EU CBAM Compliance for Indian Exporters

What Is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is the European Union's carbon border tax on imports of carbon-intensive goods. Established under EU Regulation 2023/956 , CBAM requires EU importers to pay for the carbon emissions embedded in certain products they bring into the EU. Effectively extending the EU's carbon pricing to imported goods.

The core purpose of CBAM is to prevent carbon leakage. The risk that EU manufacturers, facing carbon costs under the EU Emissions Trading System (ETS), relocate production to countries with weaker or no climate regulations. Without CBAM, an EU steel producer paying for carbon permits competes against imports from countries where carbon emissions are free, creating an incentive to shift production offshore and undermining the EU's climate goals.

How Does CBAM Relate to the EU ETS?

The EU ETS is the world's largest carbon market, requiring European manufacturers in covered sectors to buy emission allowances for every tonne of CO2 they emit. Currently, EU producers receive a portion of their allowances for free (known as "free allocations") to protect their competitiveness against imports. CBAM is designed to replace these free allocations: as CBAM phases in, free allocations phase out. By 2034, EU producers will receive zero free allowances, and imports will face the full CBAM cost.

CBAM Timeline

Which Indian Products Are Affected?

CBAM currently covers six product categories, chosen because they are the most carbon-intensive and most at risk of carbon leakage. For Indian exporters, four of these categories are commercially significant.

Will CBAM Expand to More Products?

The EU has indicated it may expand CBAM to additional product categories after 2030, potentially including organic chemicals, polymers and plastics, glass, and ceramics. The European Commission is required to assess the feasibility of extending CBAM to these sectors by 2030. Indian exporters in chemicals and plastics should monitor developments closely.

How CBAM Works

CBAM operates on a simple principle: imported goods should face the same carbon cost as goods produced within the EU. Here is the mechanism in practice.

Step 1: Calculate Embedded Emissions

For each covered product imported into the EU, the "embedded emissions" must be determined. This includes both direct emissions (CO2 released during production, including combustion of fuels and process emissions from chemical reactions) and indirect emissions (CO2 from electricity consumed during production). Embedded emissions are expressed in tonnes of CO2 equivalent per tonne of product.

Step 2: EU Importers Buy CBAM Certificates

EU importers (known as "authorized CBAM declarants") must purchase CBAM certificates from their national authority. Each certificate covers one tonne of embedded CO2 emissions. The price of a CBAM certificate is linked directly to the weekly average auction price of EU ETS allowances. Currently in the range of €60. 90 per tonne of CO2 .

Step 3: Deduct Carbon Price Paid in Origin Country

If the exporting country has its own carbon pricing mechanism (a carbon tax or ETS), the CBAM cost is reduced by the carbon price already paid. For example, if a Turkish steel exporter pays €10/tonne of CO2 domestically, their CBAM liability is reduced by that amount. However, India currently has no carbon tax or ETS. Meaning Indian exporters face the full CBAM cost with zero deduction.

CBAM Cost Formula

CBAM Cost = (Embedded Emissions per tonne of product) × (EU ETS price per tonne CO2) − (Carbon price paid in origin country) × (1 − Free allocation adjustment factor)

Transitional Phase Reporting (Oct 2023. Dec 2025)

The transitional phase served as a learning period. During this period, EU importers were required to submit quarterly CBAM reports to the EU's CBAM Transitional Registry. But no CBAM certificates needed to be purchased and no financial payments were due.

What Data Did Indian Exporters Need to Provide?

During the transitional phase, EU importers needed the following information from their Indian suppliers for each consignment of covered goods:

• Specific embedded emissions. Tonnes of CO2 per tonne of product, based on actual production data from the exporting facility.
• Direct vs indirect emissions split. Breakdown between Scope 1 (process and combustion) and Scope 2 (electricity) emissions.
• Production process description. The type of production route used (e.g., blast furnace vs electric arc furnace for steel).
• Electricity source and emission factor. The grid emission factor or actual emission factor for electricity consumed.
• Any carbon price paid. Documentation of any carbon tax or ETS cost incurred in India (in most cases, zero).

Default Values vs Actual Emissions

During the transitional phase, the EU allowed importers to use "default values" published by the European Commission when actual emissions data was unavailable. These default values are based on the average emissions intensity of the worst-performing installations globally, meaning they are typically higher than actual emissions for most Indian facilities. In the definitive phase, reliance on default values will result in significantly higher CBAM costs for your EU buyers.

