India Must Build Policy Architecture to Counter EU Carbon Border Mechanism

The European Union's Carbon Border Adjustment Mechanism took effect on January 1, 2026, creating a direct competitive disadvantage for Indian steel, aluminium and other covered exports and adding an estimated average tax burden of around 25 percent on affected shipments. A commentary argues that India must move beyond objecting to CBAM and construct domestic carbon pricing and trade architecture to protect its economic and climate interests.

A 2024 Centre for Science and Environment study found that goods subject to CBAM accounted for nearly 10 percent of India's total exports to the European Union in 2022-23. With the mechanism now operational, Indian exporters of steel and aluminium — including MSME producers in Gujarat — face compliance cost burdens that larger competitors with established carbon accounting systems can more easily absorb. The CBAM's application to Scope 1 emissions in regulated sectors means Indian producers without domestic carbon pricing face a penalty that cannot be offset without a credible domestic pricing mechanism.

India's traditional argument at the UNFCCC — that the polluter pays principle and common but differentiated responsibilities should exempt developing nations from carbon border charges imposed by wealthy countries — has strategic logic but limited near-term commercial relief. With CBAM legally in force, the commentary argues that India needs to construct its own domestic carbon pricing system and bilateral frameworks that would demonstrate equivalent climate ambition to the EU, potentially qualifying Indian exporters for relief under the mechanism's provisions.

India's Carbon Credit Trading Scheme, launched in 2026 and already described as one of the world's largest new carbon markets, provides a foundation. The next step, analysts argue, is to operationalise the scheme's sectoral coverage at a speed that allows Indian exporters to demonstrate measurable emissions reductions before the CBAM's full-cost implementation phases begin. Developing a climate-trade negotiating architecture — engaging not only the EU but forming coalitions with similarly positioned economies — is presented as the medium-term strategic imperative.

Key figure — CBAM adds approximately 25% average tax burden on affected Indian exports