CBAM and Indian Exports: What Every Manufacturer Must Know Before 2026 Filing

Published: March 17, 2026 | Reading time: 12 minutes

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is no longer a policy proposal to be monitored from a distance. It is an operational reality. Since October 2023, EU importers of steel, aluminium, cement, fertilisers, electricity, and hydrogen have been filing quarterly CBAM reports declaring the embedded emissions in their imports. From January 2026, the definitive phase begins, and those embedded emissions carry a financial cost tied to the EU Emissions Trading System (EU ETS) carbon price.

For Indian manufacturers, CBAM represents the most significant trade-related climate policy to affect exports since the Montreal Protocol. India is among the top three most exposed countries globally, alongside China and Russia, due to the carbon intensity of its industrial base and the scale of its exports to the EU in CBAM-covered sectors.

This article quantifies the exposure, explains the mechanism, and outlines what Indian manufacturers must do — not in the abstract future, but now.

What Is the CBAM Timeline and How Does It Affect Indian Exporters?

CBAM’s implementation follows a phased timeline designed to give both EU importers and third-country exporters time to adapt. The phases are distinct in their requirements and financial implications.

Phase	Period	Requirement	Financial Impact
Transitional	Oct 2023 – Dec 2025	Quarterly reporting of embedded emissions in CBAM goods imported to EU	None — reporting only
Definitive Phase 1	Jan 2026 – Dec 2033	Purchase of CBAM certificates; free EU ETS allowances phased out gradually	Increasing — as free allowances reduce, CBAM cost rises
Full Implementation	Jan 2034 onwards	Full CBAM certificate purchase; zero free EU ETS allowances	Full carbon cost on all embedded emissions

The critical nuance that many Indian manufacturers miss: the financial impact in 2026 is not zero. While free EU ETS allowances cushion the transition, the cushion shrinks annually. In 2026, approximately 97.5% of free allowances remain, meaning the CBAM financial burden is small but non-zero. By 2030, free allowances drop to approximately 75%, making the annual exposure substantial. By 2034, the full carbon cost applies.

This phase-in creates a dangerous illusion of time. Companies that see the minimal 2026 cost and defer action will face a sharply accelerating cost curve with diminishing time to adapt.

Which Indian Sectors and Products Fall Under CBAM?

CBAM covers six categories of goods, defined by their Combined Nomenclature (CN) codes. For Indian industry, the exposure is concentrated but significant:

Iron and Steel: India’s largest CBAM-exposed export category. India exported approximately 5-6 million tonnes of iron and steel products to the EU in 2024, including hot-rolled coils, cold-rolled products, stainless steel, and long products. Indian steel’s average emission intensity of 2.0-2.8 tCO2 per tonne of crude steel (depending on the blast furnace vs. electric arc furnace mix) is significantly higher than the EU average of approximately 1.3 tCO2/tonne, creating a substantial carbon cost differential.

Aluminium: India’s aluminium sector is heavily coal-dependent, with smelting energy primarily sourced from captive thermal power plants. This results in emission intensities of 12-18 tCO2 per tonne of primary aluminium, compared to the EU average of approximately 6-8 tCO2/tonne. Hindalco and Vedanta/NALCO are the most exposed Indian producers.

Cement: While India’s cement exports to the EU are relatively small, the sector faces CBAM exposure through indirect channels — clinker exports and downstream products. Indian cement emission intensity of 0.57-0.65 tCO2 per tonne of cement is broadly comparable to EU levels, making the relative CBAM impact less severe than for steel or aluminium.

Fertilisers: Indian fertiliser exports to the EU are growing, particularly urea and ammonia. The CBAM exposure is significant because Indian ammonia production relies heavily on natural gas reforming with limited carbon capture, resulting in emission intensities of 1.8-2.2 tCO2 per tonne of ammonia.

Hydrogen: Currently minimal export volumes, but strategically important given India’s National Green Hydrogen Mission and the EU’s hydrogen import ambitions. CBAM creates a clear price signal favouring green hydrogen over grey hydrogen in EU trade.

How Are Embedded Emissions Calculated Under CBAM?

CBAM’s emission calculation methodology is precise and detailed. Indian manufacturers must understand three critical concepts: direct emissions, indirect emissions, and the default value penalty.

Direct (Scope 1) embedded emissions are the GHG emissions from the production process itself — combustion, process emissions, and fugitive emissions at the installation where the CBAM good is manufactured. For steel, this includes blast furnace emissions, coke oven emissions, and associated combustion. For aluminium, it includes anode consumption and perfluorocarbon (PFC) emissions during smelting.

Indirect (Scope 2) embedded emissions from electricity consumption during production are included for certain products. For aluminium, where electricity is 30-40% of production cost and the primary driver of emission intensity, indirect emissions are a major component of the CBAM calculation. India’s high grid emission factor (0.716 tCO2/MWh) significantly inflates the indirect emission component for Indian producers.

