Carbon Border Adjustment Mechanism (CBAM): How India Could Benefit from the US Probe

Carbon Border Adjustment Mechanism (CBAM) Latest News

• The United States Trade Representative (USTR) has launched an investigation into the European Union’s expansion of its Carbon Border Adjustment Mechanism (CBAM) — a move that could escalate trade tensions between the two blocs. 
• The USTR has invited public comments from American small businesses till November 9. Seeking public comments is typically the first step toward possible retaliation — signalling the US may push the EU to soften CBAM’s implementation.
• For India, this development carries an unusual silver lining: any US-driven softening of CBAM could automatically benefit Indian exporters too, thanks to a clause in the India-EU trade deal.

What Is CBAM, and Why Is the US Investigating It?

• CBAM is the EU’s carbon pricing mechanism. It requires EU importers of goods in six carbon-intensive sectors to declare the embedded emissions of imported products and pay a carbon price equivalent to what EU domestic producers already pay.
• Covered Sectors: Aluminium; Cement; Electricity; Fertiliser; Hydrogen; Iron and steel.

The US’s Specific Complaint

• The EU calculates default emission values using country- and sector-level production/energy data.
• However, the EU adds a punitive mark-up to these default values — a measure meant to push companies toward submitting verified company-level data instead.
• Any company-level data must be verified by an EU-accredited third-party verifier — adding cost and compliance burden, which the US says disproportionately hurts American small businesses.

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How India Stands to Benefit

• India had tough negotiations with the EU over CBAM while finalising the India-EU trade deal, since the regulation is expected to hit a wide range of Indian metal exports. 
• Crucially, however, Indian negotiators secured a ‘forward-Most Favoured Nation’ (MFN) CBAM clause.
• What this clause does – It ensures that any concession the EU grants to another trading partner (here, the US) under a separate agreement automatically extends to India too.
  • In the EU-US trade deal joint statement (August last year), the EU had already committed: “…the European Commission… commits to work to provide additional flexibilities in the CBAM implementation” for US businesses.
  • If the ongoing USTR probe results in further CBAM flexibilities for the US, India would also receive those same concessions — without needing to renegotiate separately.

The Stakes for Indian Industry

• According to the Global Trade Research Initiative (GTRI), CBAM could translate into a 20–35% tax on select Indian exports — particularly iron, steel, and aluminium — into the EU. 
• This is effectively being called a steel bill for India.
• Added complication — Steel Scrap
  • The EU is the world’s largest producer of steel scrap, and its move to curb steel-scrap exports, combined with CBAM, acts as a non-tariff barrier against Indian industry.
  • Despite Indian objections, the EU kept CBAM outside the scope of the India-EU trade deal.
• Why Production Method Matters
  • Blast furnace–basic oxygen furnace (BF-BOF) route: highest emissions.
  • Gas-based direct reduced iron (DRI): lower emissions.
  • Scrap-based electric arc furnace (EAF) route: lowest emissions.
• India’s Vulnerability: Indian manufacturers largely rely on the blast furnace route, making them currently underprepared for CBAM’s carbon-price burden.

India’s Response: The Green Steel Push

• The government plans to scale up scrap-based steel production via electric arc furnace technology, under its Green Steel Initiative.
• However, a May 2025 report by the Indian Council for Research on International Economic Relations (ICRIER) flagged a major constraint:
  • Scrap currently makes up only 20% of India’s steelmaking feedstock.
  • This is limited by domestic scrap availability of just ~25 Million Metric Tonnes (MMt) annually.
  • The report notes: hard-to-abate sectors like steel face unprecedented pressure to decarbonise amid tools like CBAM, with scrap steel central to this transition — yet India’s constrained scrap access remains a critical bottleneck.

Conclusion

• The US probe into CBAM is, at its core, a dispute over how the EU prices carbon at its borders — but it has inadvertently opened a door for India. 
• Thanks to a carefully negotiated MFN clause, any flexibility the EU grants the US could flow to Indian exporters too, without further bargaining. 
• Yet this remains a short-term cushion, not a solution: India’s long-term competitiveness in a carbon-taxed world will depend on how fast it can scale scrap-based, low-emission steel production — a transition still constrained by domestic scrap scarcity.

Source: IE