Definitive Phase from 2026

Since January 2026, CBAM has entered its definitive phase. EU importers must now apply for authorization as CBAM declarants, purchase CBAM certificates, and surrender them annually based on the embedded emissions in their imports.

How Is the Financial Impact Calculated?

The actual CBAM cost per tonne of imported product depends on three variables: the product's embedded emissions intensity, the EU ETS price, and the remaining free allocation adjustment. Here is a worked example for steel:

Example: Indian Hot-Rolled Steel Coil

• Embedded emissions: 2.1 t CO2 / t steel (typical Indian blast furnace route)
• EU ETS price: €80 / t CO2 (approximate mid-2026 price)
• Carbon price paid in India: €0
• Free allocation adjustment (2026): 97.5% (only 2.5% of free allocations removed in year one)
• CBAM cost in 2026: 2.1 × €80 × 2.5% = €4.20 / t steel
• CBAM cost at full implementation (2034): 2.1 × €80 × 100% = €168 / t steel

Phase-In Schedule for Free Allocation Reduction

Calculating Embedded Emissions

Accurate emissions calculation is the foundation of CBAM compliance. The EU's implementing regulation specifies detailed rules for monitoring and reporting embedded emissions. Here is what Indian exporters need to understand.

Direct Emissions (Scope 1)

Direct emissions cover all CO2 released at the production facility during the manufacturing process. This includes:

• Combustion emissions. CO2 from burning fossil fuels (coal, natural gas, fuel oil, coke) in furnaces, kilns, boilers, and heaters used in production.
• Process emissions. CO2 released from chemical reactions inherent to the production process. For steel, this includes carbon released during the reduction of iron ore by coke in a blast furnace. For cement, it includes CO2 released from calcination of limestone (CaCO3 to CaO + CO2).
• Flaring emissions. CO2 from safety flaring of process gases.

Indirect Emissions (Scope 2)

Indirect emissions cover CO2 from electricity consumed during production. The calculation uses an emission factor for the electricity source:

• Grid emission factor. If the facility draws power from the national grid, the country's average grid emission factor applies. India's grid emission factor is approximately 0.71 t CO2/MWh (Central Electricity Authority data), reflecting the high share of coal-fired generation.
• Facility-specific factor. If the facility has captive renewable energy (solar, wind) or power purchase agreements (PPAs) for renewable electricity, a lower emission factor can be claimed, subject to verification.

System Boundaries

The emissions calculation must cover the entire production process within defined system boundaries. For steel, this typically includes everything from iron ore sintering and coke making through to hot rolling. For aluminium, it covers bauxite refining (alumina production) through electrolytic smelting. Emissions from upstream mining and transportation of raw materials are generally excluded, but emissions from the production of precursor materials (e.g., clinker for cement, pig iron for steel) are included.

Verification Requirements

From the definitive phase, embedded emissions data must be verified by an accredited independent verifier. The EU requires verification to be performed by a body accredited under an EU member state's national accreditation body or under an equivalent standard recognized by the EU. Indian exporters should work with verification bodies that have EU-recognized accreditation. Several international verification firms operate in India (e.g., Bureau Veritas, TÜV, SGS, DNV).

India's Carbon Price Situation

A critical factor in CBAM is whether the exporting country has a domestic carbon price. If a carbon tax or ETS exists in the origin country, the CBAM cost is reduced by the amount of carbon price already paid. This is where India faces a significant disadvantage.

India Has No Carbon Tax or ETS

Unlike the EU, the UK, South Korea, or even China (which has a nascent ETS for the power sector), India currently has no economy-wide carbon tax or emissions trading system. India previously had a coal cess (Clean Energy Cess) introduced in 2010 at INR 50/tonne of coal, later increased to INR 400/tonne, which functioned as a de facto carbon price of approximately . 2/tonne of CO2. However, this cess was subsumed into GST in 2017 and no longer exists as a separate carbon levy.

India's Carbon Credit Trading Scheme (CCTS)

India announced its Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022. The Bureau of Energy Efficiency (BEE) has been designated as the administrator. However, as of August 2026, the CCTS remains in early stages:

• The scheme covers the compliance market (mandatory obligations for designated consumers under the PAT scheme) and a voluntary carbon market.
• Trading has not yet reached sufficient scale or price discovery to constitute a meaningful carbon price.
• The EU has not recognized India's CCTS as a qualifying carbon pricing instrument for CBAM deduction purposes.

What This Means for Indian Exporters

Impact on Indian Exporters

CBAM's impact on Indian exporters varies by sector, production technology, and energy mix. Here is a sector-by-sector assessment.

