EU Carbon Border Adjustment Mechanism Enters Definitive Phase; India’s Trade Implications

The European Union’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase on 1 January 2026. First proposed in July 2021, CBAM is a climate policy tool that aims to prevent “carbon leakage” by imposing a carbon-linked charge on imports based on their embedded greenhouse-gas emissions. During the earlier transitional phase, EU importers only had to report emissions; from 2026 they must surrender CBAM certificates equal to the emissions embedded in their imports.

In its first phase, CBAM covers carbon-intensive products such as steel, cement, aluminium, fertilisers, electricity and hydrogen. Even while India pursues a bilateral India–EU Free Trade Agreement, CBAM will continue to apply to these goods, making carbon-intensive exports to Europe costlier. Market access is therefore increasingly shaped not only by tariffs but also by compliance with carbon-emission standards.

India’s steel and aluminium sectors are likely to face the most immediate impact, given their large share of exports to the EU and their carbon-intensive production using coal-based blast furnaces. Although the carbon levy is formally paid by EU importers, part of the burden is likely to be passed on to Indian exporters through tighter contracts and stricter supplier selection. India has argued at the World Trade Organization (WTO) that CBAM is a unilateral measure that violates the principle of Common But Differentiated Responsibilities (CBDR) under the United Nations Framework Convention on Climate Change (UNFCCC).

For exam aspirants, CBAM links several core themes: WTO and non-tariff barriers, EU’s “Fit for 55” climate package, carbon pricing, the Paris Agreement, and the India’s domestic carbon market under the Carbon Credit Trading Scheme. Indian industry is preparing through measures such as carbon-intensity benchmarking, green steel and hydrogen pilots, and the planned domestic carbon market.