India’s CBAM relief spurs steel shift, but uncertainty looms

To alleviate the financial strain of complying with the EU's CBAM, the Indian government has introduced a reimbursement scheme offering up to Rs 10 lakh to small steel exporters for certification costs. Complementing this, the Commerce Ministry is rolling out outreach programs specifically designed to guide exporters, particularly SMEs, through the complexities of CBAM verification and to help them capitalize on the benefits embedded in the new trade agreement with the EU.

India’s forthcoming free trade agreement with the EU incorporates a dedicated annexure addressing CBAM-related challenges by recognizing carbon prices already paid domestically, thereby preventing double taxation on Indian steel exports. As Additional Secretary Darpan Jain explains, this mechanism not only safeguards exporters from redundant carbon levies but also includes a strategic flexibility clause allowing India to request comparable accommodations should the EU extend further CBAM adjustments to other trading partners in the future.

Recent analyses reveal that the anticipated financial impact of the EU's CBAM on India's steel sector may be substantially less severe than initially projected, largely due to the sector's heterogeneous carbon intensity and strategic shifts toward exporting low-carbon steel. Sandbag’s modelling contrasts a 'business-as-usual' scenario with €762 million in fees by 2034 against a more realistic 'expected' scenario where gross fees drop to €407 million as exporters prioritize existing low-emission output for the European market. This nuanced understanding underscores how market dynamics and production profiles critically shape the CBAM cost burden.

Further refining these projections, Sandbag’s report 'The EU CBAM’s real impact on India' highlights that rising EU steel prices could dramatically reduce CBAM costs for Indian exporters, potentially shrinking the financial burden from €762 million to as little as €79 million. This price effect, coupled with the deployment of new low-emission capacity, could even transform the CBAM from a cost center into a profit opportunity, with an 'ambitious' long-term scenario forecasting a net gain of €44 million. Such findings suggest that Indian steel producers who invest in cleaner technologies may not only mitigate CBAM fees but also capitalize on favorable market conditions.

The competitive positioning of specific Indian steel plants further illustrates this evolving landscape; for example, ArcelorMittal’s Hazira facility, noted for its low emission intensity, exemplifies how existing infrastructure can be leveraged to thrive under CBAM regulations. According to the report, plants with sufficiently low carbon footprints are poised to maintain or even enhance their market share in the EU by aligning with the carbon pricing framework, turning regulatory compliance into a strategic advantage rather than a liability.

Indian steel exporters confront significant operational hurdles in complying with the EU’s CBAM, particularly in establishing robust emissions monitoring, reporting, and verification (MRV) systems. As the EU mandates accurate emissions data from 2026, exporters face a steep learning curve to communicate verifiable information to EU importers, compounded by limited third-party verification capacity and high upfront IT infrastructure costs, especially burdening smaller upstream enterprises. This challenge is underscored by the EU’s application of default emission values with a 10% markup in 2026, escalating to 30% by 2028, which imposes costly penalties on those unable to provide verified data, incentivizing urgent investments in emissions infrastructure to avoid default surcharges and maintain market access.

The EU’s phased CBAM rollout and ongoing regulatory adjustments create a dynamic compliance landscape that both alleviates and complicates cost burdens for Indian exporters. The proposed delay of certificate purchase obligations from 2026 to 2027 offers a critical grace period for exporters to adapt, while anticipated expansions of CBAM’s scope to downstream products and incremental increases in obligation rates—from 2.5% in 2026 to a full 100% by 2034—signal rising long-term costs. Moreover, reforms to the EU Emissions Trading System (ETS), including the reintroduction of phased-out allowances as a buffer and stringent anti-circumvention measures targeting “resource shuffling,” inject further uncertainty and potential cost risks, requiring exporters to continuously monitor evolving rules to strategically manage compliance expenses.

Market dynamics under CBAM are driving Indian steel exporters toward innovation and sustainability as a competitive imperative. While compliance imposes upfront costs, aligning with international low-carbon standards positions exporters advantageously in the EU market by enabling them to replace costly default emission penalties with verified lower emissions data, thus capturing meaningful cost advantages. This shift not only mitigates the financial impact of CBAM but also fosters long-term efficiency gains, as exporters who proactively invest in emissions reduction technologies and transparent reporting stand to benefit from enhanced market access and reputational capital in a decarbonizing global economy.

Despite these strategic incentives, Indian exporters remain wary that intensified EU trade policies, such as the new tariff-rate quota regime for steel imports, may dampen their willingness to invest adequately in emissions MRV systems due to reduced market access prospects. This reluctance risks perpetuating reliance on default emission values, which carry steep markups and compound cost exposure. Hence, the interplay between regulatory complexity, market access constraints, and compliance investments creates a precarious environment where exporters must balance short-term financial pressures against long-term sustainability commitments to thrive under CBAM.