Steel: The Biggest Exposure

India exports approximately $4 billion worth of steel to the EU annually, making it the sector most exposed to CBAM. Key factors:

• Indian steel production is predominantly blast furnace (BF-BOF) route , which emits 2.0. 2.5 t CO2 per tonne of crude steel. The global average is 1.85 t CO2/t.
• At full CBAM implementation (€80/t CO2): additional cost of €100. 170 per tonne of steel , representing a 15. 25% increase on current FOB prices.
• Electric arc furnace (EAF) steel using scrap has lower emissions (0.4. 0.6 t CO2/t), but India's EAF share is only ~25% of total production.
• Major Indian exporters affected: Tata Steel, JSW Steel, SAIL, AMNS India (ArcelorMittal-Nippon), Jindal Stainless.

Aluminium: Highly Energy-Dependent

India exports approximately .5 billion worth of aluminium products to the EU. Aluminium smelting is extremely electricity-intensive, making indirect emissions the dominant factor:

• Aluminium smelting consumes ~14. 16 MWh of electricity per tonne. With India's coal-heavy grid (0.71 t CO2/MWh), indirect emissions alone reach 10. 11 t CO2/t aluminium.
• Total embedded emissions for Indian aluminium: typically 12. 16 t CO2/t , compared to 2. 4 t CO2/t for aluminium produced with hydroelectric power (e.g., Norway, Canada).
• At full CBAM: additional cost of €150. 250 per tonne , depending on smelter energy mix.
• Smelters with captive renewable energy (such as Hindalco's operations with solar PPAs) will have a significant competitive advantage.

Fertilizers: Concentrated Impact

India's fertilizer exports to the EU are smaller in value (~$200 million) but face high per-unit CBAM exposure due to the energy-intensive production of urea and DAP:

• Urea production emits ~1.6. 2.0 t CO2/t of urea (depending on the natural gas vs naphtha feedstock).
• At full CBAM: additional cost of ~€130. 160 per tonne of urea.
• Indian urea producers using naphtha feedstock (more carbon-intensive) will face higher costs than gas-based producers.

Competitiveness vs Key Rivals

How to Prepare

Indian exporters cannot wait for the Indian government to negotiate CBAM exemptions or establish a recognized carbon pricing system. Here is a five-step action plan.

Step 1: Identify Your Affected Products

Map every product you export to the EU against the CBAM product scope. Check HS codes at the 6-digit level against the CBAM goods list in Annex I of Regulation 2023/956. Pay attention to downstream products that contain CBAM-covered materials (e.g., steel tubes under Ch 73, not just primary steel under Ch 72). If any of your EU-bound products fall within scope, you are affected.

Step 2: Calculate Your Facility's Specific Emissions

Conduct a thorough carbon footprint assessment of your production facility. This means metering fuel consumption (coal, natural gas, coke, fuel oil) at each process stage, tracking electricity consumption by source (grid vs captive renewable), accounting for process emissions (e.g., from limestone calcination or iron ore reduction), and calculating total embedded emissions per tonne of each product. Use the EU's specified monitoring methodology to ensure your data is CBAM-compatible.

Step 3: Get Your Emissions Data Verified

Engage an EU-accredited verification body to independently verify your emissions calculations. This is mandatory under the definitive phase. Your EU buyer cannot use unverified data. Verification typically costs 5,000. $50,000 depending on facility complexity and the number of product lines. Plan for annual verification cycles aligned with the CBAM reporting calendar.

Step 4: Communicate Data to Your EU Buyers

Proactively share your verified emissions data with your EU importers in the format they need for their CBAM declarations. This includes a product-level emissions intensity certificate, a breakdown of direct and indirect emissions, documentation of the production route and energy sources, and the verification statement. Making this seamless for your buyer strengthens the commercial relationship and differentiates you from competitors who provide incomplete or no data (forcing the buyer to use expensive default values).

Step 5: Invest in Emission Reduction

The most sustainable response to CBAM is reducing your actual emissions. Key investment areas:

• Renewable energy procurement. Install captive solar or wind capacity, or sign long-term PPAs for green power. This directly reduces Scope 2 emissions, which is especially impactful for aluminium smelters.
• Scrap-based steelmaking. Shift from blast furnace (BF-BOF) to electric arc furnace (EAF) routes where feasible. EAF steel using scrap produces 0.4. 0.6 t CO2/t vs 2.0. 2.5 t CO2/t for BF-BOF.
• Energy efficiency upgrades. Waste heat recovery systems, efficient kilns and furnaces, process optimization to reduce specific energy consumption.
• Hydrogen-based reduction. Explore green hydrogen as a reductant in steelmaking (DRI-H2 route) as the technology matures and costs decline.
• Carbon capture and storage (CCS). Evaluate CCS feasibility for process emissions that cannot be eliminated through fuel switching (e.g., cement calcination emissions).

