Impact of CBAM on India, A Velvet Glove Around an Iron Fist

Introduction

In recent years, climate change and global trade have become deeply intertwined. The withdrawal of the United States from the Paris Climate Accord (2017–2021), the rising urgency of decarbonization, and the growing trend of environmental trade measures have created new challenges for developing economies. Among these measures, the European Union’s Carbon Border Adjustment Mechanism (CBAM) has emerged as one of the most controversial.

CBAM seeks to impose a uniform carbon cost on imports to the EU, irrespective of the exporting country’s level of development, historical emissions, or economic capacity. Although framed as a climate-friendly policy to reduce carbon leakage, critics argue that CBAM is a form of “green protectionism”—a velvet glove around an iron fist. It risks distorting global trade, undermining the principle of Common but Differentiated Responsibilities (CBDR), and disproportionately hurting developing countries like India.

This essay examines CBAM in depth—its design, rationale, global criticism, implications for India, and possible policy responses.

What is CBAM?

The Carbon Border Adjustment Mechanism is a policy designed by the EU to impose carbon costs on certain imported goods. The idea is that if the EU industries are required to pay for their carbon emissions under the EU Emissions Trading System (ETS), then foreign exporters should also face similar costs. Otherwise, EU firms would face “unfair” competition from producers in countries with weaker climate regulations.

Initially, CBAM covers five carbon-intensive sectors:

1. Iron and steel

2. Aluminium

3. Cement

4. Fertilisers

5. Electricity

According to estimates, CBAM could impact around 80–100 tonnes of CO₂ annually in imports into the EU, much of which originates from developing countries. For India, whose exports to the EU include significant amounts of steel, aluminium, and cement, CBAM represents a serious trade challenge.

CBAM and the Principle of CBDR

One of the cornerstones of international climate governance is the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC), enshrined in the UNFCCC and reaffirmed in the Paris Agreement.

CBDR recognizes that:

• Developed countries are historically responsible for most greenhouse gas emissions.

• Developing countries still require carbon space for industrialization and poverty alleviation.

• Therefore, climate actions and costs must be differentiated, not uniform.

By imposing a flat carbon price on imports, CBAM ignores these differences. It disregards historical responsibility, current economic capability, and developmental priorities. This undermines the moral and political foundation of global climate cooperation.

The “Velvet Glove” Argument

The EU presents CBAM as a fair and necessary climate policy aimed at reducing “carbon leakage”—the risk of industries relocating to regions with laxer climate standards. However, in practice, CBAM resembles a non-tariff barrier to trade:

• It violates the spirit of the World Trade Organization (WTO) by discriminating against imports.

• It functions like a Most-Favoured Nation (MFN) exception, giving EU producers unfair protection.

• It effectively exports the EU’s climate costs to other countries, instead of taking responsibility for its own emissions.

Thus, while CBAM appears as a velvet glove promoting climate responsibility, underneath lies the iron fist of green protectionism.

Impact on India’s Trade

India is among the countries most exposed to CBAM. The EU is India’s third-largest trading partner, accounting for around 11% of India’s global trade. Indian exports of iron, steel, aluminium, and cement to the EU will face steep costs under CBAM.

Key Sectors at Risk

1. Iron and Steel – India is a major exporter of iron and steel products, accounting for over 18% of its EU-bound exports in these categories.

2. Aluminium – Aluminium exports, a high energy-intensive sector, face significant cost escalation.

3. Cement – Though smaller in volume, cement exports will be heavily penalized due to the high carbon footprint of the sector.

4. Fertilizers – India is both an importer and exporter of fertilizers; CBAM will increase production costs and trade uncertainties.

A study by the European Commission estimates that India’s CBAM liability could reach over €1.8 billion annually by 2030, unless the country aggressively decarbonizes.

Financial Implications

CBAM not only imposes trade barriers but also raises concerns about climate finance equity:

• The revenue generated from CBAM will be collected by the EU and used for its own climate goals, rather than supporting developing countries.

• Estimates suggest CBAM revenues could exceed €10 billion annually by 2040.

• Developing countries like India, instead of receiving climate finance as promised under UNFCCC, will paradoxically end up funding EU’s decarbonization.

This undermines the principle of climate justice and further deepens mistrust in global climate negotiations.

WTO Concerns

CBAM’s compatibility with WTO rules is questionable:

• Non-Discrimination Principle – WTO prohibits differential treatment between domestic and imported products. CBAM, by applying carbon costs only to imports, violates this.

• Environmental Exceptions (GATT Article XX) – While WTO allows trade restrictions for environmental reasons, such measures must not constitute disguised protectionism. CBAM, critics argue, fails this test.

• MFN Violation – By discriminating against countries with different climate standards, CBAM undermines the MFN rule.

If challenged at the WTO, CBAM could trigger disputes and retaliatory tariffs, escalating global trade tensions.

