As of 1 January 2026, Carbon Border Adjustment Mechanism (CBAM) has flipped from paperwork to payments – importers of Indian steel and aluminium now must buy carbon certificates for every tonne crossing into Europe, priced at the current EU ETS rate of €88-90 per tonne CO₂, with first quarterly deadlines by the end of March this year. 

How does it work?

The EU’s CBAM covers six carbon-heavy goods – steel, aluminium, cement, fertilisers, hydrogen, and electricity where importers must first report embedded emissions shipment by shipment, then from this month buy and surrender CBAM certificates at the weekly EU ETS price (€88 per tonne CO₂ as of early January). The catch for Indian exporters: if your steel emits 2.5 tonnes CO₂ per tonne produced, that’s a €220 add-on per tonne sold in Europe, unless you’ve already paid a matching carbon price back home which can then be deducted from the EU bill.

India’s Half-Ready Shield

The Carbon Credit Trading Scheme (CCTS) could have been India’s ready answer: this domestic carbon market, enabled by 2022 Energy Conservation Act amendments, works by giving steel and aluminium plants specific emissions limits per tonne of output if you emit less than target, you earn credits to sell; if you exceed it, you must buy credits from cleaner peers to stay compliant, creating India’s first nationwide carbon price signal. But CCTS rollout lags badly: while EU payments started this month, India’s system is still developing monitoring frameworks and won’t see active credit trading until late 2026, leaving exporters to shoulder the full CBAM cost upfront with minimal immediate deduction. Even worse, when CCTS finally trades credits (late 2026), prices are expected around $10/mtCO2e, a fraction of EU’s €88 leaving a huge gap that slams blast furnace mills and MSMEs already hit by reporting costs.

Buyers aren’t waiting for India’s carbon market to catch up. Even before CBAM payments began, Indian steel and aluminium shipments to Europe fell 24.4% to $5.8 billion in FY2025 as EU importers cut orders or renegotiated contracts to avoid expected carbon costs. And now the math gets brutal, Indian steel emits 2.5 tonnes CO₂ per tonne produced (far above cleaner global benchmarks), meaning CBAM piles on €162-220 extra per tonne sold in Europe equivalent to a 20-35% tariff that wipes out the traditional price advantage. 

The Bigger Picture

CBAM doesn’t just clip export margins, it reshapes India’s growth path. Steel and aluminium shipments to Europe are only 0.2% of GDP, yet analysts estimate a 0.02-0.03% GDP growth drag through 2030 if carbon revenue keeps flowing to Brussels instead of funding Indian factories. City households will notice steel and cement prices climb 5-10% as costs pass through; rural construction and manufacturing feel the slowdown through job cuts and supply chain ripples.

On climate, CBAM is actually forcing the green shift India planned anyway: switching from coal-guzzling blast furnaces to scrap-fed electric arc furnaces (EAF) cuts emissions by 70%, but this needs concrete policy – scrap collection networks across states, green hydrogen pilot funding, faster EAF plant clearances to convert today’s CBAM pain into tomorrow’s low-carbon steel that can win back EU buyers (Bose, 2025).

So now will India keep funding Europe’s carbon tax or build its own pricing power before that first 31 March deadline hits?