EU Carbon Tax and its Impact on the Indian Industry
1. The Regulatory Genesis: CBAM and the EU Emissions Trading System (ETS)
CBAM is integrated with the EU Emissions Trading System (EU-ETS), the world's premier international 'Cap-and-Trade' emissions regime, currently operating in its fourth phase (2021–2030). Under the EU-ETS, a legally binding cap is set on total greenhouse gas emissions, which reduces annually to incentivize decarbonization. Entities exceeding their caps must purchase emission allowances, while efficient producers can monetize surplus credits.
To support the EU’s "Fit for 55" package—which legally commits the bloc to reducing greenhouse gas emissions by 55% below 1990 levels by 2030—the EU is phasing out the free allowances previously granted to European heavy industry. To prevent European manufacturers from being undercut by non-EU competitors, CBAM imposes a carbon fee on imported goods equal to the price paid by domestic EU manufacturers under the ETS.
Phase 1: Transitional Reporting (1 October 2023 – 31 December 2025): Importers must report embedded greenhouse gas emissions on a quarterly basis without paying a financial carbon levy.
Phase 2: Definitive Implementation (1 January 2026 Onward): EU importers must buy and surrender CBAM certificates matching their verified embedded emissions. While CBAM initially covers only Scope 1 (direct manufacturing emissions), the European Commission will evaluate incorporating Scope 2 (indirect energy emissions) and Scope 3 (transport and supply chain emissions) prior to 2026.
2. Sectoral Scope & Target HSN Classifications
In its initial phase, CBAM targets six carbon-intensive industrial sectors:
| Sr. No. | CBAM Sector | Applicable HSN Codes (2-Digit / 4-Digit Level) | Coverage Scope & Product Description |
|---|---|---|---|
| 1. | Cement | 2523 | Portland cement, aluminous cement, slag cement, and hydraulic cements, including clinkers. |
| 2. | Iron & Steel | 72 and 73 | Primary iron and steel products (HSN 72) and fabricated articles of iron or steel (HSN 73). |
| 3. | Aluminium | 76 | Unwrought aluminium, aluminium alloys, plates, sheets, tubes, and finished structural goods. |
| 4. | Fertilisers | 31 | Mineral or chemical nitrogenous fertilizers, ammonia, nitric acid, and complex fertilizers. |
| 5. | Electricity | 2716 | Electrical energy traded across international grid transmission systems. |
| 6. | Hydrogen | 2804 | Pure gaseous or liquid hydrogen produced via reforming or electrolysis. |
The European Union represents India's third-largest trading partner, accounting for 10.8% of total Indian trade (trailing only the USA and China). Conversely, India is the EU's 10th-largest trading partner, commanding 2.1% of total EU external trade.
3. The Vulnerability Epicenter: Deep Dive into Iron, Steel & Aluminium
The core exposure for Indian industry is concentrated in Iron & Steel (HSN 72 & 73) and Aluminium (HSN 76). These sectors constitute over $8.3 Billion in annual exports to the EU, representing almost a quarter of India's global sales in these categories.
A. Iron & Steel (HSN 72 and 73)
The global iron and steel industry accounts for almost 7% of total global greenhouse gas emissions. The EU-27 is an industrial manufacturing powerhouse—particularly in the automotive sector—importing over one-third of the world’s total traded iron and steel.
| Year | EU-27 Imports: HSN 72 ($ Bn) | World Imports: HSN 72 ($ Bn) | EU-27 Imports: HSN 73 ($ Bn) | World Imports: HSN 73 ($ Bn) |
|---|---|---|---|---|
| 2018 | $162.78 (36.89%) | $441.25 (100%) | $106.41 (33.11%) | $321.38 (100%) |
| 2019 | $138.35 (35.33%) | $391.51 (100%) | $100.84 (32.41%) | $311.12 (100%) |
| 2020 | $114.56 (33.75%) | $339.39 (100%) | $93.12 (33.63%) | $276.93 (100%) |
| 2021 | $195.84 (35.29%) | $554.92 (100%) | $122.87 (35.72%) | $343.93 (100%) |
| 2022 | $216.57 (37.18%) | $582.47 (100%) | $131.78 (35.62%) | $370.00 (100%) |
Between 2015 and 2020, India’s iron and steel exports to the EU expanded at 8.4% per annum, reaching an average annual export value of approximately $6 Billion:
| Year | India's HSN 72 to EU ($ Bn) | India's HSN 73 to EU ($ Bn) | Share of EU in India's HSN 72 (%) | Share of EU in India's HSN 73 (%) |
|---|---|---|---|---|
| 2020 | $2.54 Billion | $1.34 Billion | 23.9% | 21.4% |
| 2021 | $5.96 Billion | $2.00 Billion | 28.1% | 23.9% |
| 2022 | $4.10 Billion | $2.05 Billion | 27.0% | 20.7% |
B. Aluminium Products (HSN 76)
India is the world's 8th largest exporter of aluminium, supplying 3.4% of global demand in 2022 ($9.598 Billion). Indian aluminium exports expanded at a 20% CAGR between 2018 and 2022. Concurrently, the EU imported $105 Billion in aluminium products in 2022 (representing 38.6% of global imports).