India’s Diplomatic Position

India has consistently opposed CBAM at international forums, calling it:

• Unilateral – Imposed without consultation with developing countries.

• Discriminatory – Ignores CBDR principles.

• Trade-Distorting – Violates WTO norms.

India has raised the issue at COP summits and with the G20, emphasizing the need for cooperative, not coercive, climate measures.

India’s Domestic Challenges

To reduce CBAM exposure, India must accelerate its domestic decarbonization efforts. However, this is not without hurdles:

1. Coal Dependency – Over 70% of India’s electricity still comes from coal.

2. High Energy Intensity of Industry – Steel and aluminium production are carbon-heavy.

3. Financial Constraints – Transitioning to green technologies requires massive investment.

4. Technology Gap – Limited access to advanced low-carbon technologies.

Without significant policy shifts, Indian exporters will struggle to remain competitive in the EU market.

Policy Options for India

1. Engage Diplomatically

• Strengthen alliances with other developing countries like Brazil, South Africa, and Indonesia to oppose CBAM.

• Push for reform in climate finance at COP negotiations.

2. Explore WTO Dispute Settlement

• Work with like-minded nations to challenge CBAM as a violation of WTO rules.

3. Accelerate Green Industrialization

• Invest in renewable energy and green hydrogen.

• Promote Carbon Capture and Storage (CCS) in steel and cement sectors.

• Incentivize energy efficiency.

4. Develop a Domestic Carbon Market

• India has launched the Carbon Credit Trading Scheme (CCTS) in 2023. Aligning this with international standards could reduce EU-imposed costs.

5. Negotiate Sectoral Exemptions

• Seek exemptions or transition periods for specific industries.

• Argue for recognition of India’s voluntary climate commitments under the Paris Agreement.

Global Reactions to CBAM

• United States: Initially opposed, but considering its own version of carbon border adjustments.

• China: Strongly criticizes CBAM as protectionist and discriminatory.

• Africa: Many African exporters fear losing EU market access.

• Developed Countries: Japan and Canada are exploring similar measures, signaling a trend of carbon tariffs.

Thus, CBAM could trigger a fragmented global trade regime, with competing carbon tariff systems, further marginalizing developing economies.

The Road Ahead for India

India faces a dual challenge:

1. Protect its export competitiveness.

2. Accelerate its low-carbon transition.

While resisting CBAM diplomatically, India must also turn the challenge into an opportunity. By adopting green hydrogen, electrification of industries, renewable expansion, and green finance mechanisms, India can gradually align with global low-carbon trade.

A balanced approach—resisting unfair unilateral measures while embracing sustainable growth—will be key to safeguarding India’s economic and climate future.

Conclusion

The EU’s CBAM represents a new phase in the intersection of climate policy and international trade. Though justified under the guise of environmental responsibility, it functions as a disguised trade barrier—a velvet glove covering an iron fist.

For India, CBAM threatens export revenues, increases financial burdens, and undermines climate justice. Yet, it also signals the inevitability of a carbon-constrained global economy. The real choice for India lies in how quickly and strategically it can adapt.

Diplomatic resistance, coupled with domestic decarbonization, will be essential. India must lead developing nations in demanding fairness in global climate governance, while simultaneously preparing its industries for a low-carbon future.

Only then can India turn the challenge of CBAM into an opportunity for sustainable growth and global leadership in climate diplomacy.

Five Exam-Oriented Q&A

Q1. What is the Carbon Border Adjustment Mechanism (CBAM) and why is it controversial?
A: CBAM is the EU’s policy to impose carbon costs on imports from carbon-intensive sectors (steel, aluminium, cement, fertilizers, electricity). It is controversial because it undermines the principle of CBDR, discriminates against developing countries, and functions as green protectionism.

Q2. How does CBAM affect India’s trade and economy?
A: India’s exports of steel, aluminium, and cement to the EU will face steep costs, potentially amounting to €1.8 billion annually by 2030. This threatens India’s export competitiveness, increases production costs, and imposes indirect climate finance burdens on India.

Q3. What are the WTO implications of CBAM?
A: CBAM likely violates WTO principles of non-discrimination and Most-Favoured Nation treatment. While the EU may invoke GATT Article XX environmental exceptions, critics argue CBAM is disguised protectionism and could be challenged at the WTO.

Q4. What policy responses can India adopt against CBAM?
A: India should engage diplomatically, explore WTO disputes, accelerate green industrialization, develop a domestic carbon market (CCTS), and negotiate for sectoral exemptions.

Q5. How does CBAM impact global climate finance equity?
A: Instead of channeling resources to developing countries as per UNFCCC commitments, CBAM revenues will be retained by the EU to fund its own climate goals. This reverses the principle of climate justice, making developing nations fund developed nations’ decarbonization.