India's preparedness for the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM) remains significantly insufficient, according to a recent report by the Global Trade Research Initiative (GTRI). With the EU set to impose a carbon tax on various products, including metals, in just approximately 100 days, both the Indian government and exporters have been slow to take the necessary steps to address this impending trade barrier.

The CBAM regulation, which was officially announced in May 2023, will initially apply to goods such as iron, steel, aluminum, cement, electricity, hydrogen, and fertilizers. The EU plans to extend the CBAM's reach over the next several years to include all major industrial products. The mechanism is designed to equalize carbon costs between goods manufactured within the EU and those imported from other countries. Starting January 1, 2026, the EU will impose a carbon tariff on selected imports, utilizing the EU Emissions Trading System (ETS) price and accounting for any carbon price already paid in the exporting country.

Despite a two-year transition period since October 2023, India has not made significant progress in preparing for CBAM. According to GTRI, exporters, particularly micro, small, and medium-sized enterprises (MSMEs), lack clarity regarding emissions reporting and verification processes. Furthermore, there has been a lack of major policy initiatives to support capacity building or subsidize compliance costs.

GTRI Founder Ajay Srivastava has voiced concerns that the implementation of EU CBAM levies from January 2026 poses a significant risk of further export contraction. He has suggested that India should examine the flexibilities reportedly offered to the United States under their trade framework and seek similar treatment as part of ongoing trade agreement discussions between India and the EU.

The impact of CBAM is already being felt, with India's steel and aluminum exports to the EU experiencing a 24.4% decline, from $7.71 billion in FY24 to $5.82 billion in FY25. Steel exports have been particularly hard hit, plummeting by 35.1% to $3.05 billion, while exports of iron and steel articles have fallen by 6.8%.

GTRI has urged the government to expedite the implementation of the Carbon Credit Trading Scheme (CCTS), establish clear sectoral benchmarks, and subsidize reporting costs for MSMEs. They also recommend establishing a central helpdesk for exporters and negotiating flexibilities with the EU, similar to those offered to the US. Without immediate action, CBAM could worsen India's trade deficit with the EU and complicate ongoing free trade agreement negotiations.

The EU's CBAM is expected to have a substantial impact on global trade, particularly for developing countries like India. High CBAM duties could undermine globalization, potentially rendering World Trade Organization (WTO) and Free Trade Agreement (FTA) commitments meaningless. While the EU's average import tariff is low, the CBAM tax is estimated to be a 20-35% tariff equivalent.