How Indian Industries Are Adapting to CBAM and Carbon Pricing

How EU carbon border rules are reshaping Indian manufacturing exports

The European Union started charging carbon prices on imported goods in October 2023. Steel, aluminium, cement, fertilizers, electricity, and hydrogen now face new costs based on their production emissions. For UK businesses that source materials from India or compete with Indian manufacturers, these changes matter. They affect pricing, supply chains, and market dynamics across multiple sectors.

Indian exporters began reporting emissions in January 2024. Full carbon duties arrive in 2026. Consequently, manufacturers in India are investing in cleaner production methods. They are switching to renewable energy and adopting domestic carbon trading. However, progress varies widely between large corporations and smaller firms.

UK importers should understand these shifts. Similarly, businesses competing in European markets need to track how Indian suppliers are adapting. The changes will influence who can afford to export, what alternative materials become available, and which supply chains remain viable under the new carbon pricing regime.

What CBAM requires from exporters to Europe

The Carbon Border Adjustment Mechanism taxes embedded emissions in imports. It aligns with the EU Emissions Trading System pricing. Countries with carbon-intensive production face higher costs. India falls into this category for several key industrial sectors.

Steel exports from India face particular pressure. Analysis from BCG shows Indian steel exporters could see costs rise 32% by 2032. This represents the steepest increase globally. By contrast, exporters from countries with cleaner production methods will pay substantially less.

During the transitional phase through 2025, exporters must submit quarterly emissions declarations. No fees apply yet. Nevertheless, this reporting builds the foundation for enforcement starting in 2026. At that point, duties could reach €173.80 per tonne for Indian steel shipments.

India operates energy efficiency schemes and renewable energy certificate programs. These include the Perform, Achieve and Trade (PAT) scheme. However, these mechanisms do not fully align with CBAM standards. As a result, Indian exporters may face higher deemed emissions calculations. This misalignment creates additional costs unless resolved through policy coordination.

The Indian government launched the Carbon Credit Trading Scheme in June 2025. It covers 253 iron and steel entities initially, using 2023-24 as a baseline year. This domestic carbon market enables companies with lower emissions to trade credits. Furthermore, it provides potential offsets during CBAM negotiations with the EU.

Indian steel sector targets and technology shifts

The Ministry of Steel set a target of 2.2 tonnes of CO₂ per tonne of crude steel by 2030. This represents a 13.69% reduction from 2023-24 levels. Achieving this requires substantial changes in production methods.

Direct reduced iron electric arc furnace (DRI-EAF) production must increase from the current 7-9% to 18-20% of total output. Meanwhile, scrap-based production needs to rise from 10-12% to 25-27%. These shifts demand significant capital investment and operational changes across the sector.

JSW Steel is testing natural gas in blast furnaces at its facilities. The company operates a 25MW green hydrogen plant at Vijayanagar. Additionally, JSW has invested in waste heat recovery systems and captive solar and wind generation. These initiatives demonstrate the scale of adaptation among leading manufacturers.

Green hydrogen pilots are advancing across the sector. Carbon capture projects are also under development. However, these technologies remain expensive and technically challenging. Smaller manufacturers lack the resources to implement them at comparable speed.

The Indian government is developing a green steel taxonomy. This classification system will align domestic standards with international requirements. It should help exporters demonstrate compliance more easily. Moreover, it may support premium pricing for lower-carbon products in both domestic and export markets.

How aluminium and other sectors are responding

Hindalco has published sustainability plans focused on energy efficiency improvements. The company is integrating renewable power sources into its operations. It is also exploring alternative fuels to reduce emissions intensity. These measures follow similar patterns to steel sector adaptations.

India’s non-fossil fuel capacity reached 51.1% of total generation. This provides a foundation for industrial decarbonization. Manufacturing facilities can increasingly source renewable electricity. However, intermittency and grid constraints still limit full conversion to clean power.

Scrap recycling is expanding across metal sectors. Recycled materials typically require far less energy than primary production. Therefore, increasing scrap usage offers one of the fastest routes to lower emissions. The challenge lies in developing adequate collection, sorting, and processing infrastructure.

Research and development spending on clean technologies has increased. Nevertheless, commercialization timelines remain uncertain for many promising approaches. Consequently, most manufacturers are focusing on proven efficiency improvements and renewable energy adoption rather than waiting for breakthrough technologies.

Large manufacturers versus small and medium firms

JSW Steel and Hindalco have comprehensive sustainability roadmaps. They employ dedicated teams for emissions measurement and reporting. Furthermore, they can access capital markets to fund clean technology investments. Their size provides economies of scale that reduce per-unit costs of compliance.

