At COP29, India reaffirmed its commitment to sustainable growth and highlighted its decarbonization strategy across key sectors. As the world’s fourth-largest CO₂ emitter, India faces substantial challenges, particularly in carbon-intensive industries like steel, which contributes roughly 12% of global emissions*. The recent introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) marks a pivotal moment, targeting a fair carbon price for imports and domestic goods. This regulation is expected to impact Indian exports in sectors like steel, cement, and aluminum, urging businesses to meet stricter carbon standards.
While CBAM introduces new challenges, it also offers Indian industries a unique opportunity to accelerate their decarbonization efforts and enhance competitiveness in the global market. The policy shift could serve as a catalyst for India’s transition to greener industry practices and boost its position in a carbon-conscious global economy.
To align with these changes, India has launched the Carbon Credit Trading Scheme (CCTS) under its National Framework for the Indian Carbon Market (ICM). The scheme aims to incentivize and reward companies actively reducing greenhouse gas (GHG) emissions. It consists of two core mechanisms: a compliance mechanism addressing emissions from the energy and industrial sectors, and an offset mechanism encouraging voluntary GHG reduction efforts.
CBAM at a Glance
CBAM, or the Carbon Border Adjustment Mechanism, is the EU’s response to the challenge of carbon leakage—where industries might move operations to regions with less stringent emissions standards or where carbon-intensive imports replace domestic products. Through CBAM, the EU aims to level the playing field by pricing the carbon emissions of imported goods in the same way as domestically produced goods under its Emissions Trading System (ETS). CBAM will cover seven high-emission sectors—steel, iron, cement, aluminum, fertilizers, hydrogen, and electricity—with its full implementation set for January 1, 2026. The mechanism, which began its transitional phase in October 2023, will require importers to track and report emissions until full compliance begins in 2026.
By imposing a carbon price on imports, CBAM encourages international producers to adopt cleaner practices and aligns with the EU’s climate objectives under the Paris Agreement. This framework could, in turn, encourage Indian companies exporting to the EU to accelerate their decarbonization initiatives, as India’s alignment with global climate goals becomes increasingly essential for economic competitiveness.
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Key Elements: Embedded Emissions and CBAM Certificates
The core of CBAM compliance revolves around two components: embedded emissions and CBAM certificates. Embedded emissions measure the total greenhouse gas released during a product’s production process, including both direct emissions from manufacturing and indirect emissions from electricity consumed. Each CBAM-regulated good imported into the EU must declare its embedded emissions, verified by accredited bodies, to ensure transparency and accountability.
CBAM certificates are the mechanism through which importers compensate for these emissions. Each certificate corresponds to one ton of CO₂ equivalent, with its price tied to the EU ETS’s market-based allowance prices. Importers will need to purchase and surrender these certificates for all covered goods entering the EU. Notably, if a carbon price has already been paid in the country of origin—such as through India’s existing carbon tax—this cost can offset the CBAM obligation, preventing double taxation on emissions.
Starting in July 2024, importers must engage more deeply with their supply chains to obtain primary emissions data, moving beyond default values provided by the EU. This ensures that reported emissions data reflects actual production practices and holds exporters to higher environmental standards. The compliance cycle requires quarterly reporting, with CBAM certificates surrendered annually by the end of May for the prior year’s imports.
Strategies and Engagement for CBAM Compliance
Successfully navigating CBAM compliance involves strategic planning and collaboration across the supply chain. For importers, compliance strategies include securing verifiable emissions data from suppliers, selecting suitable emissions calculation methods, and ensuring accurate reporting of imported goods. Importers need to verify that their imported goods align with CBAM’s regulatory codes (CN codes), which categorize goods based on their carbon intensity and dictate applicable CBAM regulations. Additionally, importers must remain aware of changes in ETS systems outside the EU and ensure that imports adhere to the latest CBAM requirements.
Suppliers play a critical role in CBAM compliance, as they provide the foundational data on embedded emissions. They must categorize their products accurately (e.g., simple vs. complex goods), calculate direct and indirect emissions, and confirm if carbon pricing has already been applied in the product’s country of origin. This transparency is facilitated by a standardized template from the European Commission, which enhances data consistency across borders.
Moreover, the EU encourages training and due diligence for suppliers, ensuring they understand the CBAM’s implications on product categorization, emissions calculation, and the overall reporting process. Engaging suppliers in sustainability practices is not only essential for CBAM compliance but also reinforces their position as responsible global players amid increasing environmental scrutiny.
In conclusion, as CBAM enters full effect in January 2026, it will significantly impact importers and exporters, particularly those in high-carbon emitting sectors such as steel, aluminum, cement, fertilizers, hydrogen, and electricity—industries crucial to Indian business and export markets. To maintain competitiveness in the EU market, Indian companies in these sectors should understand CBAM’s requirements and align with its standards. Proactive preparation includes collaborating with suppliers for accurate emissions data and adopting compliance best practices. Additionally, India’s implementation of the Carbon Credit Trading Scheme (CCTS) aims to establish a national framework for reducing greenhouse gas emissions through carbon credit trading, aligning domestic industries with global carbon reduction initiatives.
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