CARBON BORDER ADJUSTMENT MECHANISM (CBAM)

Implementation Guide for Indian Exporters and EU Importers

This guide covers the EU Carbon Border Adjustment Mechanism (CBAM) — Regulation (EU) 2023/956 — a landmark carbon pricing measure that requires EU importers to account for the carbon embedded in certain imported goods. CBAM directly affects Indian exporters of steel, aluminium, cement, fertilisers, hydrogen, and electricity. Understanding and preparing for CBAM is now a commercial priority for India-EU trade in these sectors.

1. What Is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is an EU measure that puts a carbon price on imports of specific goods from outside the EU, equivalent to the price that would have been paid if the goods had been produced under the EU's carbon pricing rules (the EU Emissions Trading System — EU ETS). It is designed to prevent "carbon leakage" — the risk that EU producers subject to carbon costs are undercut by imports from countries without equivalent carbon pricing.

CBAM operates in two phases:

Transitional Phase (1 October 2023 – 31 December 2025): No financial obligation. EU importers must register as CBAM declarants and file quarterly reports on the volume and embedded carbon content of covered imports. This is the data collection and system-building phase.

Definitive Phase (from 1 January 2026): EU importers must purchase CBAM certificates corresponding to the embedded carbon in their imports, at a price linked to the EU ETS carbon price. The number of certificates required is reduced by any equivalent carbon price paid in the country of production.

2. Covered Products — CBAM Sectors

CBAM applies to goods classified under specific CN codes in the following sectors:

CBAM also applies to certain downstream products — for example, some steel structures, aluminium articles, and fertiliser mixtures that incorporate CBAM-covered materials. The full list of covered CN codes is in Annex I of Regulation (EU) 2023/956. Always verify the specific CN codes on the EU TARIC system.

India is a significant exporter of steel and aluminium products to the EU — CBAM is therefore directly commercially relevant for a substantial portion of India's EU exports in these sectors.

3. How CBAM Works — The Carbon Price Mechanism

3.1 Embedded Emissions

CBAM applies to the "embedded emissions" in imported goods — the greenhouse gas emissions generated during the production of the goods in the country of origin. Embedded emissions include:

Direct emissions: Emissions from the production process itself (e.g. CO2 from blast furnace steel production, N2O from fertiliser production).

Indirect emissions (for certain products): Emissions from the electricity used in the production process. For the definitive phase, indirect emissions are included for aluminium and some other products.

3.2 CBAM Certificate Price

CBAM certificate prices are linked to the weekly average auction price of EU ETS allowances (EUAs). The EU ETS price has ranged from approximately EUR 25 to EUR 100 per tonne of CO2 equivalent in recent years, depending on energy prices and policy developments. As of the transitional phase, the financial obligation begins from 1 January 2026 — at which point the actual CBAM cost per tonne of steel, aluminium, or cement imported will be determined by: the embedded emissions per tonne of the specific product, multiplied by the prevailing EU ETS price per tonne of CO2.

Illustrative example (indicative only — actual figures depend on EU ETS price and verified emissions):

A tonne of hot-rolled steel from India with embedded emissions of 2.0 tCO2e, at an EU ETS price of EUR 60/tCO2: CBAM cost = 2.0 × EUR 60 = EUR 120 per tonne. If the ETS price rises to EUR 80, CBAM cost = EUR 160 per tonne. This is a significant additional cost on top of the standard import duty.

3.3 Carbon Price Credit for India

If India imposes an equivalent carbon price on the production of CBAM-covered goods (through a carbon tax, cap-and-trade scheme, or other mechanism), the EU will deduct the equivalent carbon price already paid from the CBAM certificate obligation. Currently, India does not have a national carbon pricing mechanism equivalent to the EU ETS — meaning Indian exporters of CBAM-covered goods will face the full CBAM cost with no deduction.

India has established the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation Act 2001 (as amended in 2022) and has launched the Indian Carbon Market (ICM). If the ICM matures to a level recognised by the EU as equivalent, Indian exporters may be able to claim a partial or full CBAM credit. This is a key bilateral negotiating priority in the India-EU trade and climate dialogue.

