India to support steel exports hit by Europe’s carbon tax

UPSC Study Note: India's Steel Exports and EU's Carbon Border Adjustment Mechanism (CBAM)

1. At a Glance

• CBAM (Carbon Border Adjustment Mechanism) is the EU's carbon tariff on carbon-intensive imports — a trade-climate policy that directly hits India's steel and aluminium exports to the EU. [1]
• India is among the largest affected emerging economies: 15–40% of its steel exports to Europe face carbon cost liability under CBAM from 1 January 2026. [1]
• The Indian government has explicitly signalled sectoral support for affected steel exporters — making this a live intersection of trade policy, climate diplomacy, and industrial strategy. [S5 (article)]
• Tests across GS-II (international institutions, trade), GS-III (industrial policy, environment), and GS-IV (ethics of carbon equity).

2. Why in the News

• India–EU Free Trade Agreement (FTA) signed ~February 2026: The deal slashed tariffs on several sectors but left CBAM fully intact, meaning carbon costs on Indian steel exports were not negotiated away. [5]
• On 9 February 2026, Steel Secretary Sandeep Poundrik stated at a government event in New Delhi that India's steel exports "will continue to be impacted" by CBAM and import quotas, and that the government will take steps to support the sector. [5]
• CBAM entered its definitive (payment) phase on 1 January 2026, shifting from a mere reporting obligation (Oct 2023–Dec 2025) to actual certificate purchase requirements. [2][3]
• India separately failed to secure an exemption from the UK's analogous carbon border mechanism in the UK–India trade agreement. [4]

3. Background & Evolution

• Predecessor logic: CBAM mirrors the EU Emissions Trading System (EU ETS) — it prices carbon for domestic EU producers; CBAM extends that price to imports to prevent carbon leakage (production shifting to low-regulation countries). [3]

4. Core Static Facts

What is CBAM?

• A carbon border tariff levied on imports into the EU of specified carbon-intensive goods.
• Legal basis: Regulation (EU) 2023/956 of the European Parliament and the Council. [3]
• Administering body: European Commission (Taxation and Customs Union Directorate). [3]

Sectors covered (initial list):

1. Iron & Steel
2. Aluminium
3. Cement
4. Fertilisers
5. Electricity
6. Hydrogen [3]

Mechanism:

• EU-based importers (registered as "authorised CBAM declarants") must buy CBAM certificates corresponding to the embedded GHG emissions in imported goods. [1]
• The certificate price tracks the EU ETS carbon price (€/tonne CO₂).
• Indian exporters do not pay directly — but the cost is passed back to them via lower offtake prices or renegotiated contracts. [1]

Phases: | Phase | Period | Obligation | |-------|--------|------------| | Transitional | Oct 2023 – Dec 2025 | Emissions reporting only | | Definitive | 1 Jan 2026 onwards | Certificate purchase + surrender |

India-specific numbers:

• 15–40% of India's steel exports to Europe at risk from CBAM (ICRA estimate). [1]
• Price reduction pressure: 15–22% on Indian steel and aluminium exporters. [2]
• Profit impact: USD 60–165 per metric tonne decline projected over CY 2026–2034. [2]
• Approximately two-thirds of India's steel shipments to the EU may be affected by volume-based impact. [6]

5. Multi-Dimensional Analysis

Economic

• CBAM effectively acts as a non-tariff barrier (NTB) — imposes carbon cost without being a conventional tariff, making WTO challenge structurally complex. [1]
• Indian steelmakers have higher emission intensity than EU producers, widening the cost gap; decarbonisation is the only long-term structural escape route. [7]
• The USD 60–165/MT profit erosion over 2026–2034 threatens viability of EU-bound steel contracts, potentially redirecting Indian steel to Asian/African markets. [2]
• Indian government support measures likely to include PLI scheme extensions, export promotion funds, or dedicated green steel incentives.

Environmental

• CBAM incentivises decarbonisation of Indian steel production — shift from coal-based blast furnaces to Electric Arc Furnaces (EAF) or hydrogen-based DRI (Direct Reduced Iron). [7]
• Carbon leakage prevention is the stated EU rationale — ensures imports face the same carbon price as EU domestic production. [3]
• Nature Climate Change (2026): Early data shows high-emission Indian firms already reduced EU export volumes during the CBAM reporting phase; low-emission firms maintained levels — confirming CBAM's differentiated impact. [7]

Geopolitical / Strategic

• India–EU FTA (Feb 2026): Despite the deal, CBAM remained non-negotiable for the EU — highlights limits of bilateral FTAs in overriding unilateral climate trade instruments. [5]
• India raised CBAM concerns at the WTO — potential grounds: GATT Article XX (environmental exception) vs. Article I (MFN) and Article III (national treatment). [1]
• Commerce Minister Piyush Goyal formally conveyed India's concerns to the European Commission. [1]
• UK CBAM parallel: India also failed to secure exemption in UK–India trade deal — suggesting a systemic pattern of Western carbon border instruments persisting regardless of bilateral trade arrangements. [4]

Legal / Constitutional

• CBAM is grounded in EU Regulation 2023/956 — directly applicable in all EU member states; not a directive requiring transposition. [3]
• WTO compatibility is contested: critics argue CBAM discriminates against developing nations with less fiscal capacity to decarbonise — potentially violating Common But Differentiated Responsibilities (CBDR) principle under UNFCCC. [1]
• India's WTO challenge, if filed, would likely invoke GATT Article III (national treatment) or challenge it as a disguised restriction on trade under Article XX.

