From January 1, every shipment of Indian steel and aluminium to the European Union will face a carbon tax as the EU’s Carbon Border Adjustment Mechanism (CBAM) moves from reporting to actual payment phase. CBAM makes the EU the first economy to tax imports based on a product’s carbon footprint.

CBAM currently covers six sectors—steel, aluminium, cement, fertilisers, electricity, and hydrogen—but this is only the start. The EU has made it clear that the list will expand steadily, and within a few years, most industrial goods entering Europe will carry a carbon cost.

Although EU importers are legally required to bear the compliance costs associated with buying CBAM certificates, these costs will be passed back to foreign suppliers. As a result, many Indian exporters may need to cut prices by 15-22% to remain competitive in the EU market.

The impact on each firm will depend on its production process. Lower emissions during the making of a product mean lower tax. In steel, blast-furnace routes are the most carbon-intensive; gas-based direct-reduced iron is cleaner; and scrap-based electric arc furnaces are the lowest-emission option. In aluminium, emissions depend mainly on electricity use, with coal-based power sharply raising carbon costs. Since India imports most of its metal scrap, scrap prices are also likely to rise once CBAM takes effect.

Micro, small, and medium enterprises (MSMEs)........

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