After much anticipation, the Carbon Border Adjustment Mechanism (CBAM) is set to take effect from January 2026. Under this mechanism, any country exporting carbon-intensive products to the EU will be required to pay a border carbon price, essentially to match the carbon cost faced by EU producers under the EU Emissions Trading System (ETS). The embedded emissions in the product will determine the carbon price. Initially, CBAM will apply to highly emissions-intensive sectors such as iron & steel, cement, aluminium, fertilisers, electricity and hydrogen.
It is important to understand the potential impact of CBAM on the Indian industry and assess whether firms are adequately prepared. The steel sector is India’s most exposed among CBAM-covered products. As of 2024, the iron & steel sector’s share in India’s total exports was about 4.6 per cent, while the EU alone accounts for 32.7 per cent of this sector’s exports. To comply with CBAM, Indian firms must accurately measure and report their emissions, adopt advanced monitoring technologies and eventually pay the additional carbon costs imposed at the EU border.
For Indian steel to remain competitive, firms will need to invest in decarbonisation measures, such as energy-efficiency improvements and cleaner production technologies. Indian steel giants are reportedly viewing this more as an opportunity and actively building ‘green steel’ capacity and infrastructure to comply with CBAM. Significant investments are going into DRI (direct reduced iron) plants using natural gas/renewables, waste heat recovery and green hydrogen to lower carbon intensity. Aligned with global goals, these companies aim for a significant CO2 reduction intensity by 2030 through their SEED initiative, incorporating technologies like carbon capture and increased scrap usage. However, the critical question is whether smaller Indian firms have the financial and technological bandwidth to make such investments.
MSMEs unprepared
A recent journal paper by Kasturi Das and Kaushik Ranjan Bandyopadhyay finds that, while large firms may be able to comply with CBAM requirements, MSMEs remain largely unprepared – an outcome that aligns with expectations. As a result, CBAM is unlikely to drive meaningful decarbonisation outcomes in India unless the broader constraints facing the domestic industry are addressed.
The key question, therefore, is how India can leverage this moment as an opportunity. The answer lies in correcting the fundamental weaknesses in India’s industrial competitiveness. Rather than branding CBAM as an unfair practice to oust beyond-limits carbon producers, it should be viewed as a self-corrective exercise. While multiple factors like labour productivity, technology adoption and regulatory challenges contribute to uncompetitive outcomes, as indicated by a Centre for Social & Economic Progress (CSEP) study, this discussion focuses particularly on India’s trade policies and how they shape industrial efficiency and the ability to transition towards a low-carbon manufacturing ecosystem.
It is often argued that the steel sector requires trade protection because it is not sufficiently competitive. However, excessive protection can, in fact, delay competitiveness by insulating firms from competitive pressures and slowing the transition to the next stage of competitiveness, namely, decarbonisation.
India remains heavily dependent on imports of key steel inputs such as ferrous scrap, as well as several important semi-finished products of steel and stainless steel. Yet, these inputs are subject to high levels of protection through MFN tariffs. Intermediate goods in the iron & steel sector, subject to import tariffs of more than 10 per cent, accounted for imports worth about $10.3 billion in 2023. By raising the cost of imported inputs, such tariffs increase overall production costs for domestic steel producers. This, in turn, exacerbates competitiveness challenges and can make investments in decarbonisation technologies less attractive for firms.
Beyond tariffs, steel imports are also protected through non-tariff measures such as anti-dumping duties. The steel sector accounts for one of the highest incidences of anti-dumping measures in India, further adding to input costs and production inefficiencies.
It is pertinent to note that Indian steel firms rely on imported advanced technologies for improving efficiency and reducing emissions. High tariffs and other trade barriers on these technologies raise their cost and limit access, undermining firms’ ability to modernise and decarbonise. Taken together, these trade policy measures risk locking the sector into a high-cost, high-emissions trajectory, rather than enabling a transition toward globally competitive and low-carbon steel production.
Take the example of green steel, which refers to steel produced using cleaner energy sources instead of fossil fuels. Green steel production requires the availability of green energy inputs, such as renewable electricity (for example, solar or wind power) or green hydrogen. While India has announced targets for green steel and green hydrogen, it is equally important to assess the country’s readiness to achieve these goals.
Green hydrogen is produced through electrolysis, a process that uses renewable energy and water to generate hydrogen. Electrolysers are the key equipment required for this process. At present, however, India does not produce electrolysers at scale. Although the National Green Hydrogen Mission provides several incentives and support schemes to promote domestic electrolyser manufacturing, the policy framework also introduces contradictory signals.
Quality control orders (QCOs) are another regulatory instrument that mandates standards for domestic production and imports. While they are designed to ensure quality, recent evidence from a CSEP study shows that QCOs have also restricted import flows into the country. There is also a QCO proposed for electrolysers, and its imposition could raise costs and constrain access to critical technologies at an early stage of market development, potentially slowing the scale-up of green hydrogen and related industries. Such regulatory measures risk slowing down capacity creation, precisely when scale, learning and technology diffusion are essential. This highlights the need for policy coherence, while incentives aim to accelerate green hydrogen and green steel production, restrictive standards introduced too early may undermine these objectives.
The recent recognition of how detrimental such regulations can be for domestic industrial competitiveness by the government of India is a positive step in this direction. In the short term, avoiding the imposition of QCOs on intermediate goods should be a key policy principle, especially for products where India lacks a clear competitive edge and which are critical inputs for emerging paradigm-shifting sectors, such as green products and new technologies that are reshaping the global economic landscape.
The reasons for our manufacturing sector’s failure to take off, when several Asian peers were successfully advancing on this front, need to be carefully examined – particularly, the trade policy-related barriers that constrained India’s integration into global value chains. More importantly, as the global economy transitions toward green manufacturing, reflected in regulatory initiatives such as the EU’s CBAM, India must rectify its trade policy framework to ensure that it does not miss this opportunity again. To be a Viksit Bharat by 2047, Indian companies must put a major foot determinedly forward with government support to ensure that CBAM should come across as a challenge easily met.