Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism, or CBAM, is a rule of the European Union (EU). It puts a charge on the carbon pollution that was released while making certain goods abroad, when those goods are brought into the EU. In simple words, it is a carbon price at the border. If a steel bar made in another country caused a lot of carbon dioxide emissions, the EU importer of that steel must pay for those emissions, just as an EU steel maker would.

Why does the EU need CBAM?

Inside the EU, factories must pay for the carbon they release, through a system called the EU Emissions Trading System (EU ETS). This makes EU goods costlier to produce. Now imagine a steel company in Europe that has to pay for its pollution, while a steel company in another country pays nothing. The foreign steel becomes cheaper.

EU buyers may switch to it, or the EU company may shift its factory abroad. The pollution does not fall; it simply moves to another country. This is called carbon leakage. CBAM tries to stop this by making imported goods carry the same carbon cost as goods made in the EU.

Where did it come from?

The EU has set itself a goal of becoming "climate neutral" by 2050 under its European Green Deal (2019). In 2021 it announced a package of climate laws called "Fit for 55", meaning a cut of at least 55% in emissions by 2030 compared with 1990. CBAM was part of this package. The final law is Regulation (EU) 2023/956, adopted in 2023. A simplification law, Regulation (EU) 2025/2083, was adopted in October 2025 to reduce paperwork before the full phase began.

The phases of CBAM

CBAM is being brought in slowly, in steps:

1. Transitional phase (1 October 2023 to 31 December 2025): Importers only had to report the emissions in their imported goods, every quarter. They paid nothing.
2. Definitive phase (from 1 January 2026): Importers must now pay, by buying CBAM certificates. Each certificate covers one tonne of carbon dioxide (or its equivalent). Certificates for 2026 imports go on sale from February 2027. Each year, the importer must file a yearly CBAM declaration and hand in (surrender) its certificates by 30 September of the next year. So the first declaration and surrender, for 2026 imports, is due by 30 September 2027.
3. Full phase-in by 2034: The EU is slowly removing free permits for its own industries between 2026 and 2034. As free permits fall, the CBAM charge on imports rises by the same share. This keeps the treatment of EU and foreign producers equal.

Which goods are covered?

CBAM currently covers six sectors, all of which are carbon-heavy:

• Iron and steel
• Aluminium
• Cement
• Fertilisers
• Electricity
• Hydrogen

The EU plans to review whether to add more products in future.

How does it work, step by step?

Let us take a simple example of an Indian steel exporter.

1. An EU company imports steel from India. It must be registered as an "authorised CBAM declarant".
2. The Indian producer measures how much carbon was released to make that steel. These are called embedded emissions.
3. The EU importer declares these emissions every year.
4. The importer buys CBAM certificates to cover them. The price of a certificate follows the average price of carbon permits in the EU ETS. In 2026 the price is set every quarter; from 2027 it will be set every week. The first price, for January to March 2026, was €75.36 per tonne.
5. If a carbon price was already paid in the country where the steel was made, that amount is deducted. So a country with its own carbon price can reduce the charge on its exporters.

Think of it like a school canteen rule. If students who bring food from home must pay the same "cleaning fee" as students who buy in the canteen, nobody gains an unfair edge. CBAM tries to do the same for carbon.

Small importers are exempt

Under the 2025 simplification, an importer who brings in 50 tonnes or less of CBAM goods in a year does not have to follow CBAM. This applies to iron and steel, aluminium, cement and fertilisers, but not to electricity and hydrogen. The EU says this removes about 90% of importers from CBAM while still covering about 99% of the emissions. This weight-based limit replaced the old rule, which exempted only small parcels worth €150 or less each.

India's position and Indian examples

India exports steel and aluminium to the EU, so CBAM directly affects Indian businesses. Many Indian steel plants use coal-based blast furnaces, which release more carbon per tonne than many European plants. So Indian steel may face a higher charge. India has raised concerns at the WTO and in climate talks. Its main arguments are:

• CBAM is a unilateral measure: the EU made the rule alone, without agreement from its trading partners.
• It goes against the principle of Common But Differentiated Responsibilities (CBDR), which says rich countries that polluted first should do more.
• It adds heavy reporting costs, especially for small exporters (MSMEs).

India has also built its own carbon market, the Carbon Credit Trading Scheme (CCTS), 2023, under the Energy Conservation (Amendment) Act, 2022. The Bureau of Energy Efficiency (BEE) runs it. A working Indian carbon price could, in future, be used to claim deductions under CBAM.

CBAM in the India-EU Free Trade Agreement (FTA)

India and the EU announced the conclusion of their FTA on 27 January 2026, at the 16th India-EU Summit. The FTA does not exempt India from CBAM. Indian goods still pay the same CBAM charge as goods from any other country. But India secured some CBAM commitments:

• Forward-looking MFN assurance: MFN means "most-favoured nation". If the EU later gives any other country an easier CBAM deal, India gets the same easier deal too.
• Cooperation on carbon prices and verifiers: The two sides will work together on recognising India's carbon price and Indian verifiers. A verifier is an agency that checks a factory's emission figures.
• Help to cut emissions: The EU will give money and targeted support to help Indian firms reduce greenhouse gases and meet new carbon rules.

