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The European Union’s Carbon Border Adjustment Mechanism (CBAM) has taken effect, placing a carbon levy on imports of emissions-intensive goods.
Indian exports of steel, aluminium, cement and fertilisers are expected to face higher costs, potentially affecting competitiveness.
Developing countries argue that uniform carbon standards ignore historical responsibility and economic capacity differences.
India estimates the levy could add an average tax burden of around 25 per cent on affected exports to the EU.
The debate has intensified calls for global dialogue on how climate policies interact with trade and development.
The European Union’s Carbon Border Adjustment Mechanism (CBAM) came into effect on January 1, 2026, marking the start of a new trade regime that places a levy on the carbon embedded in imports of carbon-intensive goods.
For India, one of the European Union’s (EU) key trading partners, CBAM is expected to raise costs for exporters of products such as steel, iron, aluminium, cement and fertilisers, potentially reducing their trade competitiveness.
Many developing countries, including India, have questioned the fairness of applying uniform emissions standards to both developed and developing economies. At the recently concluded 30th Conference of Parties (COP30) to the United Nations Framework Convention on Climate Change in Belém, Brazil unilateral climate-linked trade measures emerged as a central point of contention, with developing countries arguing that such policies impose disproportionate burdens and risk deepening existing trade inequalities.
CBAM is designed to put a price on carbon emissions generated during the production of certain goods imported into the EU. It applies to imports of select carbon-intensive products, including iron, steel, cement, aluminium, fertilisers, electricity and hydrogen — sectors that typically rely heavily on coal and other fossil fuels.
Within the EU, companies are already subject to carbon pricing under the Emissions Trading System (ETS), a regulated carbon market in which the Union sets an annual cap on greenhouse gas emissions and companies must purchase allowances for their emissions.
The EU says extending a similar cost to foreign producers is necessary to prevent “carbon leakage” — a situation in which companies relocate carbon-intensive production to countries with weaker climate policies, undermining emissions reductions within Europe.
Under the mechanism, EU importers must register with national authorities, declare the emissions embedded in their imports and purchase CBAM certificates accordingly. The price of these certificates is linked to the auction price of EU ETS allowances, currently between €87 and €90 per tonne of carbon dioxide. In 2026, prices will be calculated as quarterly averages, shifting to weekly averages from 2027 onwards.
While the tax is formally paid by the EU importer, the cost is expected to be passed on to exporters. The levy is calculated based on two factors:
Carbon emissions generated during production of the imported good
carbon price borne by EU companies
If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted. But countries like India do not have any carbon tax mechanism.
Similar border measures are also under consideration elsewhere. The United Kingdom has announced plans for its own CBAM, expected to take effect in 2027, while the United States is debating proposals such as the PROVE IT Act and the Foreign Pollution Act.
The EU maintains that CBAM places a “fair price” on carbon and encourages cleaner industrial production beyond its borders. However, many exporting nations argue that such measures unfairly penalise developing economies, undermine multilateral trade principles and conflict with the concept of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC).
“Unilateral, trade-restrictive climate measures are not about ambition — they are about giving competitive advantage to industries in the Global North at the cost of development in the Global South,” India had told a room full of negotiators in the Just Transition Work Programme (JTWP) on the fourth day of the COP30.
Developing countries have pointed to Article 3.5 of the UN climate convention, which cautioned that climate measures must not amount to arbitrary discrimination or disguised restrictions on international trade as developed countries tend to have less carbon intensive production processes.
Trishant Dev, deputy programme manager for climate change at the Centre for Science and Environment (CSE), said CBAM risks shifting the cost of decarbonisation onto poorer countries. “CBAM redefines trade competitiveness by making carbon a border condition. From a climate policy perspective, for developing countries especially, it risks shifting the burden of decarbonisation onto them and runs against the principles of equity and common but differentiated responsibilities. For India, our 2023 study shows significant impacts on steel and aluminium exports, with an estimated 25 per cent price burden on exports. This means exporters will likely have to absorb these costs to remain competitive,” he said.
At COP30, in the final text, Parties decided to set up three dialogues under the subsidiary bodies in Bonn between 2026 and 2028, with involvement from international agencies like World Trade Organization (WTO).
For India, the introduction of CBAM is expected to increase export costs in the short to medium term, particularly because much of its industrial production still relies on coal.
A 2024 study by Delhi-based think tank Centre for Science and Environment, Carbon Border Adjustment Mechanism (CBAM): The Global South's response to a changing trade regime in the era of climate change, analysed exports from CBAM-covered sectors. It found that goods subject to CBAM accounted for 9.91 per cent of India’s total exports to the EU in 2022-23.
These exports include iron and steel, aluminium, fertilisers and cement. India does not currently export hydrogen or electricity to the EU.
“By value, this was about 0.2 per cent of India’s GDP in 2022-23. These exports comprise about one-fourth (25.7 per cent) of India’s total goods exports to the world for the CBAM-covered sectors, which is not insignificant for the industries operating in these sectors,” it said.
Using trade data across three years to account for fluctuations, the study estimated that at a carbon price of €100 (around $106) per tonne of carbon dioxide equivalent, CBAM could impose an average additional tax burden of 25 per cent on affected exports.
For the 2022-23 financial year, this would be equivalent to around 0.05 per cent of India’s GDP.
Separately, UNCTAD estimated in a 2021 report that if CBAM were applied to all goods covered by the EU ETS, exports worth up to $16 billion from developing countries could face additional charges.
“The application of a CBAM could impact the development of poorer countries and reduce their opportunities for export-led development, particularly if countries with carbon taxes and greener production processes are exempted from the CBAM,” it said.