India's Exposure to the EU's Carbon Border Adjustment Mechanism (CBAM) and its Implications for the Steel Industry

The European Union's Carbon Border Adjustment Mechanism (CBAM), set to be fully implemented by January 2026, represents a significant challenge for India's steel industry. India ranks among the highest globally on the CBAM Exposure Index due to its substantial steel exports to the EU and the high greenhouse gas (GHG) emissions intensity of its steel production. The financial impact on Indian steel mills is expected to be severe, compounded by the inadequacy of domestic carbon pricing mechanisms to counteract the CBAM’s effects. This report provides a comprehensive analysis of the situation, outlining the likely consequences for India's steel industry, potential mitigation strategies, and the broader economic implications.

1. Introduction

The EU's CBAM is a cornerstone of its climate strategy, aiming to prevent carbon leakage and ensure that the carbon cost is factored into the price of imported goods. The mechanism will impose a carbon tariff on imports based on the carbon emissions associated with their production. As one of the world's largest steel producers and a significant exporter to the EU, India faces considerable challenges under this new regulatory framework.

2. India's Exposure to CBAM

2.1. High CBAM Exposure Index

According to the World Bank, India is one of the most exposed countries to the CBAM, ranking just behind Zimbabwe, Ukraine, Georgia, and Mozambique. The high volume of steel exports to the EU, combined with the high carbon intensity of Indian steel production, contributes to this elevated exposure. The CBAM Exposure Index, designed by the World Bank, quantifies this risk by measuring the relative exposure of different countries to the CBAM.

2.2. Impact on Indian Steel Exports

In 2023, India exported over 3 million tonnes (mnt) of steel to the EU, making it the second-largest exporter to the region after South Korea. Given the high emissions intensity of Indian steelmaking (approximately 2.55 tCO2/tcs), Indian exporters are at a competitive disadvantage compared to other major steel-exporting countries such as South Korea (1.7 tCO2/tcs) and China (2.1 tCO2/tcs).

The EU market is highly lucrative for Indian steel mills due to high realization rates. The full implementation of CBAM, which will phase out free allowances under the EU Emissions Trading System (ETS), is expected to significantly reduce the competitiveness of Indian steel in the EU market.

2.3. Financial Implications

The Centre for Science and Environment (CSE) estimates that the CBAM could impose a tax burden equivalent to 0.05% of India's GDP, assuming a carbon price of €100 ($106) per tonne of CO2 equivalent. This tax burden would be over 25% of the value of CBAM-covered goods exported to the EU, illustrating the substantial financial impact on the Indian steel industry.

3. Inadequacy of Domestic Carbon Pricing

3.1. India's Carbon Credit Trading Scheme (CCTS)

India is developing a domestic carbon pricing mechanism, the Carbon Credit Trading Scheme (CCTS), led by the Bureau of Energy Efficiency. However, the effectiveness of this scheme in mitigating the CBAM's impact is uncertain, primarily because of the expected disparity between carbon prices in India and the EU.

3.2. Structural Weakness in Developing Economies

Carbon pricing in developing economies like India is typically lower than in developed economies. This disparity limits the effectiveness of domestic carbon pricing as a countermeasure to the CBAM. Without a carbon price equivalent to the EU's, Indian steel exports to the EU will remain subject to the full impact of the CBAM, reducing their competitiveness.

4. Potential Mitigation Strategies

4.1. Diversification of Export Markets

One potential strategy for Indian steel mills is to diversify their export markets away from the EU. However, this approach faces significant challenges. Alternative markets may not offer the same volume potential or realization rates as the EU, making it difficult for Indian mills to maintain profitability.

4.2. Decarbonization of Steel Production

The CBAM could act as a catalyst for Indian steel mills to accelerate their decarbonization efforts. By investing in low-emission production processes, Indian mills could reduce their carbon footprint and improve their competitiveness in the EU market. However, these investments are capital-intensive and may take time to yield results.

4.3. Regulatory Interventions

To protect the domestic steel industry, India could consider imposing tariffs on embedded CO2 emissions of imported steel products. Such measures could help level the playing field for domestic producers facing higher costs due to CBAM. Additionally, supporting the development of green technologies and offering incentives for decarbonization could help mitigate the impact.

5. Impact on MSMEs

The implementation of CBAM is likely to have a disproportionate impact on India's micro, small, and medium enterprises (MSMEs) involved in the steel supply chain. These enterprises may lack the financial resources to invest in decarbonization technologies, making them vulnerable to the increased costs imposed by CBAM. Government support, in the form of subsidies, technical assistance, and capacity-building programs, will be crucial to ensure the survival and competitiveness of MSMEs in this new regulatory environment.

6. Broader Economic Implications

6.1. Reduction in Exports to the EU

The CBAM is expected to result in a cumulative reduction of 1.1% in Asia's total exports to the EU, according to the Asian Development Bank (ADB). For India, this could translate into a significant loss of export revenue, given the importance of the EU market for the steel industry.

6.2. Impact on GDP

The potential reduction in steel exports, coupled with the additional costs imposed by CBAM, could have a negative impact on India's GDP. The CSE's estimate of a 0.05% reduction in GDP due to CBAM highlights the broader economic risks associated with this regulation.

7. Conclusion

The EU's CBAM presents a formidable challenge for India's steel industry, with significant financial, economic, and competitive implications. Indian steel producers, particularly those exporting to the EU, must urgently adapt to this new regulatory landscape by investing in decarbonization, diversifying export markets, and advocating for supportive domestic policies. The success of these efforts will determine the industry's ability to navigate the challenges posed by CBAM and maintain its position in the global steel market.

8. Recommendations

1. Accelerate Decarbonization Efforts: Indian steel producers should prioritize investments in low-emission technologies to reduce their carbon intensity and improve competitiveness in the EU market.
2. Diversify Export Markets: Explore and expand into alternative markets with favorable trade conditions to reduce dependence on the EU market.
3. Develop Domestic Carbon Pricing Mechanisms: Expedite the development of the CCTS and ensure that it aligns with international carbon pricing standards to mitigate CBAM's impact.
4. Support for MSMEs: Implement targeted support measures for MSMEs in the steel supply chain to help them adapt to the new regulatory environment.
5. Policy Advocacy: Engage with the government to explore regulatory interventions, such as tariffs on embedded CO2 emissions, to protect the domestic steel industry from unfair competition.
6. Collaborate with International Partners: Engage in dialogue with international partners and stakeholders to seek exemptions or adjustments to CBAM that reflect the developmental needs and challenges faced by emerging economies like India.