Administrative

• Indian steelmakers must now invest in verified emissions data systems — CBAM requires third-party verified embedded emission data per shipment from 2026. [3]
• Steel Secretary Poundrik's statement indicates Ministry of Steel is the nodal ministry for domestic response coordination. [5]
• Steelmakers are already reworking production processes and strengthening compliance infrastructure as CBAM entered payment phase. [2]

6. Recent Developments (Last 12–18 Months)

• January 2026: CBAM definitive phase begins — certificate purchase obligation activates for EU importers of Indian steel, aluminium, cement, fertilisers, electricity, hydrogen. [2][3]
• January 2026: Indian steelmakers begin reworking production schedules and strengthening emissions compliance systems ahead of first CBAM settlement deadlines. [2]
• ~February 2026: India–EU FTA signed — tariff reductions on multiple sectors, but CBAM left intact; no carbon cost exemption negotiated for Indian exports. [5]
• 9 February 2026: Steel Secretary Sandeep Poundrik publicly states government will support steel sector impacted by CBAM and EU import quotas. [5]
• December 2025: GTRI (Global Trade Research Initiative) report warned Indian exporters may need to cut prices 15–22% or lose EU market share from 1 Jan 2026. [2]
• Nature Climate Change study (2026): Published early evidence that CBAM reporting phase already reshaped EU–India steel trade patterns — high-emitters contracted exports. [7]

7. Prelims Hooks

1. CBAM stands for Carbon Border Adjustment Mechanism — an EU regulation (No. 2023/956) imposing carbon costs on imports of specified goods.
2. CBAM covers six sectors: iron & steel, aluminium, cement, fertilisers, electricity, and hydrogen.
3. CBAM's transitional (reporting) phase ran from October 2023 to December 2025; payment phase began 1 January 2026.
4. Under CBAM, it is the EU-based importer (not the Indian exporter) who legally purchases CBAM certificates — but the cost burden is commercially transferred back to Indian exporters. [1]
5. 15–40% of India's steel exports to Europe are at risk from CBAM (ICRA estimate). [1]
6. CBAM compliance could reduce Indian steel exporter profits by USD 60–165 per metric tonne over 2026–2034. [2]
7. Indian steel and aluminium exporters may be forced to reduce prices by 15–22% to retain EU market access. [2]
8. India–EU FTA signed in February 2026 slashed tariffs but left CBAM fully intact. [5]
9. The government official who announced India's support for CBAM-hit steel sector is Steel Secretary Sandeep Poundrik. [5]
10. India has explored challenging CBAM at the WTO — Commerce Minister Piyush Goyal conveyed concerns to the European Commission. [1]
11. The EU legal basis for CBAM is Regulation (EU) 2023/956 — directly applicable without national transposition. [3]
12. CBAM certificate prices are linked to the EU Emissions Trading System (EU ETS) carbon price. [3]
13. The concept of carbon leakage — production shifting to low-regulation jurisdictions to avoid carbon costs — is the stated justification for CBAM. [3]
14. India also failed to secure exemption from the UK's carbon border mechanism in the UK–India trade deal. [4]

8. Mains Relevance

GS Papers:

• GS-II: India's foreign trade policy; India–EU relations; WTO and dispute settlement; international institutions
• GS-III: Environmental policy and industry; decarbonisation of manufacturing; industrial policy; steel sector

Syllabus Headings:

• GS-III: "Conservation, environmental pollution and degradation, environmental impact assessment" + "Indian Economy — industrial policy"
• GS-II: "Important International institutions, agencies and fora — their structure, mandate" + "Effect of policies and politics of developed and developing countries on India's interests"

Plausible Mains Questions:

1. "The EU's Carbon Border Adjustment Mechanism (CBAM) is both a climate policy tool and a trade barrier. Critically examine its implications for India's steel and aluminium export sectors, and evaluate India's strategic options." (GS-III/GS-II)
2. "Carbon border mechanisms adopted by developed nations may undermine the principle of Common But Differentiated Responsibilities (CBDR). Discuss with reference to India's experience with the EU's CBAM." (GS-II/GS-III)
3. "India's bilateral trade agreements have failed to insulate its exporters from unilateral climate trade instruments. Analyse the gaps in India's trade negotiation strategy with reference to CBAM." (GS-II)

9. Related Topics to Study Next

10. Common Errors / Trap Areas

1. Who pays CBAM? — Aspirants often write "Indian exporters pay CBAM." Incorrect. The legal obligation falls on EU-based importers who buy certificates; however, the economic burden is commercially passed back to Indian exporters via price negotiation.
2. CBAM is not a conventional customs duty — it cannot be challenged simply as a tariff under GATT; its WTO status is contested and legally complex (Article XX environmental exception complicates the challenge).
3. Transitional vs. Definitive Phase confusion: Reporting obligations existed from Oct 2023; actual financial payments began only from 1 January 2026. Do not conflate the two phases.
4. Nodal ministry: The relevant ministry for India's domestic response is Ministry of Steel (Secretary: Sandeep Poundrik), not Ministry of Commerce (though Commerce is involved in trade negotiations and WTO strategy).
5. CBAM sectors: The list is specific — six sectors only (steel, aluminium, cement, fertilisers, electricity, hydrogen). Do not expand it to all manufacturing; textiles, pharma, IT — India's other major exports — are not covered in the current CBAM scope.