India steps up CBAM preparedness as EU carbon payments begin in 2027
Indian exporters are being urged to strengthen emissions monitoring, reporting and verification (MRV) systems as the European Union's Carbon Border Adjustment Mechanism (CBAM) moves from its transitional, reporting-only phase into its definitive, financially binding phase from January 2026.
Under the definitive regime, EU importers of covered goods must purchase and surrender CBAM certificates corresponding to the embedded carbon emissions of imports, with actual carbon payments due to begin from 2027 based on 2026 import volumes.
Sectors most exposed for India include iron and steel, aluminium, cement and fertilisers — energy-intensive, export-oriented industries with significant EU trade exposure.
Industry bodies and policy analysts have flagged that exporters lacking verified emissions data will be charged based on default (higher) emissions benchmarks, raising the effective cost of compliance, with MSME exporters particularly under-prepared.
Carbon Border Adjustment Mechanism (CBAM)
CBAM is the EU's mechanism to price the carbon embedded in certain imported goods, aiming to prevent "carbon leakage" — the shifting of carbon-intensive production to countries with laxer climate rules — and to complement the EU's domestic carbon market, the EU Emissions Trading System (EU ETS). CBAM's transitional phase began 1 October 2023 (reporting obligations only, no charges), running through 31 December 2025; the definitive phase began 1 January 2026, making EU importers financially liable for embedded emissions via mandatory purchase of CBAM certificates, with the certificate price linked to the weekly average auction price of EU ETS allowances from 2027.
Key Details
- Transitional phase: 1 October 2023 – 31 December 2025 (reporting only).
- Definitive phase: from 1 January 2026 (financial liability begins); certificate price benchmarked to EU ETS allowance price.
- Covered sectors: iron and steel, aluminium, cement, fertilisers, electricity, hydrogen (six sectors).
- Legal basis: EU Regulation 2023/956, part of the EU's "Fit for 55" climate package.
As CBAM's definitive phase takes effect, Indian exporters in the covered sectors face actual carbon costs on EU-bound shipments for the first time, making verified emissions data (rather than default values) commercially significant.
MRV (Monitoring, Reporting, Verification) and Default Emissions Values
MRV is the system by which greenhouse gas emissions embedded in a product are measured, reported to authorities, and independently verified by an accredited body — the backbone of any credible carbon pricing or carbon border mechanism. Under CBAM, if an exporter cannot supply verified actual emissions data, the EU applies default emissions values (typically set higher than average actual emissions of the exporting country) to calculate the certificate liability, penalising exporters without robust MRV systems.
Key Details
- CBAM declarations require verification by an EU-accredited verification body.
- Absence of verified data triggers default emissions values, generally set conservatively high, increasing compliance cost.
- Estimates suggest additional costs in the range of tens of euros per tonne for steel exports lacking verified data [Unverified — exact figure varies by source and year].
The push for Indian exporters to strengthen MRV capacity is specifically about avoiding the cost penalty of default emissions values once carbon payments under CBAM become due.
Carbon Leakage and the EU Emissions Trading System (EU ETS)
The EU ETS, launched in 2005, is the world's first major cap-and-trade carbon market, requiring EU industries to hold allowances for each tonne of CO2 emitted, with a declining emissions cap over time. Historically, some EU sectors received free allowances to prevent carbon leakage (relocation of production to less-regulated jurisdictions); CBAM is designed to progressively replace this free-allocation mechanism for CBAM-covered sectors by extending an equivalent carbon cost to imports.
Key Details
- EU ETS established 2005; covers power generation and energy-intensive industries within the EU.
- CBAM certificate prices are pegged to EU ETS allowance auction prices.
- Free allocation to EU industries in CBAM sectors is being phased down as CBAM is phased in, to avoid double protection.
As free allowances for EU domestic industry are withdrawn, CBAM's import charge becomes the primary carbon-leakage safeguard, directly raising the stakes for India's carbon-intensive export sectors.
India's Domestic Response: MSME Support and Carbon Market Development
India has developed the Carbon Credit Trading Scheme (CCTS, notified under the Energy Conservation (Amendment) Act, 2022) to create a domestic compliance carbon market, partly as a response to external mechanisms like CBAM and to build institutional carbon-pricing capacity. Government support measures under discussion include cost-sharing schemes to help MSME exporters meet CBAM compliance costs, given their limited capital and technical capacity for emissions verification.
Key Details
- Energy Conservation (Amendment) Act, 2022 provides the legal basis for India's domestic carbon market (CCTS).
- Bureau of Energy Efficiency (BEE) is the administrator; Central Electricity Regulatory Commission (CERC) regulates trading.
- Government has discussed schemes to subsidise a significant share of CBAM compliance costs for MSMEs [Unverified — exact percentage varies by source].
India's domestic carbon market and MSME support measures are being positioned as the policy response to reduce the competitiveness hit from CBAM on export-oriented energy-intensive sectors.
- CBAM transitional phase: 1 October 2023 – 31 December 2025 (reporting only); definitive phase begins 1 January 2026; actual carbon payments/certificate purchases tied to 2026 import data become due from 2027.
- CBAM covers six sectors: iron and steel, aluminium, cement, fertilisers, electricity, hydrogen.
- Legal basis: EU Regulation (EU) 2023/956, under the EU's "Fit for 55" climate package.
- India's principal CBAM-exposed exports: iron and steel, aluminium.
- India's domestic carbon market (CCTS) established under the Energy Conservation (Amendment) Act, 2022; administered by the Bureau of Energy Efficiency.