The Carbon Border Adjustment Mechanism

How the European Union's carbon border tax charges importers for emissions embedded in goods like steel and aluminium, and why India and other exporters object.

The European Union makes its own industries pay for carbon emissions through its Emissions Trading System. But this creates a risk: production might shift to countries without carbon pricing, called carbon leakage, and EU firms might lose out to cheaper imports. The Carbon Border Adjustment Mechanism, or CBAM, is the EU’s response.

How CBAM works

Importers of certain goods into the EU must account for the carbon emissions embedded in producing them.
They must buy CBAM certificates priced in line with the EU’s carbon price.
If a carbon price was already paid in the exporting country, this can be deducted.

Goods covered

CBAM initially covers carbon-intensive goods:

Iron and steel
Aluminium
Cement
Fertilisers
Electricity
Hydrogen

Timeline

A transitional phase from October 2023 required importers to report emissions without paying.
The definitive phase began in January 2026, when importers became financially liable for emissions in their imports. The EU simplified rules in 2025, exempting small importers.

Why India objects

India is a major exporter of steel and aluminium to the EU. Indian officials and industry argue that:

CBAM is a form of protectionism disguised as climate policy.
It ignores the principle of common but differentiated responsibilities, under which rich countries should do more on climate.
It imposes heavy reporting costs on exporters, especially smaller firms.

India has been developing its own Carbon Credit Trading Scheme, partly so domestic carbon costs could be counted.

The economic debate

Supporters: CBAM prevents leakage and encourages other countries to price carbon.
Critics: it may hurt developing economies and fragment trade rules.
Other countries, including the United Kingdom, have planned similar mechanisms.

The steel exporter

An Indian steelmaker exports to Europe. Under CBAM, its European buyer must pay for the emissions in each tonne of steel. To stay competitive, the steelmaker considers cleaner technologies, such as using more scrap in electric furnaces, which lowers emissions per tonne.

Thinking CBAM taxes all imports into the EU

CBAM covers specific carbon-intensive sectors, not all goods, though it may expand over time.

Key takeaways

CBAM charges EU importers for emissions embedded in certain goods.
It covers steel, aluminium, cement, fertilisers, electricity and hydrogen.
Financial obligations began in January 2026 after a reporting phase from 2023.
India argues it is protectionist and unfair to developing countries.