The Carbon Border Adjustment Mechanism is a climate policy introduced by the European Union (EU) to impose a carbon cost on certain imported goods based on the greenhouse gas emissions associated with their production.

In simple terms, CBAM aims to ensure that imported goods face a carbon cost comparable to that borne by goods produced within the EU.

Sectors covered: Cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.

It is closely linked to the concept of carbon leakage.

• Carbon leakage: When industries shift production to countries with weaker climate policies to avoid higher environmental compliance costs.
• Carbon pricing: Putting a price on greenhouse gas emissions, for example through a carbon tax or an emissions trading system.

Impact of CBAM on India

• Steel and aluminium exports: Indian products with high embedded emissions may face additional costs in the EU market.
• MSMEs: Smaller exporters may struggle with emissions measurement, verification and compliance costs.
• Competitiveness: Carbon-intensive production could become less attractive relative to cleaner production.
• Development concerns: Developing countries argue that the policy may constrain industrialisation and impose disproportionate burdens.
• Trade tensions: CBAM has become a point of disagreement between India and the EU.

Opportunities

• Adoption of renewable energy and energy-efficient industrial processes.
• Greater investment in green steel and low-carbon manufacturing.
• Development of emissions-monitoring and verification systems.

• Improved competitiveness in markets increasingly prioritising low-carbon products.
• Incentives for India to develop credible domestic carbon-pricing mechanisms.

Way forward for India

• Accelerate industrial decarbonisation through renewable energy, energy efficiency and green hydrogen.
• Develop robust domestic carbon accounting, reporting and verification systems.
• Support MSMEs through technical assistance and affordable access to cleaner technology.
• Pursue constructive negotiations with the EU and use WTO mechanisms where appropriate.
• Ensure that climate policies account for equity, development needs and historical responsibility.