Small and medium manufacturers face different constraints. Many lack in-house expertise for emissions verification. Compliance costs represent a larger proportion of revenue. Access to affordable finance for equipment upgrades remains limited. As a result, these businesses are adapting more slowly.

Verification requirements create particular difficulties for smaller exporters. Independent certification costs money and requires technical documentation. Building this capability takes time and expertise. Meanwhile, larger competitors are already generating verified emissions data that supports their export business.

The gap between large and small manufacturers is widening. Early movers with verified low emissions can generate tradable credits under the Carbon Credit Trading Scheme. These credits provide revenue that helps fund further improvements. Late adopters face higher costs without this offsetting income stream.

Steel and aluminium costs under carbon border charges

Steel exporters shipping to the EU could pay €173.80 per tonne in carbon duties from 2026. This assumes no change in current production emissions intensity. For high-volume exporters, these costs add up quickly. They will either erode profit margins or force price increases that reduce competitiveness.

BCG analysis projects a 32% cost increase for Indian steel exporters by 2032. This calculation accounts for expected EU carbon price increases over time. Exporters from regions with lower emissions intensity will face substantially smaller increases. Consequently, market share will shift toward producers with cleaner operations.

Aluminium faces similar pressures, though exact duty levels vary by production method and facility. Carbon-intensive smelting processes attract higher charges. Producers using renewable electricity for electrolysis will pay less. This creates a direct competitive advantage for hydropower-based production.

These cost differentials will reshape trade flows. Some analysts predict export volumes from India to the EU will decline 5.72% overall. Certain product categories may see sharper drops. Alternatively, Indian manufacturers might redirect exports to markets without carbon border charges, potentially affecting global pricing and availability.

What the Carbon Credit Trading Scheme means for exporters

The CCTS creates a domestic carbon market in India. Companies that reduce emissions below sector benchmarks earn credits. These credits can be sold to companies exceeding their targets. Therefore, early investment in clean production generates financial returns beyond operational efficiency.

Steel and iron entities were the first covered under the scheme, starting in the 2025-26 compliance year. The baseline uses 2023-24 emissions data. This timing rewards companies that began decarbonization before the scheme launched. Conversely, it penalizes those who delayed action.

Credits from CCTS may be recognized in future EU-India trade negotiations. If the EU accepts these credits as offsets against CBAM duties, Indian exporters gain a significant advantage. However, this recognition is not yet confirmed. Negotiations continue as part of broader free trade agreement discussions.

Revenue from credit sales can fund additional emissions reductions. This creates a positive feedback loop for leading companies. They invest in clean technology, generate credits, sell them for revenue, and reinvest in further improvements. Meanwhile, lagging companies must buy credits while also investing in their own reductions.

Five critical points for UK businesses and buyers

• Indian steel exporters face potential cost increases of 32% by 2032 due to EU carbon border charges, affecting pricing and availability for UK importers.
• Emissions reporting began in January 2024, with full carbon duties starting in 2026 at potential rates of €173.80 per tonne for steel shipments.
• India’s Carbon Credit Trading Scheme, launched June 2025, covers 253 steel and iron entities and may provide offsets in future EU trade negotiations.
• Production targets require DRI-EAF methods to increase from 7-9% to 18-20% and scrap-based output to rise from 10-12% to 25-27% by 2030.
• Large manufacturers are advancing rapidly with green hydrogen, renewable energy, and verification systems, while small and medium firms face significant resource constraints.

Strategic implications for procurement and supply chains

UK businesses sourcing steel or aluminium from India should assess supplier emissions profiles now. Suppliers with verified low emissions will face lower costs under CBAM. Therefore, they can offer better long-term pricing stability. Suppliers without emissions verification may face sudden cost increases or export restrictions.

Diversification strategies should account for carbon intensity differences. Alternative suppliers from regions with cleaner production or existing carbon pricing may become more competitive. However, switching costs and relationship factors also matter. A balanced approach considers both immediate price and long-term supply security.

Public sector buyers should note that carbon reporting compliance increasingly affects supplier eligibility for government contracts. Indian suppliers serving UK public procurement will need to demonstrate emissions measurement capability. This requirement extends beyond CBAM into broader ESG tender criteria.

Companies competing with Indian manufacturers in EU markets should track competitive dynamics carefully. As Indian producers invest in decarbonization, they may achieve cost advantages over others who delay. Alternatively, some Indian manufacturers may exit EU markets entirely, creating opportunities for other suppliers.