| Year | India's Aluminium Exports to EU ($ Bn) | India's Share in EU Total Imports (%) | Share of EU in India's Total Aluminium Exports (%) |
|---|---|---|---|
| 2020 | $0.47 Billion | 0.78% | 9.23% |
| 2021 | $2.27 Billion | 2.60% | 39.33% |
| 2022 | $2.24 Billion | 2.09% | 21.10% |
With the EU consistently absorbing over 20% of India’s aluminium exports (averaging over $2 Billion annually), CBAM implementation will force domestic smelters to address the carbon footprint of their captive coal power plants.
4. Sectoral Analysis: Cement, Fertilisers, Electricity & Hydrogen
While metals face acute disruption, analysis of the remaining four sectors reveals negligible immediate impact on Indian trade:
| Sector & HSN Code | Global EU Import Scale (2022) | India's Exports to EU (2022) | Share in India's Sectoral Exports (%) | Vulnerability Assessment |
|---|---|---|---|---|
| Cement (HSN 2523) | $3.09 Billion *(20.58% of world)* | $0.01 Million | 0.05% | Negligible: High transport costs limit Indian cement to domestic and neighboring South Asian markets. |
| Fertilisers (HSN 31) | $29.87 Billion *(19.78% of world)* | $1.75 Million | 0.002% | Negligible: India is a major net importer of chemical fertilizers; domestic demand absorbs production. |
| Electrical Energy (HSN 2716) | $97.17 Billion *(75.02% of world)* | $0.00 | 0.00% | Zero: Cross-border grid transmission to Europe is geographically impossible; trade is confined to regional neighbors. |
| Hydrogen (HSN 2804) | $3.95 Billion *(21.85% of world)* | $0.38 Million | 2.42% | Low: Trade volumes remain minimal; however, provides a strategic baseline for future Green Hydrogen exports. |
5. Trade Policy Implications: Environmental Protection vs. Green Protectionism
Analysis of the 2022 trade summary confirms that India’s exposure is concentrated heavily in primary and fabricated metals:
| Product Line and HSN Code | Share of India's Exports to the EU in 2022 | Strategic Risk Level |
|---|---|---|
| Iron and Steel (HSN 72) | 26.04% | Critical Exposure |
| Articles of Iron or Steel (HSN 73) | 22.72% | Critical Exposure |
| Aluminium (HSN 76) | 21.40% | Critical Exposure |
| Hydrogen (HSN 2804) | 2.42% | Low Exposure |
| Cement & Clinkers (HSN 2523) | 0.05% | Negligible Exposure |
| Fertilisers (HSN 31) | 0.002% | Negligible Exposure |
| Electrical Energy (HSN 2716) | 0.00% | Zero Exposure |
6. Strategic Recommendations: Formulating an Indian Carbon Framework
To shield domestic industry and protect national export earnings, India must adopt a proactive, market-driven policy response:
India must accelerate the rollout of its domestic Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022. Because CBAM allows deductions for carbon prices paid in the country of origin, establishing a domestic carbon price ensures that revenues remain within the Indian treasury to fund industrial decarbonization rather than flowing to the EU.
Indian primary steelmakers must accelerate the adoption of Direct Reduced Iron (DRI) utilizing Green Hydrogen under the National Green Hydrogen Mission. Concurrently, primary aluminium smelters must increase their share of renewable captive solar and wind power to lower Scope 1 and Scope 2 emission footprints.
Establish an accredited national network of independent carbon audit and verification agencies. Empowering Indian Chartered Accountants and energy auditors to certify product carbon footprints reduces compliance costs for domestic MSMEs facing European reporting mandates.
Conclusion
The EU's Carbon Border Adjustment Mechanism marks the dawn of a new era in global commerce where environmental metrics dictate trade competitiveness. While posing immediate challenges to India's $8+ Billion metal exports, CBAM presents a strategic opportunity to accelerate industrial energy transitions. By enacting a domestic carbon pricing framework and adopting sustainable manufacturing practices, Indian industry can protect its global market share and lead the transition toward low-carbon manufacturing.