The European Union’s Carbon Border Adjustment Mechanism (CBAM), entering its financial phase in January 2026, marks a structural shift in global trade. Unlike traditional tariffs, CBAM embeds carbon pricing into imports of carbon-intensive products. For India’s steel industry which contributes nearly 12% of manufacturing GDP and employs over 2 million people this is not a marginal regulatory change. It is a competitiveness shock.
India exported approximately 3 million tonnes of steel to the EU in FY2024, valued at ~$4.5 billion. Under CBAM, these exports now face a carbon cost exposure because Indian steel production averages 2.4 tonnes of CO₂ per tonne of steel, nearly double the EU’s benchmark level of 1.28 tCO₂/t.
The core question is not whether CBAM will affect Indian steel. It will. The real question is whether India treats CBAM as a trade barrier or as a structural trigger for industrial transformation.
The Global Steel Context: A Market Under Pressure
Global steel trade is already undergoing structural stress. China’s property sector slowdown historically absorbing 30–35% of Chinese steel demand has created surplus capacity estimated at nearly 100 million tonnes annually, equivalent to India’s total production. Chinese exports have surged, supported by subsidies in the range of 4–7%, intensifying global price competition.
Simultaneously, carbon-based trade regulation is emerging as a new layer of competitiveness. CBAM is not an isolated policy experiment. Carbon border pricing discussions are active in Australia, the UK, and parts of North America. The global steel market is shifting from price-based competition to carbon-adjusted competition.
India is entering this phase with a structural disadvantage.
Carbon Competitiveness: The Structural Gap
India’s steel carbon intensity remains among the highest globally.
The gap is substantial. At an assumed EU ETS price of €80 per tonne of CO₂, Indian steel exporters face an estimated €88 per tonne carbon cost, compared to Korea’s €24 and China’s €70.
At current exposure, India’s annual compliance burden is estimated at approximately €264 million on EU-bound exports alone. If EU ETS prices rise toward projected levels of €150 per tonne by 2030, the competitiveness gap will widen sharply.
CBAM is therefore not merely a reporting burden. It is a margin eroder.
Export Trends: The Vulnerability Is Already Visible
India’s steel exports under HS Code 72 have declined significantly over four fiscal years.
Exports have fallen nearly 60% since FY21-22. While global demand slowdown and Chinese competition contributed, CBAM anticipation and compliance uncertainty have already begun influencing EU trade patterns.
Italy remains the largest EU destination, but volumes have halved.
India’s exposure is not theoretical. It is measurable.
Technology Structure: Where the Real Problem Lies
India’s steel carbon intensity is driven by technology mix.
India’s large Integrated Steel Plants (ISPs) rely heavily on BF–BOF, a carbon-intensive route dependent on imported coking coal. Coking coal alone accounts for 40–60% of production cost, exposing producers to both carbon and commodity volatility.
India is the world’s largest DRI producer, but much of it is coal-based, keeping emissions high.
The EAF route offers lower emissions, yet scrap availability is weak. India is the world’s second-largest scrap importer, a paradox for a growing steel economy.
ISP vs MSME: Uneven Transition Capacity
Large ISPs like Tata Steel and JSW Steel have declared net-zero commitments (2045 and 2050 respectively). They are experimenting with hydrogen DRI, CCUS, and scrap expansion
However, MSMEs, which dominate EAF-based secondary production, face structural constraints:
- Limited capital for decarbonisation
- Weak emissions monitoring systems
- High scrap import dependence
- Complex CBAM compliance requirements
CBAM will not affect firms equally. It will favour those with capital and penalise those without transition capacity.
Without targeted policy support, the mechanism may accelerate consolidation within India’s steel industry.
Policy Gaps: Where India Is Underprepared
India’s Green Steel Taxonomy (baseline 2.2 tCO₂/t) is a positive start. But it does not yet provide:
- A clear technology transition roadmap
- Scaled transition finance mechanisms
- Structured MSME decarbonisation support
Most critically, India lacks a coordinated carbon competitiveness strategy.
CBAM is not just an environmental regulation. It is industrial policy by another name.
Strategic Recommendations: From Compliance to Competitiveness
To avoid structural erosion, India must act across five dimensions:
1. Accelerate Scrap Ecosystem Development: Steel from scrap reduces emissions by 60–70%. Formal scrap collection networks, recycling zones, and faster vehicle scrappage implementation are essential.
2. Establish Transition Finance Architecture: Introduce sustainability-linked loans, green bonds, and concessional financing tied to emission reduction milestones.
3. Scale Gas-Based and Hydrogen DRI: Coal-based DRI must gradually transition to gas and green hydrogen pathways. Hydrogen clusters near renewable energy hubs can lower cost barriers.
4. Carbon Capture for Legacy BF–BOF: Retrofit large ISPs with CCUS in the interim phase to prevent abrupt export loss.
5. Develop a CBAM Strategy Cell: A coordinated monitoring and advisory body to assist MSMEs with reporting, benchmarking, and verification.
CBAM compliance should not be reactive. It should be strategic.
The Strategic Reality
CBAM exposes a structural vulnerability in India’s industrial model: growth built on carbon-intensive manufacturing in a world moving toward carbon-accounted trade.
But it also offers leverage. Countries that move early toward green steel will command premium markets.
India can either absorb €264 million annually in carbon costs, rising sharply with ETS prices or invest in structural transformation.
The choice is not between environment and exports.
It is between temporary compliance and long-term competitiveness.
Takeaway: A Trade Shock That Can Become an Industrial Upgrade
The EU’s CBAM is not an isolated regulatory episode. It represents the future architecture of trade.
India’s steel industry stands at a decisive point. With 35% of exports linked to CBAM markets and carbon intensity nearly double benchmark levels, the urgency is clear.
If approached strategically through scrap expansion, hydrogen transition, finance innovation, and technology clarity CBAM can catalyse green steel leadership.
If ignored or under-managed, it risks structural export erosion.
CBAM is not just a carbon tax. It is a competitiveness test.
India’s response will determine whether its steel remains globally relevant or increasingly penalised.
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