Discuss how carbon border adjustment mechanisms (CBAM) of developed economies pose challenges for India's export-oriented manufacturing sectors. Suggest measures to mitigate this impact.

The EU's Carbon Border Adjustment Mechanism, whose definitive phase began in January 2026, imposes a carbon-cost-linked levy on imports of steel, aluminium, cement, fertilisers, hydrogen and electricity. For India's coal-intensive export manufacturing, it converts a climate instrument into a competitiveness barrier, demanding both negotiation and domestic decarbonisation.

Challenges for India's export-oriented manufacturing

• Erosion of price competitiveness: ICRIER estimates India's steel exports to the EU could decline about 24%, with overall iron and steel exports falling 5.7% against just 1.2% for China — India's carbon-heavy production route is penalised disproportionately [1].
• Incidence falls on Indian firms: the carbon cost is largely absorbed by exporters as price concessions to EU buyers, shrinking margins even where tonnage is retained [1].
• Visible early impact: iron and steel exports to the EU fell 13% in the four months following CBAM's rollout [1].
• Layering with trade defence measures: EU Regulation 2026/1384, effective 1 July 2026, caps duty-free steel imports at 18.3 million tonnes with a 50% out-of-quota duty; CBAM applies additionally, even within the quota [2].
• Compliance burden: verified embedded-emissions reporting and accredited verifiers strain MSME exporters lacking measurement capacity.
• Equity concern: a unilateral border levy sits uneasily with common but differentiated responsibilities and WTO non-discrimination principles.

Measures to mitigate the impact

• Price carbon domestically: an operational carbon market lets India retain revenue that would otherwise accrue to Brussels, since carbon costs already paid are set off against CBAM; the India-EU FTA's technical cooperation on recognition of carbon prices provides the opening [3].
• Use FTA safeguards: invoke the forward-looking MFN assurance on CBAM flexibilities and the €500 million transition support for emission reduction [3].
• Decarbonise production: scrap-based electric arc furnaces, green hydrogen pilots and a green steel taxonomy to cut emission intensity — the only durable lever.
• Diversify markets and pursue a negotiated multilateral framework on border carbon measures with other developing economies.

CBAM is less a passing trade irritant than a signal that carbon efficiency is becoming market access. India's advantage lies in treating compliance as an industrial-modernisation opportunity — aligning export competitiveness with its net-zero-2070 pledge and SDG-9 on sustainable industry.