Supply chain risk assessments should incorporate carbon border adjustment exposure. Contracts with fixed pricing may not account for CBAM costs. Renegotiation may become necessary. Furthermore, suppliers facing financial pressure from carbon duties may reduce quality or service levels to preserve margins.

Businesses considering Indian manufacturing partnerships should evaluate decarbonization plans. Partners with credible reduction roadmaps offer better long-term value. Those without clear plans face growing competitive disadvantages. Due diligence should include emissions verification capabilities and renewable energy access.

How domestic Indian policies interact with EU requirements

India’s existing energy efficiency schemes do not fully align with CBAM measurement standards. The PAT scheme focuses on energy intensity rather than absolute emissions. Renewable energy certificates demonstrate clean power purchase, but do not directly translate to CBAM-compliant emissions data. This misalignment creates administrative burdens for exporters.

Policy recommendations from Indian trade associations include developing a carbon tax aligned with CBAM calculation methods. This would create domestic price signals that encourage the same reductions CBAM demands. Moreover, it would generate government revenue that could support industrial transition programs.

Scrap promotion policies are advancing to increase recycled content in manufacturing. Higher scrap usage reduces emissions per unit of output. However, India’s scrap collection infrastructure remains underdeveloped compared to Europe or North America. Building this capability requires coordinated investment across the value chain.

Renewable energy scaling continues, but grid integration challenges persist. Industrial facilities need reliable baseload power. Intermittent renewable generation requires either storage systems or continued fossil fuel backup. Consequently, achieving very low emissions intensity demands more than simply installing solar panels.

International advocacy focuses on gaining EU recognition for India’s Carbon Credit Trading Scheme. If successful, this would allow Indian exporters to offset CBAM duties with domestically generated credits. Free trade agreement negotiations between the EU and India may address this issue. However, outcomes remain uncertain.

Long-term competitive effects and market structure changes

CBAM is accelerating industrial transformation in India. Companies investing now in low-carbon production gain lasting competitive advantages. They will dominate export markets where carbon costs matter. Additionally, they may command premium prices in domestic markets as buyers value sustainability credentials.

Market share shifts are already beginning. Large manufacturers with resources to invest in clean technology are pulling ahead. Smaller competitors without access to capital or expertise are falling behind. This consolidation may reduce supplier diversity over time, potentially affecting buyer negotiating power.

Some Indian manufacturers may establish EU production facilities to avoid border charges. This strategy works for companies with sufficient scale and capital. However, it effectively exports jobs and production capacity from India. It also concentrates production in higher-cost regions, potentially raising prices for all buyers.

Green technology investments may enhance India’s global positioning beyond European exports. Companies developing expertise in low-carbon steel or aluminium production can serve growing demand worldwide. As other regions implement carbon pricing, these capabilities become more valuable. Therefore, current investments may generate returns in multiple markets.

Government support for small and medium manufacturers will determine whether they survive the transition. Without assistance, many may exit export markets or close entirely. This could disrupt supply chains and reduce competition. Training programs on emissions measurement and reduction could help smaller firms build necessary capabilities.

UK businesses should monitor these structural changes closely. Supplier bases may contract, particularly among specialized or regional manufacturers. Consequently, procurement strategies should identify alternative sources before disruptions occur. Building relationships with multiple suppliers across different regions reduces concentration risk.

Where to find official guidance and policy updates

The European Commission publishes detailed CBAM implementation guidance on its Carbon Border Adjustment Mechanism website. This includes reporting requirements, calculation methodologies, and updates on enforcement timelines. UK importers should review these resources even though the UK is no longer an EU member, as many UK businesses trade with EU partners.

India’s Ministry of Steel provides updates on sector decarbonization targets and green steel taxonomy development through its official channels. These publications explain domestic policy directions that will shape Indian manufacturer capabilities. Additionally, the ministry releases data on production methods and emissions intensity trends.

The Carbon Credit Trading Scheme framework and compliance requirements appear on the Bureau of Energy Efficiency website. This source offers details on covered entities, baseline calculations, and trading mechanisms. Businesses sourcing from Indian manufacturers can use this information to assess supplier participation and performance.

BCG and other consulting firms have published detailed analyses of CBAM impacts on Indian industry. These reports provide cost projections, strategic recommendations, and sector-specific insights. While commercial in nature, they offer valuable data for supply chain planning and competitive analysis.

For UK businesses navigating sustainability compliance requirements across their supply chains, carbon reporting support services can help interpret how supplier emissions affect your own Scope 3 calculations and procurement decisions.