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The European Union is proposing to substantially expand its starting January 2028, adding approximately 180 manufactured products to its ambit. According to the , this transition from taxing raw materials to finished industrial goods will severely impact Indian exporters, forcing them to accelerate decarbonization and emission accounting to maintain market access.
The proposed expansion of the Carbon Border Adjustment Mechanism (CBAM) threatens to act as a significant non-tariff barrier for India's export sector. Currently applicable to primary goods like iron, steel, aluminum, and cement, the inclusion of value-added engineering goods, fasteners, and machinery parts moves the levy deeper into the manufacturing value chain. For India, where the power grid is predominantly coal-reliant, the carbon footprint of manufactured exports is inherently higher compared to developed nations. This means Indian exporters will have to pay a steep carbon tax at EU borders, sharply reducing their price competitiveness. Additionally, smaller manufacturers will face high compliance burdens related to supply-chain traceability and complex carbon accounting. This unilateral trade measure raises concerns about its compatibility with World Trade Organization rules, specifically the principle of non-discrimination.
From a climate governance perspective, the EU justifies the Carbon Border Adjustment Mechanism (CBAM) as a tool to prevent carbon leakage (a scenario where industries relocate to countries with laxer environmental regulations to avoid carbon costs). However, developing nations argue that this mechanism violates the core UNFCCC principle of Common but Differentiated Responsibilities (CBDR). By imposing equivalent carbon prices on developing nations, the EU is effectively ignoring the historical emissions of the developed world and penalizing the industrialization trajectory of the Global South. The proposed inclusion of indirect emissions (such as the carbon footprint of the electricity used in production) will further penalize countries that are still navigating their energy transition away from fossil fuels.
To mitigate the fallout from such unilateral climate-linked trade barriers, India must rapidly scale up its domestic institutional frameworks. The implementation of India's domestic Carbon Credit Trading Scheme under the Energy Conservation Act must be expedited so that Indian companies can offset EU taxes by paying for carbon domestically. Furthermore, the government needs to incentivize industrial decarbonization through schemes like the Perform Achieve and Trade (PAT) scheme and accelerate the integration of renewable energy into industrial clusters. Diplomatically, India needs to leverage multilateral platforms to push for mutual recognition of carbon standards and seek technical or financial assistance from the EU to help MSMEs adapt to these stringent reporting norms.