India's climate-trade crossroads

India's export-heavy industries are facing a new kind of trade barrier — one centered not on tariffs or quotas but on carbon emissions. The European Union's Carbon Border Adjustment Mechanism (CBAM), designed to tax imports based on embedded carbon emissions, will fully apply by 2026, with the current transitional phase lasting until 2025.

- AMARENDU NANDY

Currently, EU importers are required only to report the carbon emissions embedded in goods such as iron and steel, cement, aluminium, electricity, fertilisers, and hydrogen from non-EU countries. However, by 2026, these imports will face a carbon levy, with companies needing to purchase CBAM certificates, effectively linking the carbon price to the EU's Emissions Trading System (ETS). In essence, the EU's stance is clear: "If our industries pay a carbon price, then imports from countries without similar costs should too." This is framed as an effort to prevent "carbon leakage" — the concern that, without such a tax, industries might shift production to countries with looser environmental standards, undermining global climate goals. This seemingly technical regulation presents more than just a compliance hurdle for India.