EU imposes Carbon Border Tax raising costs for exporters

The Carbon Border Adjustment Mechanism (CBAM) of the European Union (EU) has come into effect on January 1, 2026, ushering in a new phase of climate-linked trade regulation that is expected to increase costs for exporters from carbon-intensive economies. This includes India too.

The CBAM mechanism places a levy on the carbon emissions embedded in certain imported goods, aligning import costs with the carbon pricing already faced by European producers.

CBAM currently applies to imports of iron and steel, aluminium, cement, fertilisers, electricity and hydrogen—sectors that are heavily dependent on fossil fuels. Under the system, EU importers are required to declare the emissions associated with their imports and purchase CBAM certificates, with prices linked to the EU Emissions Trading System (ETS).

Right now, certificate prices are in the range of €87 – €90 per tonne of carbon dioxide and will be calculated on a quarterly basis in 2026, moving to weekly averages from 2027.

While the levy is formally paid by EU importers, trade experts warn that the additional cost will likely be passed on to exporters, eroding the competitiveness of suppliers from developing countries. For India, a major trading partner of the EU, the impact is expected to be significant in sectors such as steel, aluminium, cement and fertilisers, where production remains largely coal-based and where no domestic carbon pricing mechanism exists to offset the levy.

The rollout of CBAM has renewed concerns among developing countries over the fairness of applying uniform emissions standards across economies with differing development levels. At the recent COP30 climate talks in Brazil, unilateral climate-linked trade measures emerged as a key point of contention, with several countries arguing that such policies risk deepening global trade inequalities and conflict with the principle of common but differentiated responsibilities.

According to a 2024 Indian study, goods covered under CBAM accounted for nearly 10 per cent of India’s exports to the EU in 2022–23. The study estimated that at a carbon price of €100 per tonne, the mechanism could impose an average additional tax burden of around 25 per cent on affected Indian exports.

With similar carbon border measures under consideration in the UK and the US, exporters and policymakers in India are increasingly under pressure to accelerate industrial decarbonisation and reassess trade strategies in a rapidly changing global trade environment.