UK CBAM

The United Kingdom, no longer part of the EU, has announced its own Carbon Border Adjustment Mechanism. While conceptually similar to the EU CBAM, the UK scheme has distinct timelines and features that Indian exporters selling to the UK market must track separately.

UK CBAM Key Details

How the UK CBAM Differs from the EU

• Broader product scope. The UK CBAM includes ceramics and glass, which the EU CBAM does not yet cover. Indian ceramics exporters selling to the UK should take note.
• Tax-based mechanism. Unlike the EU's certificate system, the UK CBAM is administered as a tax by HMRC (Her Majesty's Revenue and Customs). UK importers will pay the CBAM levy through the tax system rather than purchasing tradeable certificates.
• Different carbon price. The UK ETS operates independently of the EU ETS and has historically traded at £40. 60/tonne, broadly similar to the EU ETS but not identical.
• Later start. The UK CBAM is expected to take effect in January 2027, giving exporters an additional year compared to the EU.

Dual CBAM Compliance

Indian exporters who sell to both the EU and the UK will need to comply with two separate CBAM regimes. While the underlying emissions data is the same, the reporting formats, submission requirements, verification standards, and payment mechanisms may differ. The good news is that once you have a robust emissions monitoring and verification system in place for the EU CBAM, adapting it for the UK CBAM should be relatively straightforward.

Frequently Asked Questions

How does CBAM impact Indian steel exports to the EU?

India exports approximately $4 billion worth of steel to the EU annually. CBAM adds a carbon cost based on the embedded emissions in that steel. With Indian blast furnace steel averaging 2.1 tonnes of CO2 per tonne of steel, and EU ETS prices around €80/tonne, the additional cost at full implementation (2034) would be approximately €168 per tonne. Since India has no domestic carbon price, there is no deduction available. In the near term (2026. 2028), the cost is much lower due to the phase-in schedule, but it increases every year.

What is the EU carbon border tax and how does it affect India?

The EU CBAM (Carbon Border Adjustment Mechanism) is effectively a carbon border tax on imports of carbon-intensive goods into the EU. It requires EU importers to pay for the carbon emissions embedded in imported steel, aluminium, cement, fertilizers, and hydrogen. India is particularly affected because it has no domestic carbon price (meaning zero deduction from CBAM costs), its steel and aluminium production is relatively carbon-intensive due to coal dependence, and India has significant export volumes to the EU in these categories.

Can Indian exporters avoid CBAM costs?

Indian exporters cannot avoid CBAM entirely if they sell covered products to the EU, but they can minimize costs. The most effective strategies are: (1) reducing actual emissions through renewable energy, scrap-based production, and energy efficiency; (2) providing verified facility-specific emissions data rather than relying on default values (which are typically higher); and (3) if India establishes a recognized carbon pricing mechanism in the future, paying a domestic carbon price that can be deducted from CBAM obligations. Diverting exports to non-CBAM markets is also an option, but the UK and potentially other countries are implementing similar mechanisms.

Who pays for CBAM. The Indian exporter or the EU importer?

Legally, the CBAM payment obligation falls on the EU importer (the "authorized CBAM declarant"). However, in practice, the cost is shared through price negotiations. EU importers will factor CBAM costs into their purchasing decisions, and Indian exporters with higher emissions will face pressure to lower prices or risk losing orders to lower-emission competitors. The burden effectively shifts to the exporter through market dynamics, even though the formal payment flows from the EU importer to the EU authority.

Is India planning a carbon tax to get CBAM deductions?

India has launched a Carbon Credit Trading Scheme (CCTS) under the Energy Conservation Act, but it is still nascent and not yet recognized by the EU for CBAM deduction purposes. There has been policy discussion about introducing a formal carbon pricing mechanism that could qualify for CBAM deductions, but no concrete timeline has been announced as of August 2026. India has also raised concerns about CBAM at the WTO, arguing it is a unilateral trade barrier that discriminates against developing countries. However, the WTO process is unlikely to yield results before CBAM costs become significant.

Update history

• 2026-08-11 First published.