4. Obligations During the Transitional Phase (2023–2025)

4.1 EU Importer Obligations

Register as a CBAM declarant on the EU CBAM transitional registry (managed by national customs authorities).

Identify all imports of CBAM-covered goods in each quarter.

File a CBAM transitional report for each quarter within one month of the quarter end. The report must include: quantity of each CBAM-covered good imported; country of origin; CN code; embedded emissions per unit; production method used; and any carbon price paid in the country of origin.

Obtain embedded emissions data from the Indian exporter. During the transitional phase, default values published by the European Commission may be used where actual emissions data cannot be obtained — but default values are set conservatively high to incentivise actual data collection.

4.2 Indian Exporter Obligations

Indian exporters are not directly subject to CBAM obligations — CBAM is a charge on the EU importer, not the exporter. However, Indian exporters have strong commercial incentives to provide accurate embedded carbon data to their EU buyers:

EU importers using default emissions values will pay more CBAM certificates than those using verified actual emissions — making Indian exporters using actual data more competitive than those who cannot provide it.

EU buyers are increasingly asking Indian suppliers to provide emissions data as part of supplier qualification and ESG due diligence.

From 2026, the ability to demonstrate lower embedded emissions directly reduces the CBAM cost for the EU importer — directly improving commercial competitiveness.

5. Embedded Emissions Data Collection for Indian Exporters

5.1 What Data Is Required?

The EU CBAM Regulation and implementing measures define how embedded emissions must be calculated. The data required includes:

Specific embedded emissions: Tonnes of CO2 equivalent per tonne of product (tCO2e/t), calculated using the methodology set out in Commission Implementing Regulation (EU) 2023/1773.

Production route: The specific production process used (e.g. blast furnace — basic oxygen furnace for steel vs. electric arc furnace).

Energy inputs: Type and quantity of fuel and electricity used per tonne of production.

Emission factors: The carbon intensity of the energy inputs (kg CO2 per GJ of fuel, kg CO2 per kWh of electricity from the grid).

Carbon price paid: Any carbon tax or ETS cost paid in India on the production covered — currently zero for most Indian producers.

5.2 Monitoring and Reporting

Indian exporters wishing to provide actual embedded emissions data (rather than default values) must establish a monitoring and reporting system:

Identify a qualified person or team responsible for CBAM data collection — this may require engagement of an environmental consultant.

Install metering for energy inputs at the production facility (gas, coal, electricity by quantity and type).

Calculate CO2 emissions from each fuel type using internationally recognised emission factors (e.g. IPCC 2006 Guidelines).

Calculate total embedded emissions per tonne of product for each production batch.

Have the emissions data verified by an accredited third-party verifier — from 2026, the EU will require verified emissions data. During the transitional phase, unverified data is accepted.

Provide the data to EU buyers in the format required by Commission Implementing Regulation (EU) 2023/1773 for inclusion in the CBAM transitional report.

6. Strategic Response for Indian Exporters — CBAM Readiness

Indian exporters in CBAM-covered sectors should treat CBAM readiness as a strategic commercial priority, not just a compliance exercise:

Invest in low-carbon production: Switching from coal-intensive production methods (blast furnace steel) to lower-carbon alternatives (electric arc furnace using renewable electricity) directly reduces embedded emissions and therefore reduces the CBAM cost for EU buyers — improving commercial competitiveness.

Renewable electricity procurement: For aluminium smelting and other electricity-intensive processes, procurement of renewable electricity (or renewable energy certificates) significantly reduces the indirect emissions component of CBAM.

Accurate emissions monitoring now: Establish monitoring systems during the transitional phase so that verified actual data is available from 2026. Exporters who cannot provide actual data will be at a commercial disadvantage.

Engage with EU buyers early: Proactively communicate CBAM preparedness to EU buyers as part of supplier qualification — position low-carbon production as a commercial differentiator.

Monitor the Indian Carbon Market: Track the development of India's CCTS and ICM — if the ICM achieves EU recognition, Indian exporters may benefit from a carbon price credit that reduces the net CBAM cost.

7. CBAM Readiness Checklist for Indian Exporters

Doc 56 — CBAM Implementation Guide — Neutral Template