Commonly confused concepts

• CBAM vs EU ETS: The EU ETS puts a carbon price on factories inside the EU. CBAM puts a matching carbon price on goods coming into the EU. CBAM is the border partner of the ETS.
• CBAM vs a normal customs duty: A customs duty is a tax on the value of goods. CBAM is a charge based on the carbon released while making the goods, not their value.
• CBAM vs carbon tax: A carbon tax is a fixed price per tonne set by the government. CBAM's price is linked to the market price of carbon in the EU ETS.
• Carbon leakage vs carbon offset: Carbon leakage is when pollution shifts to another country because of strict rules at home. A carbon offset is when a company pays for a project elsewhere that cuts emissions, to balance its own emissions.

Is CBAM legal under WTO rules?

This is the key question in the Russia case. Critics say CBAM may break two basic WTO rules:

• Most-Favoured-Nation (MFN) treatment, GATT Article I: a country must treat imports from all WTO members equally.
• National treatment, GATT Article III: once imported goods enter a country, they must not be treated worse than local goods.

The EU says CBAM treats all countries the same way, and that even if it did not, it is protected by GATT Article XX. This article allows exceptions for measures needed to protect human, animal or plant life or health (Article XX(b)), and for measures to conserve exhaustible natural resources (Article XX(g)), as long as they are not a disguised trade barrier.

The first WTO case against CBAM (Russia vs EU, DS639)

In the WTO, a country that feels another country broke trade rules can file a dispute. First the two sides hold talks, called consultations. If the talks fail, a small group of trade experts, called a panel, hears the case and gives a ruling. Here is how the CBAM case has moved:

1. 12 May 2025: Russia asked the EU for consultations on CBAM. The case was given the number DS639.
2. 24 July 2026: Russia asked for a panel for the first time. The EU blocked it, which WTO rules allow only once.
3. 25 September 2026: The WTO's Dispute Settlement Body (DSB), where all members meet to run disputes, set up the panel. This made it the first formal WTO dispute to put CBAM before a panel.

Russia's main claims are:

• CBAM treats goods differently based on the country they come from. This breaks the MFN rule (GATT Article I).
• Buying CBAM certificates is an extra charge on imports, above the maximum tariffs the EU promised at the WTO (GATT Article II).
• The registration, reporting and emissions-checking rules work as banned non-tariff barriers (GATT Article XI).
• The free permits the EU gives its own industries under the EU ETS are a banned export subsidy, under the WTO Agreement on Subsidies and Countervailing Measures.

The EU says both CBAM and the EU ETS follow WTO rules. CBAM keeps running while the case goes on. India, along with 17 other WTO members such as China, the United States, Japan and Brazil, joined as a third party. A third party is a country that is not suing anyone, but can give its views to the panel because the result affects it. India joined because its steel and aluminium exporters face the same CBAM costs.

Issues, criticism and the way forward

• Burden on developing countries: Exporters from poorer countries may lose markets or profits, even though these countries caused far less of the world's past emissions.
• Clash with climate principles: Article 3.5 of the UN Framework Convention on Climate Change (UNFCCC) says climate measures should not become a hidden restriction on trade. Many developing countries say CBAM does exactly that.
• Costly paperwork: Measuring and verifying emissions is difficult and expensive, especially for small firms.
• Supporters' view: The EU and supporters say CBAM pushes the whole world to cut emissions and keeps a fair playing field for EU industry that already pays for pollution.
• Way forward: Experts suggest that India speed up its own carbon market so that its carbon price can be deducted, help MSMEs measure their emissions, invest in greener steel (such as green hydrogen-based steel), and negotiate recognition of Indian carbon pricing with the EU.

Concepts to Know

• Embedded emissions: The greenhouse gases released while a product was being made. For example, the carbon released by burning coal to make one tonne of steel.
• Carbon price: Money a polluter must pay for every tonne of carbon dioxide it releases. It makes pollution costly so that companies try to reduce it.
• Unilateral measure: A rule that one country or group makes on its own, without the agreement of the other countries affected by it.
• Common But Differentiated Responsibilities (CBDR): A principle from the 1992 Rio Earth Summit. All countries must fight climate change, but rich countries that polluted more in the past should carry a bigger share of the effort.
• GATT (General Agreement on Tariffs and Trade): The main WTO agreement on trade in goods. It first came in 1947 and was updated as GATT 1994.
• Non-tariff barrier: Anything other than a tax that makes importing harder, such as rules, licences, paperwork or quotas.
• Export subsidy: Help from the government that depends on how much a company exports. It makes the company's goods cheaper abroad, so the WTO bans it.