Early Signals of EU Carbon Border Adjustment Mechanism: Reshaping India's Steel Export Landscape

Early Signals from the EU Carbon Border Adjustment Mechanism: Reshaping India's Steel Export Landscape

Since the EU Carbon Border Adjustment Mechanism (CBAM) entered its transitional reporting phase in October 2023, early pressure signals have been felt in global carbon-intensive commodity trade. A study published in *Nature Climate Change* has, for the first time, used firm-level data to reveal how CBAM affects the behavior of Indian steel exporters: high-emission companies significantly reduced their export volumes and revenue to the EU, while low-emission firms largely maintained their existing export levels. This finding indicates that CBAM is reshaping supply chains in line with its policy design, creating market advantages for cleaner producers while sending clear price signals to high-emission suppliers.

Industry Background: Carbon Leakage Risks and CBAM Design

Climate policies vary significantly across the globe. Some countries and regions impose strict greenhouse gas emission limits, while others have little to no constraints. For energy-intensive and trade-exposed industries, this asymmetry may lead companies to relocate production to regions with laxer policies or source raw materials from such areas—a phenomenon known as "carbon leakage." Although empirical evidence on carbon leakage is mixed, the rising carbon prices and growing policy ambition have intensified calls to address leakage risks.

Border carbon adjustment mechanisms address this challenge by leveling the carbon-related costs between domestic and foreign producers. CBAM imposes a charge on imported goods based on their embedded carbon emissions, deducting any explicit carbon price already paid in the exporting country. Its goal is to ensure that consumers within the implementing region face the same carbon price regardless of the origin of the goods, thereby incentivizing cleaner production. The EU launched CBAM in October 2023, initially covering carbon-intensive sectors such as cement, steel, aluminum, fertilizers, hydrogen, electricity, and some intermediate products—industries that account for roughly half of the emissions covered by the EU Emissions Trading System (EU ETS).

During the transitional period (through the end of 2025), importers are required to report the embedded emissions of covered goods. In the first reporting phase (ending in 2024), companies could choose from three reporting methods: the EU method, an equivalent method, or default values published by the European Commission. Starting January 1, 2025, actual values are expected to be reported, with simplified procedures allowing non-EU operators to upload and share their emissions data. Once the formal phase begins in 2026, importers must purchase CBAM certificates for embedded carbon emissions, aligning carbon costs with those of EU producers under the EU ETS.

Current Developments: A Watershed for Indian Steel Companies

The steel sector is particularly noteworthy: it is both highly emission-intensive and deeply integrated into global value chains, with evidence suggesting that steel trade is sensitive to carbon pricing asymmetries.The steel industry is particularly noteworthy: it is both highly emission-intensive and deeply integrated into the global value chain, with evidence showing that steel trade is sensitive to carbon pricing asymmetries. India is one of the EU's leading steel suppliers, with a direct emission intensity about twice the EU average (for equivalent product mixes). Among the three most important product categories for India's exports to the EU (HS codes 7210, 7207, and 7208), India's direct emission intensity is 2.6 to 2.7 times that of the EU-27. These characteristics mean that after the full implementation of CBAM, Indian exporters will face significant compliance costs.

However, most existing CBAM studies rely on prior numerical models at the national or industry level, while the policy applies to individual goods, and the emission performance and trade strategies of different producers vary greatly. Therefore, firm-level analysis is crucial for understanding actual exposure and early behavioral adjustments.

This study combines plant-level emission estimates from Climate TRACE with cargo-level trade records from Panjiva. By matching parent company names, the study identifies firm-level data for 20 out of 28 Indian steel enterprises, covering export changes from 2020 to 2024.

The analysis divides firms into high-emission firms (HEF) and low-emission firms (LEF) based on emission intensity. The results show that during the CBAM reporting phase (October 2023 to end of 2024), the export volume of high-emission firms to the EU fell by about 25% and export revenue by about 30%; while the export volume and revenue of low-emission firms remained largely stable, even showing slight growth. This divergence is also reflected in pricing: the export unit prices of high-emission firms did not change significantly, indicating that the decline in sales was mainly driven by volume adjustments rather than price competition. Low-emission firms maintained their market share.

