Context:
The European Union’s Carbon Border Adjustment Mechanism (CBAM) has entered its definitive implementation phase, directly affecting carbon-intensive imports such as steel, aluminium, and cement. For India, CBAM presents both short-term trade challenges and a long-term opportunity to accelerate its green industrial transition and align with evolving global climate standards.
Key Highlights:
- Policy & Trade Developments
- The EU has operationalised CBAM, levying a carbon cost on imports based on embedded emissions.
- Indian steel exports to the EU declined by nearly 30% in FY25 compared to FY24 during CBAM’s transitional reporting phase.
- The EU Emissions Trading System (ETS) auction in December 2025 cleared at €87.57 per tonne of CO₂, reflecting a tightening carbon market under the European Union climate regime.
- Impact on Indian Industry
- Post-COVID, Indian steel exports to the EU had surged due to cost competitiveness, but CBAM reversed this trend.
- Despite CBAM, EU importers continue sourcing Indian steel, recognising advantages in decarbonised tonnes over cheaper but higher-emission alternatives.
- Carbon pricing is reshaping global value chains, with emissions intensity emerging as a key trade determinant.
- Green Hydrogen & Industrial Decarbonisation
- India’s National Green Hydrogen Mission targets 5 million metric tonnes per annum (MMTPA) by 2030.
- Progress remains slow: only ~3 GW of electrolyser capacity awarded, against an estimated requirement of 60–100 GW.
- Projects such as Sembcorp’s Tuticorin green ammonia hub face delays due to technology IP constraints and restrictions on Chinese electrolysers.
- Structural & Cost Challenges
- Green steel production entails higher capital costs, dependence on renewable energy backups, and interim reliance on cleaner fuel blends.
- Green hydrogen is expected to become commercially competitive only around 2040, necessitating transitional strategies.
Relevant Prelims Points:
- CBAM: A carbon tariff mechanism that equalises carbon costs between domestic EU producers and foreign exporters.
- EU ETS: Cap-and-trade system setting a ceiling on emissions and enabling carbon price discovery.
- National Green Hydrogen Mission: India’s flagship initiative to decarbonise industry and energy through renewable hydrogen.
- Electrolysers: Core technology for producing green hydrogen using renewable electricity.
Relevant Mains Points:
- Economic Dimension: CBAM challenges India’s carbon-intensive exports but incentivises productivity and technological upgrading.
- Environmental Dimension: Aligns trade with climate goals, discouraging carbon leakage and promoting low-carbon production.
- International Relations: Highlights climate-trade linkages and the need for equitable transition pathways for developing economies.
- Industrial Policy: Decarbonisation requires reforms in MRV (Measurement, Reporting, Verification) systems to match EU ETS standards.
- Way Forward:
- Harmonise India’s MRV frameworks with global benchmarks to maintain export competitiveness.
- Liberalise imports of intermediate goods for green technologies to scale renewable and hydrogen capacity.
- Provide targeted fiscal support and carbon-market instruments to de-risk green steel and hydrogen investments.
- Leverage India’s abundant renewable energy potential, low-cost iron ore, and hydrogen ambitions to emerge as a global leader in green metals.
UPSC Relevance:
- GS 3: Economy, environment, climate-friendly industrialisation
- GS 2: International trade, climate diplomacy
- Prelims: Climate mechanisms, carbon markets, green energy missions