the principle of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) under the United Nations Framework Convention on Climate Change (UNFCCC).
India has reiterated this in United Nations Conference of the Parties (COP) negotiations, official statements, Nationally Determined Contributions (NDC) submissions, and other multilateral forums.
Dr S Faizi, international environment policy expert and former UN environmental negotiator, said CBAM is fundamentally protectionist and cautioned against abandoning multilateral legal battles. "CBAM is discriminatory and against the WTO rules; this is another excuse by Europe to protect its business against other countries, including developing countries like India.”
“India ought to move the dispute settlement mechanism at the WTO (World Trade Organization),” Faizi said.
New Delhi has raised concerns over the EU's CBAM and other unilateral environmental trade measures in WTO discussions, while continuing to address the issue through trade negotiations and consultations with the EU rather than initiating a WTO dispute of its own.
Faizi also questioned whether carbon credits can substitute for direct emissions reductions, arguing that the priority should remain actual cuts in greenhouse-gas emissions.
“The solution lies in actually reducing carbon emissions and not in offsetting. Let us not miss the point that India is one of the worst victims of the climate crisis.” He further cautioned that India should not frame its carbon strategy in isolation from other developing economies.
While the UNFCCC, WTO and other international forums continue to debate the trade and climate implications of carbon border measures, Indian exporters cannot simply wait for those discussions to settle international trade disputes.
If competitors cut their emissions faster, or if foreign markets impose higher carbon charges on Indian goods, the consequences could show up in factory orders, export margins and jobs.
That leaves India attempting to balance three objectives at once: protecting its developing-country position in climate negotiations, keeping its exporters competitive and cutting domestic emissions fast enough to avoid increasingly expensive carbon charges abroad.