The default value trap: If an EU importer cannot provide verified actual emission data from the producing installation, CBAM applies default values. These defaults are set at the average emission intensity of the worst-performing 10% of EU installations for each product category. For Indian producers, this is punitive: a steel plant with actual emissions of 2.0 tCO2/tonne might face a default value of 2.8-3.2 tCO2/tonne — a 40-60% penalty for data absence.

Product	Typical Indian Emission Intensity	EU Average	CBAM Default Value	Cost per Tonne at EUR 65/tCO2
Crude Steel (BF-BOF)	2.4 tCO2/t	1.3 tCO2/t	~3.0 tCO2/t	EUR 156 (actual) / EUR 195 (default)
Crude Steel (EAF)	1.2 tCO2/t	0.4 tCO2/t	~1.8 tCO2/t	EUR 78 (actual) / EUR 117 (default)
Primary Aluminium	15.0 tCO2/t	7.0 tCO2/t	~18.0 tCO2/t	EUR 975 (actual) / EUR 1,170 (default)
Cement (clinker)	0.82 tCO2/t	0.78 tCO2/t	~1.05 tCO2/t	EUR 53 (actual) / EUR 68 (default)
Ammonia	2.0 tCO2/t	1.6 tCO2/t	~2.5 tCO2/t	EUR 130 (actual) / EUR 163 (default)

The data makes one thing clear: providing verified actual emission data is not optional — it is an economic imperative. The default value penalty alone can increase CBAM liability by 25-40%, making investment in measurement and verification systems almost always ROI-positive.

What Is the Financial Impact of CBAM on Indian Industry?

Estimating CBAM’s financial impact requires modelling the interaction between EU ETS carbon prices, free allowance phase-out schedules, and India-specific emission intensities. Our analysis models three scenarios:

At full implementation (2034 onwards, with zero free allowances and EU ETS prices at EUR 65/tCO2), Indian industry faces an estimated annual CBAM cost of EUR 1.2-1.9 billion using verified actual emission data, or EUR 1.5-2.5 billion if companies default to EU-assigned values. The steel sector alone accounts for over half this exposure.

To contextualise: for a typical Indian steel exporter shipping 500,000 tonnes to the EU annually, the CBAM cost at full implementation would be approximately EUR 78-90 million per year — equivalent to a 3-5% surcharge on export revenue. For aluminium producers, the impact is even more severe on a per-tonne basis due to higher emission intensities.

Why Is India Particularly Vulnerable to CBAM?

Three structural factors make India more exposed to CBAM than many other exporting nations:

1. Carbon-intensive energy mix. India’s grid emission factor of 0.716 tCO2/MWh is approximately 2.5 times the EU average. This inflates the indirect emission component for all energy-intensive products. Indian aluminium smelters using captive coal power face emission intensities double those of Scandinavian producers using hydropower. This structural disadvantage persists until India’s grid significantly decarbonises.

2. Absence of domestic carbon pricing. CBAM allows deduction of any carbon price already paid in the country of origin. Countries with domestic carbon taxes or ETS (e.g., China’s national ETS covering power generation) can offset a portion of CBAM liability. India currently has no qualifying carbon pricing mechanism. The coal cess and PAT scheme do not meet CBAM’s criteria for equivalent carbon pricing, leaving Indian exporters bearing the full CBAM cost.

3. Scale of EU trade exposure. The EU is a significant export destination for Indian steel and aluminium. While India has been diversifying export markets, the EU remains among the top three destinations for finished steel products. Companies cannot simply redirect exports to avoid CBAM without accepting lower prices or navigating different market requirements.

What Must Indian Manufacturers Do Now?

The window for preparation is narrowing. Companies that act now will secure lower CBAM costs, maintain EU market access, and build competitive advantages. The action plan operates across five workstreams:

Workstream 1: Emission measurement and verification. The single highest-impact action is establishing accurate, verifiable emission data at the installation level. This requires metering energy inputs, quantifying process emissions, and documenting the complete calculation methodology. Companies relying on default values face a 25-40% cost penalty. RSustain’s ScopeTracer tool helps map your installation-level emissions across all relevant CBAM categories.

Workstream 2: EU importer coordination. CBAM obligations fall on the EU importer, not the Indian exporter. However, the importer needs emission data from the exporter to avoid default values. Establishing data-sharing protocols with EU customers — including agreed calculation methodologies, verification standards, and reporting formats — is essential for maintaining commercial relationships.

