The European Union’s proposed expansion of the Carbon Border Adjustment Mechanism (CBAM) could fundamentally reshape the landscape for Indian industrial and engineering exports. What began as a climate-linked measure targeting a limited set of carbon-intensive sectors is now evolving into a broader trade compliance framework that may extend carbon-related costs across a wide range of manufactured goods entering Europe. From machinery components and industrial equipment to automotive parts and fabricated metal products, Indian exporters may soon face stricter emissions reporting requirements, higher compliance costs, and growing pressure to decarbonise production processes.
The development also introduces fresh tensions within the India–EU Free Trade Agreement framework, where tariff liberalisation may coincide with rising non-tariff carbon barriers. As global trade increasingly intertwines with climate policy, carbon efficiency is rapidly emerging as a new determinant of export competitiveness.
The European Union is considering a significant expansion of its carbon taxation framework, with a proposal to include nearly 180 additional steel and aluminium products under the Carbon Border Adjustment Mechanism (CBAM) from January 2028. The move is part of a broader effort to tighten climate-linked trade rules and extend carbon pricing across a wider range of industrial imports. This move could result in increased carbon tax burdens for Indian exports heading to the European market.
The European Parliament’s Committee on the Environment, Climate and Food Safety has also recommended widening the scope of CBAM to include indirect emissions, particularly those linked to electricity consumption during production. It has also rejected the use of international carbon credits for compliance, indicating a stricter approach to emissions accountability. In a draft report released on April 10, the committee proposed tightening carbon accounting norms for scrap-based production by including emissions from pre-consumer scrap. It also called for expanded assessment of indirect emissions across more sectors and the introduction of stricter anti-circumvention, reporting, and verification measures to prevent misuse.
Currently, CBAM applies to imports of iron and steel, aluminium, cement, fertilisers, hydrogen, electricity, and select downstream products. However, from January 2028, the mechanism is expected to expand significantly, potentially subjecting a wider range of Indian exports to carbon-linked charges when entering European markets. The proposed expansion would cover a wide range of products, including,
These are not raw inputs, but sophisticated, value-added engineering exports that India has nurtured over the past two decades into a distinct competitive edge. Once implemented, the expanded mechanism could place most of the industrial goods entering the EU under carbon-related levies by 2030.
Furthermore, the European Parliament has called on the European Commission to consider bringing additional sectors—such as organic chemicals, polymers, and selected scrap materials—under CBAM, signalling a steady expansion across the manufacturing landscape.
The think tank, Global Trade Research Initiative (GTRI) noted that Indian exporters to Europe may have to fast-track emissions accounting, enhance supply-chain traceability, and step up investments in decarbonisation to maintain competitiveness in a crucial export market.
The development comes as India and the EU move closer to implementing their newly negotiated Free Trade Agreement by the end of this calendar year, with CBAM continuing to be a significant point of contention between the two partners.
The provisional FTA text released in February 2026 offers only a limited concession on CBAM: India cannot be treated less favourably than any other third country if the EU extends flexibilities elsewhere. However, this remains a defensive safeguard rather than a meaningful exemption. India receives no special dispensation, no recognition of its domestic emissions-reduction efforts through carbon-pricing credits, and no additional transition period beyond what is available to other countries.
Meanwhile, compliance pressures linked to CBAM are already filtering into commercial negotiations. EU buyers are increasingly factoring carbon intensity into supplier selection, effectively reshaping procurement strategies. (Indian steel exporters, in particular, where production continues to be dominated by the blast furnace–basic oxygen furnace route and emissions average around 2.55 tonnes of CO₂ per tonne of crude steel compared to the global average of 1.9—are being pushed to either reduce prices by 15–22% or risk losing contracts.)
The proposed downstream expansion of CBAM significantly amplifies these challenges, as the concept of embedded emissions extends across the value chain. For instance, a gearbox produced in Pune using Indian blast-furnace steel is not exempt from CBAM merely because it is a finished product. Under the Commission’s proposal, the embedded carbon in the steel input is accounted for throughout the value chain and included in the EU importer’s CBAM certificate requirements.)
Adding to the asymmetry, the FTA framework could allow EU goods to progressively enter the Indian market at zero tariffs, while a growing share of Indian industrial exports faces carbon-related costs in Europe. At the same time, India’s ability to respond is constrained by CBAM-related provisions within the agreement, limiting its scope for countermeasures. Notably, a significant share of India’s agricultural exports is likely to be impacted by the EU’s deforestation regulations.
Moreover, Indian exporters will not be allowed to offset their CBAM liabilities using carbon credits purchased in voluntary or international markets. Instead, companies will need to achieve direct emissions reductions at the source or operate under a domestic carbon pricing regime recognised by the EU.
