Carbon Border Adjustment Tax (CBAM): Meaning, Impact on India

The Carbon Border Adjustment Tax, formally known as the Carbon Border Adjustment Mechanism (CBAM), marks a major shift in global trade and climate governance. Introduced by the European Union, CBAM links climate policy with international trade by taxing imports based on the carbon emissions generated during their production.

As CBAM comes into force from January 1, 2026, it has significant implications for developing economies like India, particularly for carbon-intensive sectors such as steel, aluminium, cement and fertilisers.

What Is Carbon Border Adjustment Tax (CBAM)?

The Carbon Border Adjustment Tax is a levy imposed on imported goods based on their embedded carbon emissions. Its primary objective is to ensure that imported products face the same carbon cost as goods produced within the EU.

CBAM is closely aligned with the EU Emissions Trading System (ETS), under which European companies must buy carbon allowances for their greenhouse gas emissions.

Goods Covered Under CBAM

CBAM initially applies to imports of:

• Iron and steel

• Aluminium

• Cement

• Fertilisers

• Electricity

• Hydrogen

These sectors are among the most emissions-intensive globally.

Why Did the EU Introduce CBAM?

The EU introduced CBAM to address the risk of carbon leakage—where industries shift production to countries with weaker climate regulations, undermining global emission reduction efforts.

According to the EU, CBAM:

• Prevents unfair competition for EU industries

• Encourages cleaner production globally

• Aligns trade with climate commitments

Under CBAM:

• EU importers must declare the carbon emissions embedded in imported goods

• Importers must purchase CBAM certificates

• Certificate prices are linked to EU ETS carbon prices (around €87–€90 per tonne of CO₂ in 2026)

Although the tax is paid by EU importers, the cost is expected to be passed on to exporters.

Impact of Carbon Border Adjustment Tax on India

India is one of the EU’s key trading partners, making CBAM a significant concern for Indian exporters.

Key Impacts on Indian Exports

• Higher costs for steel, aluminium, cement and fertiliser exports

• Reduced price competitiveness in EU markets

• Pressure on firms to decarbonise production processes

India does not currently have a carbon tax or emissions trading system, limiting its ability to offset CBAM charges.

Studies suggest CBAM could impose an average additional tax burden of around 25% on affected Indian exports to the EU.

Why Developing Countries Oppose CBAM

Many developing nations, including India, argue that CBAM:

• Ignores historical responsibility for climate change

• Overlooks differences in economic capacity and development needs

• Conflicts with the principle of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) under the UN climate framework

At the COP30, India criticised unilateral climate-linked trade measures, warning that CBAM could deepen global trade inequalities.

Developing countries have also cited Article 3.5 of the UNFCCC, which cautions against climate measures becoming disguised trade restrictions.

Global Spread of Carbon Border Taxes

The EU’s move may set a global precedent.

• The United Kingdom plans to introduce its own CBAM by 2027

• The United States is debating proposals such as the PROVE IT Act and the Foreign Pollution Act

• Other advanced economies are exploring climate-linked trade tools

According to UNCTAD, CBAM-like measures could affect billions of dollars of exports from developing countries.

How India Can Respond to CBAM

To mitigate the impact of Carbon Border Adjustment Tax, India may need to:

• Accelerate industrial decarbonisation

• Expand renewable energy use in manufacturing

• Develop a domestic carbon market

• Seek multilateral solutions through forums like the World Trade Organization

Structured global dialogues on climate, trade and development are expected to continue between 2026 and 2028.

Conclusion

The Carbon Border Adjustment Tax represents a fundamental transformation in global trade, where carbon intensity becomes a border condition. While CBAM aims to combat climate change, it raises serious concerns for developing economies like India, where the cost of decarbonisation could hinder export-led growth. The challenge ahead lies in balancing climate ambition with equity and development.

Sharing is caring!