Three weeks ago, I sat across from the CFO of a mid-sized steel exporter based in Raigarh. His company had been successfully exporting to Europe for fifteen years. He’d called me in a state of confusion after receiving a notice from their largest EU buyer—a German automotive parts manufacturer—requesting detailed carbon emissions data for their steel products.
Unfortunately, his concern is well-founded. The European Union’s Carbon Border Adjustment Mechanism (CBAM) isn’t a distant regulatory threat—it’s already operational with effect from 1st January, 2026, and its full impact will hit Indian exporters harder than most realize.
1. What Exactly Is CBAM?
CBAM is essentially a carbon tax on imports into the EU. It’s designed to ensure that products imported into Europe carry the same carbon cost as goods produced within the EU under their Emissions Trading System (ETS).
Think of it this way: European manufacturers pay for their carbon emissions. CBAM ensures that importers can’t undercut them by producing in countries with lax environmental regulations. It’s protectionism dressed in environmental clothing—though that doesn’t make it any less real or enforceable.
2. The Timeline That Matters:
- October 1, 2023 – December 31, 2025: Transitional phase (we’re in this now)
- Reporting obligations only, no financial charges
- Quarterly reports on embedded emissions required
- January 1, 2026 onwards: Full implementation
- Actual carbon tax charges begin
- CBAM certificates must be purchased
- Heavy penalties for non-compliance
3. Why Steel, Cement, and Fertilizers Are in the Crosshairs
The EU didn’t randomly select these sectors. They chose the most carbon-intensive industries where “carbon leakage” (relocating production to avoid emission costs) is most likely.
Current Coverage:
- Iron and Steel
- Cement
- Fertilizers (specifically ammonia, nitric acid, and nitrogen-based fertilizers)
- Aluminum
- Electricity
- Hydrogen
Planned Expansion (by 2030):
- Organic chemicals
- Polymers
- Glass and ceramics
- Pulp and paper
For India, the impact is severe. These sectors constitute approximately 26% of our total exports to the EU, worth over €8.2 billion annually.
4. The Harsh Mathematics: What This Actually Costs
Let me walk you through a real calculation that illustrates the financial impact.
Example: Indian Steel Exporter
Average carbon intensity of Indian steel: ~2.5 tonnes CO₂ per tonne of steel (Note: This varies significantly—integrated steel plants vs. DRI-based plants can differ by 40-50%)
EU ETS carbon price (current): Approximately €80-90 per tonne CO₂
Calculation per tonne of steel exported: 2.5 tonnes CO₂ × €85 = €212.50 CBAM cost per tonne of steel
If your steel is priced at €600 per tonne, you’re looking at an additional 35% cost burden. That’s not a margin squeeze—that’s potentially a market exit scenario.
One of my clients’ exports 50,000 tonnes of steel products annually to the EU. At these rates, they’re facing an annual CBAM liability of approximately €10.6 million (₹95 crores). Their current profit margins? About 12%.
The math simply doesn’t work.
5. Why Indian Exporters Are Particularly Vulnerable
Having worked extensively with heavy industry exporters, I can identify several structural challenges that make Indian companies especially exposed:
Higher Carbon Intensity Indian steel production is approximately 1.5-2x more carbon-intensive than European production. We rely heavily on coal-based processes, while Europe has increasingly shifted to electric arc furnaces and renewable energy.
Data Infrastructure Gaps Most Indian manufacturers don’t currently track emissions at the granular level CBAM requires. The regulation demands:
- Direct emissions from production (Scope 1)
- Indirect emissions from electricity consumption (Scope 2)
- Upstream emissions from raw materials (Scope 3, for some products)
- Product-specific emission factors, not facility averages
Technology Lock-in Transitioning from coal-based to low-carbon production requires massive capital investment. A single blast furnace conversion can cost ₹2,000-5,000 crores. Most MSMEs simply can’t afford this.
Limited Green Energy Access Even manufacturers wanting to reduce emissions face renewable energy availability constraints in India. Securing consistent green power at scale remains challenging.
6. The Compliance Nightmare: What You Must Do Now
The transitional reporting requirements are deceptively complex. Here’s what’s actually required:
Quarterly CBAM Reports Must Include:
- Quantity of goods imported (categorized by CN codes)
- Actual embedded emissions (direct and indirect)
- Carbon price already paid (if any, in country of origin)
- Installation details where goods were produced
The devil is in the details. “Actual embedded emissions” means:
- Calculating emissions for each production route
- Accounting for different input materials used
- Tracking electricity sources and their emission factors
- Documenting any carbon credits already purchased
7. Documents Required:
- Emission monitoring plans
- Verified emission reports (by accredited verifiers)
- Production records with batch-level traceability
- Electricity procurement documentation
- Raw material sourcing and emission factors
I’ve seen companies spend 6-9 months just establishing the systems to generate this data accurately.
8. The Verification:
Here’s a critical point most exporters miss: the emissions data you report must be verified by an accredited verifier.