Additionally, the EU is exploring the inclusion of indirect emissions—those arising from electricity consumption during production rather than on-site fuel use—under CBAM, potentially from the end of 2027. If implemented, this could sharply increase compliance costs for Indian exporters, as the country’s industrial power grid remains relatively carbon-intensive due to its continued reliance on coal-based generation.
Climate change is a global challenge that requires coordinated international action. As the European Union (EU) strengthens its climate targets while many non-EU countries maintain relatively weaker policies, the risk of “carbon leakage” arises. This refers to a situation where companies shift carbon-intensive production to countries with less stringent environmental regulations, or where EU-made goods are replaced by imports with higher carbon footprints.
To address this, the EU introduced the Carbon Border Adjustment Mechanism (CBAM), with a political agreement reached in December 2022 under the broader European Green Deal framework. From 1 October 2023, importers of certain energy-intensive goods have been required to report embedded emissions associated with their products.
CBAM is designed to ensure that imported goods face a carbon cost equivalent to that borne by domestic producers under the EU’s carbon pricing system. By doing so, it seeks to create a level playing field between domestic and foreign producers while safeguarding the EU’s climate ambitions. The mechanism also aims to prevent industries from relocating to jurisdictions with weaker climate policies, thereby maintaining the environmental integrity of EU regulations. Importantly, CBAM has been structured to remain consistent with World Trade Organization (WTO) rules.
As part of the EU’s “Fit for 55” package, CBAM supports the bloc’s goal of reducing greenhouse gas emissions by 55% by 2030 compared to 1990 levels, and achieving climate neutrality by 2050.
The 2026–27 period is a crucial preparatory phase. While downstream CBAM provisions are set to take effect in January 2028, the required reporting and verification systems must be established well in advance.
Indian manufacturers across CBAM-exposed supply chains—including those supplying Tier-1 exporters rather than exporting directly to Europe—will need plant-level emissions data instead of relying on broad corporate sustainability disclosures. This entails compliance with the EU’s Implementing Regulation 2023/1773, which demands highly granular reporting—something most Indian SMEs in the engineering and auto-components clusters are far from ready to meet.
The FTA’s climate chapter does provide a framework for technical engagement and allocates €500 million in EU support for India’s decarbonisation efforts over a two-year period. While significant, this support is geared toward long-term green transition cooperation rather than offering immediate assistance for CBAM compliance.
The evolving CBAM framework signals a structural shift in global trade, with carbon efficiency becoming as important as cost competitiveness. For India, this creates both immediate challenges and a longer-term strategic turning point. Exporters, particularly SMEs, face rising compliance burdens, tighter reporting norms, and pricing pressures. At the same time, CBAM is reshaping supply chains, sourcing decisions, and investment flows toward low-carbon production.
The asymmetry within the India–EU FTA and limited policy flexibility further complicate the landscape, while parallel measures like EU deforestation rules expand the impact. How effectively India aligns its trade, climate, and industrial policies in the coming years will determine its ability to sustain export competitiveness in an increasingly carbon-conscious global economy.
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FAQ
1: What is the Carbon Border Adjustment Mechanism (CBAM)?
CBAM is an EU policy that imposes a carbon cost on imports based on their embedded greenhouse gas emissions. It aims to ensure that foreign goods face a similar carbon price as EU-produced goods under the EU’s emissions trading system, thereby preventing carbon leakage and maintaining fair competition.
2: Which products are currently covered under CBAM and how may it expand?
CBAM currently applies to iron and steel, aluminium, cement, fertilisers, hydrogen, electricity, and selected downstream products. From January 2028, it is proposed to expand significantly to include around 180 additional steel and aluminium products and a wider range of engineering goods, machinery, and industrial components.
3: How will CBAM affect Indian exports to the EU?
Indian exporters, especially in engineering goods, steel, aluminium, and auto components, may face additional carbon-linked costs when exporting to the EU. Companies with carbon-intensive production processes could lose price competitiveness unless they reduce emissions or improve supply chain transparency.
4: Why is CBAM a concern in the India–EU Free Trade Agreement (FTA)?
While the FTA reduces tariffs, CBAM may still impose additional costs on Indian exports, creating an uneven trade balance. India has only limited safeguards in the FTA and does not receive exemptions or recognition for its domestic carbon reduction efforts, making CBAM a key point of contention.
5: What do Indian companies need to do to comply with CBAM requirements?
Indian firms will need to adopt plant-level emissions tracking, improve supply chain traceability, and comply with detailed reporting requirements under EU regulations. Many SMEs may also need to invest in decarbonisation technologies and adjust production processes to remain competitive in the EU market.
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