The climate crisis show no sign of easing. Countries are falling short of their environmental pledges and the target of keeping global temperature rises below 1.5% above pre-industrial levels appears even more increasingly challenging. With progress slow, the European Union (EU) is doing its part to up the ante, moving beyond good intentions and turning climate goals into law. In doing so, the bloc is aiming at carbon-intensive industries–– and the impact on such exporters could be profound.
With global attentions distracted by the spotlit stages of recent COP events, the introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) may have gone relatively unnoticed. In essence, the CBAM is a tariff on carbon-intensive products imported into EU countries. It forms part of the European Union’s ‘Fit for 55’ climate policy initiative to help member states reduce greenhouse gas (GHG) emissions by 55% by 2030 compared to 1990 – and it plugs an important gap.
Domestic emissions reduction measures, such as the Emissions Trading Scheme (ETS), incentivize cleaner production processes within Europe, but their introduction brings a new problem: carbon leakage. If EU companies face higher production costs at home due to carbon pricing, the chances are, they will shift production to countries with looser regulations — exporting the emissions problem instead of addressing it.
CBAM removes this loophole by attaching a carbon price tag to imports entering the EU. If carbon tax is already paid in the originating country, it will be adjusted accordingly to avoid double taxation – but whatever the final calculation, there is no escaping the bill.
The initial scope of CBAM targets six key sectors that account for almost half of the EU’s industrial emissions embedded in imports: cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity. However, the scope is expected to expand to encompass additional sectors, potentially impacting a much more comprehensive range of industries.
Across sectors, the Carbon Border Adjustment Mechanism will be implemented in two phases: the transitional phase and the operational phase.
The transitional period began in October 2023 and is scheduled to run until December 2025. During this time, importers must report quarterly GHG Scope 1 and Scope 2 emissions to the ‘Net Carbon Account’ of their respective countries, without making any financial payments or adjustments. A test phase of sorts, this allows everyone involved – importers, producers, and regulators – to learn the ropes and gather data on their products. After the initial trial run, the information gathered will be used to fine-tune the system.
The operational phase is scheduled to begin in January 2026. At this stage, companies will be required to report the amount of goods they imported into the EU in the previous year and the related GHG emissions. They will then need to provide the corresponding certificates under the CBAM, priced based on the weekly average auction price of ETS allowances, expressed in euros per tons of carbon dioxide equivalent (€/tCO2) emitted. Meanwhile, the free allocation of EU ETS allowances will be phased out at the same time as the introduction of CBAM, between 2026 and 2034.
For an exporter in India, this comes as a huge warning. The advantage of cheaper manufacturing costs that Indian exporters enjoy is likely to be negated by the CBAM tariffs and EU importers will be compelled to look elsewhere for deals.
As an example, consider iron & steel products manufactured by an Indian major. If the new CBAM tariff is assumed to be €100/tCO2e, the potential carbon tax by some estimates for say a ton of Hot rolled coil amount to approx. ~ €400 per ton. This is likely to shift the scales to countries with stricter climate norms and greener technologies, thus substantially levelling and perhaps even tipping the playing field for EU manufacturers.
The European Commission estimates that annual revenues from the tax covering CBAM products both inside and outside the EU will reach €9.1 billion (almost $9.9 billion) by 2030, with 25% distributed among member states for domestic use and 75% allocated to broader climate action.
With CBAM’s transitional phase underway, proactive adaptation is critical – and for some carbon-intensive industries it is a game of catch up. An increasing number of companies across sectors are already implementing internal carbon pricing (ICP) into their operations and decision making on a voluntary basis to divert investments away from carbon-intensive activities.
Given CBAM’s immanency, industry leaders may wish to accelerate their response and consider the action points below:
Assess your exposure: Assess compliance costs by identifying products, emissions, and CBAM liabilities, while incorporating financial planning and budgeting for potential investments and managing cash flow disruptions.
Invest in cleaner technologies: Explore clean technologies, assess feasibility, evaluate cost-effectiveness, optimize emission-intensive processes, adopt best practices, and prioritize investments for maximum emission reduction impact.
Decarbonize your supply chain: Engage suppliers, set expectations, collaborate on emission reduction, provide support and incentives, assess viability of carbon credits and transform the supply chain with sustainable practices.
Engage with policymakers: it is heartening that the Indian government has already indicated its intent to raise this as an issue with EU. To further strengthen this process, industry should step up engagement with policymakers to formulate a wider response across the domestic and international ecosystem. It is important to drive wider awareness and to collaborate with industry alliances, NGOs, and research institutions to mobilize research and action for a broader decarbonization movement.
By embracing its potential and taking proactive steps, industry leaders can emerge as winners in the race to a low-carbon future. Sustainability is no longer a niche concern; it’s the new competitive edge and deciding winners and losers.
