From January 1, 2026, the Carbon Border Adjustment Mechanism (CBAM) introduced by the European Union entered its definitive phase, transforming carbon emissions from a reporting metric into a direct cost for international trade.
Under CBAM, importers in the EU must purchase carbon certificates equivalent to the emissions embedded in imported goods, effectively extending the EU’s carbon pricing system beyond its borders.
While the financial obligation to buy these certificates begins in February 2027, it will apply to emissions embedded in goods imported during 2026.
For exporters supplying the European market, carbon efficiency is rapidly becoming a commercial factor influencing pricing, competitiveness and market access.
Sectors Covered Under CBAM
In its initial phase, CBAM applies to several carbon-intensive sectors, including:
- Cement
- Electricity
- Hydrogen
- Fertilisers
- Aluminium
- Iron and steel
The mechanism also covers nearly 180 downstream products containing significant steel or aluminium content, including:
- Automotive components
- Machinery parts
- Consumer durables
- Infrastructure materials
Over time, the European Commission has signalled that CBAM could expand to all sectors covered by the EU Emissions Trading System by 2030. These may include chemicals, plastics, glass, ceramics, pulp and paper, and petroleum refining.
This expansion means manufacturers may face indirect exposure even if their final products are not immediately covered, due to carbon-intensive inputs in supply chains.
Implications For India’s Export Economy
The mechanism applies fully to India, which exports several CBAM-covered goods to the EU, including aluminium, iron, steel and fertiliser-related products.
Think-tank analyses suggest that goods currently covered by CBAM accounted for around 10% of India’s exports to the EU in 2022-23, representing about 0.2% of India’s GDP.
Estimates indicate that at a carbon price of €100 per tonne of CO₂ equivalent, CBAM could impose an additional cost burden of around 25% on affected exports.
To remain competitive, Indian exporters may have to absorb part of these costs or reduce prices.
Trade studies further show that India exported approximately $8.2 billion worth of iron, steel and aluminium products to Europe, with 27% of global exports in these categories going to EU markets.
In steel alone, nearly 40% of India’s exports are concentrated in four EU countries, highlighting the scale of exposure.
Pricing Pressure On Exporters
The introduction of CBAM is already translating into commercial pressure for Indian exporters.
Reports indicate that Indian metal exporters may need to cut prices by 15–22% to help EU importers absorb the carbon costs associated with the mechanism.
This could particularly affect energy-intensive sectors such as steel and aluminium, which form a major share of India’s export basket.
Smaller exporters and MSMEs may face additional hurdles due to the complexity and cost of emissions measurement, reporting and verification, potentially eroding margins further.
Auto Industry And Supply Chain Impact
The global automobile industry is also undergoing a strategic shift as manufacturers increasingly factor supply-chain carbon intensity into sourcing decisions.
In India, automobile exports grew by 24% in 2025, surpassing 6.3 million units, driven mainly by passenger vehicles and utility vehicles.
However, rising scrutiny over Scope-3 emissions—those generated across supply chains—means manufacturers using high-emission metals or chemicals may face higher landed costs in Europe.
Low-Carbon Materials Gain Strategic Importance
In response to CBAM, manufacturers are increasingly exploring low-carbon materials and cleaner production technologies.
Lowering emissions at the raw-material stage reduces the overall carbon footprint of finished goods, helping exporters manage future CBAM liabilities.
Examples already emerging across Indian industry include:
- Low-carbon zinc products such as EcoZen by Hindustan Zinc
- Renewable-energy-based aluminium like Restora from Vedanta Aluminium
- Low-emission steel initiatives by Tata Steel, including electric arc furnaces and hydrogen-based technologies
- Green steel capacity plans by JSW Steel in Salav, Maharashtra
These initiatives aim to cut direct CO₂ emissions and strengthen India’s competitiveness in carbon-priced markets.
A Structural Shift In Global Trade
Beyond metals, manufacturers are also exploring:
- Renewable-energy-based chemical inputs
- Bio-based materials
- Recycled metals and plastics
- Low-carbon coatings
- Process-efficiency technologies
Such initiatives are no longer niche sustainability projects. Instead, they are central to how global manufacturing supply chains are adapting to carbon-priced trade systems.
Carbon Efficiency Becoming A Trade Determinant
As CBAM moves toward full implementation, the message for exporters is clear: carbon efficiency will increasingly determine market access in Europe.
Manufacturers that treat low-carbon inputs as strategic assets rather than regulatory compliance costs will likely be better positioned to compete in the evolving global trade landscape shaped by climate policy.