Workstream 3: Decarbonisation roadmap. CBAM creates a direct financial incentive to reduce emission intensity. Prioritise investments with the highest carbon abatement per rupee: renewable energy procurement (replacing grid electricity with solar PPAs reduces Scope 2 significantly), energy efficiency improvements, and process optimisation. For steel, the transition from BF-BOF to EAF with scrap-based production can reduce emissions by 60-70%.

Workstream 4: CBAM cost modelling. Model your specific CBAM exposure under multiple scenarios: different carbon prices (EUR 50-100/tCO2), different free allowance phase-out schedules, and different emission intensities reflecting planned decarbonisation investments. This modelling informs both pricing strategy (passing through CBAM costs to EU customers) and investment decisions (which decarbonisation projects have the best ROI when CBAM costs are included).

Workstream 5: Policy engagement. Indian industry associations (CII, FICCI, ASSOCHAM) and the Ministry of Commerce are actively engaging with the EU on CBAM implementation details. Participating in these discussions — particularly on the recognition of Indian climate policies as equivalent carbon pricing — is a strategic imperative. Any future Indian carbon market or carbon tax that qualifies for CBAM deduction would materially reduce industry exposure.

The Competitive Advantage of Early CBAM Preparation

While CBAM is widely framed as a cost and a threat, early preparation offers three distinct competitive advantages:

Pricing power in EU markets. Indian exporters that can demonstrate low emission intensity through verified data will be preferred by EU importers seeking to minimise CBAM certificate costs. A steel producer with 1.8 tCO2/tonne (best-in-class Indian) versus 2.6 tCO2/tonne (Indian average) saves their EU customer approximately EUR 52 per tonne in CBAM costs — a meaningful commercial differentiation.

Access to green finance. Companies with verified emission data and credible decarbonisation roadmaps access green bonds and sustainability-linked loans at preferential rates. The interest rate differential for green-certified debt in Indian capital markets has reached 30-50 basis points — material for capital-intensive industries like steel and aluminium.

Resilience against CBAM expansion. The EU has indicated potential expansion of CBAM to additional product categories, including organic chemicals, polymers, and potentially downstream manufactured goods. Companies that build emission measurement and management capabilities now will be better positioned to absorb future scope expansions without disruption.

Sector-Specific CBAM Strategies for Indian Industry

Steel: The transition from blast furnace (BF-BOF) to electric arc furnace (EAF) production is the most impactful decarbonisation lever. India’s EAF share is approximately 55%, but much of this uses coal-based DRI rather than scrap. Increasing scrap utilisation (India’s scrap availability is projected to reach 70-80 million tonnes by 2030) and pairing EAF with renewable electricity can reduce emission intensity below 1.0 tCO2/tonne — competitive with EU producers.

Aluminium: The primary lever is electricity decarbonisation. Replacing captive coal power with renewable energy PPAs can reduce emission intensity by 50-60%. Hindalco’s Aditya plant (with hydro-based smelting) demonstrates that Indian aluminium at 4-5 tCO2/tonne is achievable — below the global average. Industry-wide transition requires massive renewable energy investment and grid infrastructure development.

Cement: India’s cement sector is relatively well-positioned due to high blended cement ratios (using fly ash and slag) that reduce clinker factor below global averages. Key levers include alternative fuels (thermal substitution rate in India is currently 5-7% versus 45%+ in Europe), waste heat recovery, and carbon capture (pilot stage). The CBAM impact on cement is moderate but will grow if scope expands to downstream construction products.

Fertilisers: Urea production from natural gas reforming has limited short-term abatement options beyond energy efficiency. The strategic response is to invest in green ammonia production using renewable hydrogen — aligning with India’s National Green Hydrogen Mission. Companies with early green ammonia capability will have a structural CBAM advantage.

The India Carbon Pricing Question

The most impactful policy lever for reducing India’s CBAM exposure is the introduction of a domestic carbon pricing mechanism that qualifies for CBAM deduction. The economics are straightforward: every rupee of carbon price paid domestically is a rupee not paid to the EU treasury through CBAM certificates.

India’s Bureau of Energy Efficiency has been developing the Indian Carbon Market (ICM) framework, building on the PAT scheme’s architecture. If implemented with sufficient coverage and a price that approaches EU ETS levels, the ICM could significantly reduce CBAM outflows. However, the political economy of carbon pricing in India — particularly the impact on energy costs and industrial competitiveness — makes rapid implementation uncertain.

In the interim, Indian companies should model their CBAM exposure under two scenarios: one with no domestic carbon pricing offset, and one with a hypothetical Indian carbon price of INR 1,000-2,000 per tCO2. This dual modelling informs both immediate action (which does not depend on policy) and strategic positioning (which benefits from policy clarity).

