Between India and EU, a carbon gap and an FTA bridge, Pg10

Key Highlights:

• As of January 1, 2026, Indian steel and aluminium exports to the EU face higher costs due to the Carbon Border Adjustment Mechanism (CBAM).
• The EU will tax imports based on carbon emissions during production, potentially wiping out 16-22% of prices received by Indian exporters.
• In FY2025, India's steel and aluminium exports to the EU fell by 24% to $5.8 billion, after the EU began requiring plant-level carbon emissions reporting in October 2023.
• The EU carbon price is approximately €80 per tonne of CO2, impacting the cost of Indian exports significantly.

Detailed Insights:

• CBAM extends the EU's carbon pricing system to imports, imposing costs on foreign producers to prevent carbon leakage to countries with weaker climate rules.
• The tax burden is passed on to Indian exporters as EU buyers demand lower prices to cover CBAM costs, reducing earnings and bargaining power for Indian producers.
• Producing one tonne of steel using the coal-based Blast Furnace–Basic Oxygen Furnace (BF-BOF) route emits about 2.4 tonnes of carbon, leading to significant CBAM costs.
• If Indian exporters fail to provide verified emissions data, EU importers will use default CBAM values, which are set 30–80% above actual emissions, further increasing costs.
• CBAM will force the rewriting of export contracts, with European buyers adding clauses to deduct CBAM costs from prices and demanding verified plant-level data.
• The ongoing Free Trade Agreement (FTA) negotiation between India and the EU presents an opportunity to find a resolution for CBAM.
• Domestically, India needs to strengthen carbon accounting frameworks and support cleaner production methods to mitigate the impact of CBAM.

Key Concepts Involved:

• Carbon Border Adjustment Mechanism (CBAM): A mechanism by the EU to tax imports based on the carbon emissions generated during production.
• EU Emissions Trading System (ETS): A carbon pricing system within the EU where companies pay for their emissions.
• Scope 1 Emissions: Direct greenhouse gas emissions from sources owned or controlled by the reporting entity.