The Problem: The EU will only accept verifiers accredited under their system. As of now, India has very few EU-recognized verification bodies. This creates a bottleneck where:
- Getting an audit slot takes 3-4 months
- Verification costs range from €5,000 to €50,000 depending on complexity
- Any data gaps or errors require re-verification
9. Sector-Specific Implications
Let me address each major sector individually:
(a) Steel & Iron Products
India exports approximately €3.2 billion worth of steel and iron products to the EU annually. Our exposure is massive.
Key Challenges:
- India’s average steel emission intensity: 2.4-2.6 tCO₂/tonne vs. EU average of 1.4 tCO₂/tonne
- Secondary steel producers (using DRI route) face even higher penalties
- Stainless steel has complex alloy-specific emission calculations
What’s Working: Large integrated steel companies like Tata Steel and JSW have begun investing in emission reduction. Tata’s Port Talbot plant transition and JSW’s green steel initiatives are responses to CBAM.
What’s Failing: MSMEs in the secondary steel sector lack the capital and technical expertise to comply. I predict 30-40% of smaller steel exporters will exit the EU market by 2027.
(b) Cement
India’s cement exports to EU are smaller in volume (€420 million annually) but face proportionally severe impact.
Key Challenges:
- Cement production is inherently carbon-intensive (process emissions from limestone calcination)
- Clinker-to-cement ratio significantly affects CBAM liability
- Blended cement has complex calculation requirements
Opportunities:
- Indian cement companies using higher percentages of fly ash or slag can demonstrate lower emissions
- Some manufacturers are exploring carbon capture technology, though economics remain challenging
Ground Reality: Two cement exporters I advise have already redirected their production to non-EU markets (Middle East, Africa) where carbon costs don’t yet apply. This is becoming a trend.
(c) Fertilizers
This sector faces perhaps the most complex CBAM compliance requirements.
Covered Products:
- Ammonia (CN code 2814)
- Nitric acid (CN code 2808)
- Nitrogen-based fertilizers (various CN codes under 3102 and 3105)
Key Challenges:
- Ammonia production via Haber-Bosch process is extremely energy-intensive
- Natural gas prices and sourcing affect both production costs AND emission intensity
- Many Indian plants use older technology with higher emission profiles
Strategic Consideration: India’s fertilizer sector receives substantial government subsidies. CBAM compliance costs could trigger complex interactions with WTO subsidy rules—an area few are examining.
10. Red Flags: Compliance Mistakes I’m Seeing Repeatedly
a. Using Default Emission Values
During the transitional period, you can use EU default values for your product category. Many exporters are doing this to avoid the cost of actual measurement.
The Problem: EU default values for Indian products are deliberately set conservatively high. Using them results in 20-40% higher CBAM liability than actual emissions in many cases. When financial charges begin in 2026, this becomes prohibitively expensive.
b. Ignoring Electricity Emissions
Many manufacturers focus only on direct process emissions and overlook Scope 2 (electricity) emissions.
The Problem: For many Indian facilities, electricity accounts for 30-50% of total emissions. Inaccurate electricity emission factors can completely invalidate your CBAM report.
c. Inadequate Documentation Systems
Companies are providing aggregated, facility-level emission data rather than product-specific calculations.
The Problem: CBAM requires batch-level or production-route-specific data. Facility averages will be rejected during verification, requiring expensive re-reporting.
d. Assuming Importer Handles Compliance
Some exporters believe CBAM is the importer’s problem since they’re the ones submitting CBAM declarations.
The Problem: Importers are demanding emission data from exporters. Those who can’t provide it are being dropped from supplier lists. It’s becoming a market access issue, not just a regulatory one.
c. No Legal Review of Sales Contracts
Exporters aren’t revising their contracts to address CBAM responsibilities.
The Problem: Disputes are emerging over who bears CBAM costs. Without clear contractual clauses, exporters are absorbing costs they never anticipated, destroying profitability.
Concluding Remarks:
Previous trade barriers—tariffs, quotas, standards—could often be managed through political negotiations, legal challenges, or clever structuring. CBAM is different because it’s grounded in an undeniable scientific and political reality: climate change.
Indian exporters who wait for CBAM to be “resolved” politically will find themselves permanently side-lined from premium markets.
CBAM isn’t a regulatory annoyance to be managed; it’s a structural transformation of international trade. The heavy industries that adapt—through technology, through strategy, through disciplined compliance—will emerge stronger and more valuable.
Those that don’t will simply cease to be exporters.
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In case of any query and clarification regarding Exports/Customs/GST compliance, advisory and litigation and require any support, you may like to connect with us.
Abhinarayan Mishra FCA, FCS, LL.B, IP, RV; Managing Partner, SAM Law Associates LLP; KPAM & Associates, Chartered Accountants, New Delhi ; +91 9910744992; ca.abhimishra@gmail.com; samlawassociates18@gmail.com
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