Looking Ahead: CBAM’s Evolution and India’s Response

Three developments will shape CBAM’s impact on Indian industry over the next five years:

Scope expansion. The European Commission will review CBAM’s product scope by 2030, with potential inclusion of downstream products (auto parts, machinery, construction materials) that use CBAM-covered inputs. This would significantly expand the number of Indian exporters affected, beyond the current set of primary producers.

CBAM contagion. The UK has announced its own carbon border adjustment mechanism effective January 2027. Canada, Australia, and Japan are exploring similar measures. For Indian exporters, this means CBAM-style costs are not limited to the EU — they are becoming a feature of trade with all major developed economies. Building emission measurement capability once serves multiple markets.

Trade diplomacy. India has raised CBAM concerns at the WTO, arguing it constitutes a trade barrier inconsistent with multilateral climate commitments. While the legal challenge proceeds, companies should not plan on the assumption that CBAM will be overturned. The prudent strategy is to prepare operationally while supporting diplomatic engagement.

CBAM is a structural shift in international trade economics. For Indian manufacturers, it transforms carbon intensity from an environmental metric into a direct cost of doing business with the world’s largest single market. Companies that recognise this shift and act accordingly will maintain their competitiveness. Those that do not will find their EU market position eroding steadily as the cost curve steepens through 2034.

Frequently Asked Questions About CBAM and Indian Exports

What is CBAM and when does it take effect for Indian exporters?

The Carbon Border Adjustment Mechanism (CBAM) is the EU’s carbon border tax applied to imports of carbon-intensive goods. The transitional phase began October 2023, requiring quarterly reporting of embedded emissions with no financial obligation. The definitive phase begins January 2026, when EU importers must purchase CBAM certificates at EU ETS carbon prices for the embedded emissions in their imports. Indian exporters of steel, aluminium, cement, fertilisers, electricity, and hydrogen are directly affected. Use RSustain’s CBAM Duty Calculator to model your specific exposure.

How much will CBAM cost Indian steel and aluminium exporters?

At current EU ETS prices of approximately EUR 60-70 per tonne of CO2, Indian steel exporters face an estimated CBAM levy of EUR 120-180 per tonne of crude steel (based on typical Indian steel emission intensity of 2.0-2.8 tCO2/tonne). For aluminium, the impact is EUR 400-700 per tonne depending on the energy mix used in smelting. For India’s total steel exports to the EU (approximately 5-6 million tonnes annually), the aggregate CBAM cost could reach EUR 680 million to EUR 950 million per year at full implementation. Companies providing verified actual data pay significantly less than those using EU default values.

Can Indian companies reduce their CBAM liability?

Yes, through three mechanisms: (1) reducing actual embedded emissions through cleaner production processes, renewable energy, and energy efficiency — every tonne of CO2 reduced saves EUR 60-70 in CBAM costs, (2) demonstrating that a carbon price has already been paid in India (any future Indian carbon tax or ETS would be deductible), and (3) providing verified actual emission data rather than relying on EU default values, which are set at the worst-performing 10% of EU installations and typically add 25-40% to the CBAM bill. RSustain’s ScopeTracer helps map your installation-level emissions accurately.

What are the EU default emission values for CBAM and why should Indian companies avoid them?

If EU importers cannot provide verified actual emission data from the producing installation, CBAM applies default values based on the average emission intensity of the worst-performing 10% of EU installations for each product category. For Indian producers, these defaults are typically 30-50% higher than actual emissions. For example, a steel plant with actual emissions of 2.0 tCO2/tonne might face a default of 3.0 tCO2/tonne — inflating the CBAM bill by 50%. Investing in emission measurement and third-party verification almost always delivers a positive return by eliminating this default value penalty.

Does India have a carbon pricing mechanism that offsets CBAM?

As of early 2026, India does not have a comprehensive carbon pricing mechanism that qualifies for CBAM deduction. The existing coal cess and the Perform-Achieve-Trade (PAT) scheme do not meet CBAM’s criteria for equivalent carbon pricing. India’s Bureau of Energy Efficiency is developing the Indian Carbon Market (ICM) framework, but implementation timelines remain uncertain. Until a qualifying mechanism is in place, Indian exporters bear the full CBAM cost with no offset. Companies should model their exposure both with and without a future domestic carbon price to inform strategic planning.

Which Indian companies and sectors are most exposed to CBAM?

The most exposed sectors are iron and steel (EUR 680-950M annual exposure), aluminium (EUR 380-580M), and fertilisers (EUR 120-220M). Major Indian companies with significant EU export exposure include Tata Steel, JSW Steel, and SAIL for steel; Hindalco, Vedanta, and NALCO for aluminium; and UltraTech, Ambuja, and Dalmia Bharat for cement. CBAM is expected to expand to downstream products (auto parts, machinery) by 2030, which would significantly broaden the set of affected companies. Early preparation using tools like RSustain’s CBAM Duty Calculator is strongly recommended.