Impact on Energy Systems and Climate Policy

Initial signals from CBAM indicate that the carbon border adjustment mechanism is reshaping the global steel supply chain through market price mechanisms. From an energy system perspective, steel production accounts for about 7% of global industrial carbon emissions, and its decarbonization path heavily relies on clean energy (such as green hydrogen, electric arc furnace steelmaking) and carbon capture technologies. By increasing the import cost of high-emission products, CBAM creates a market premium for low-carbon steel (such as that based on hydrogen direct reduced iron or electric arc furnace short processes).

For the EU, CBAM helps prevent carbon leakage, protect the integrity of the EU ETS, and incentivize third-country producers to invest in emission reduction technologies. For India, CBAM pressure may accelerate the green transformation of its domestic steel industry. India is the world's second-largest steel producer after China, with high emission intensity and heavy reliance on coal-based energy in its industry. CBAM forces Indian steel companies to shift to low-carbon technologies, but may also increase export costs and affect trade competitiveness.

From the perspective of global climate policy coordination, CBAM may give rise to new emission accounting standards. The EU requires importers to report actual emission values, which will promote transparency in the global supply chain. In the future, similar mechanisms may be adopted by other countries, creating a 'climate club' effect.### Challenges Ahead

Despite the positive early signals of the CBAM, its full implementation still faces multiple challenges.

• Data and Calculation Complexity: The reporting phase allows the use of default values, but actual values will be required from 2025 onward. Emission data for non-EU companies is difficult to obtain, especially for small and medium-sized enterprises. Although the European Commission has simplified data sharing, a globally consistent accounting method has not yet been established.
• Risk of Trade Disputes: Developing countries view the CBAM as a trade barrier and may challenge it through the WTO dispute settlement mechanism. Countries such as India have already expressed concerns, arguing that the mechanism does not adequately reflect the principle of “common but differentiated responsibilities.”
• Carbon Price Differences and Fairness: The CBAM deducts the carbon price already paid by the exporting country, but many developing countries have very low or zero carbon prices. If the EU carbon price continues to rise (currently around €80 per tonne), compliance costs will further increase.
• Technology Transition Bottlenecks: Deep decarbonization in the steel industry depends on green hydrogen and carbon capture, technologies that are costly and still require time to scale. In the short term, Indian steel companies may prefer to reduce exports rather than invest in transformation.
• Lag in Industrial Chain Adjustment: The CBAM currently covers only initial products (e.g., pig iron, crude steel), while downstream processed products are not yet included. This could lead to a “product structure avoidance” phenomenon.

Future Outlook

Since the full implementation of the CBAM in 2026, importers must purchase certificates, and the carbon cost will shift from zero in the current reporting phase to actual payments. Combined with the rising trend of EU ETS carbon prices, the impact of the CBAM on trade will significantly intensify.

• Short Term (2026-2030): India’s high-emission steel exports to the EU will continue to shrink, with some market share replaced by low-emission capacity from the Middle East and North America. Domestically, India may accelerate the phase-out of outdated capacity and promote a higher share of the electric arc furnace short process.
• Medium Term (2030-2040): If green hydrogen technology achieves economic breakthroughs, low-carbon steel production capacity based on hydrogen-based direct reduced iron will expand in India and globally. The CBAM may become a catalyst for a global carbon pricing system, prompting more countries to introduce similar mechanisms.
• Long Term (After 2040): The steel industry may achieve near-zero emissions. As a policy lever, the effectiveness of the CBAM will depend on the degree of global carbon price convergence, the pace of technological progress, and the response measures of trading partners.

Overall, the early signals of the CBAM show that a carbon border adjustment mechanism can effectively drive the low-carbon shift of trade flows. However, policy success requires supporting measures: technical support for developing countries, financial assistance, and strict supervision to prevent product category circumvention. The transformation of steel trade is only the beginning; more carbon-intensive goods (such as aluminum, fertilizers, and hydrogen) will face similar adjustments in the future. Global energy transition and climate policies are being accelerated through such market mechanisms.