The EU’s Carbon Border Adjustment Mechanism is Already Reshaping Steel Trade with India

Climate policies vary widely from country to country, with some imposing strict rules on greenhouse gas emissions while others remain far less stringent. This disparity can undermine environmental effectiveness and the competitiveness of energy-intensive industries exposed to international trade. Indeed, companies might relocate production to regions with less demanding policies or source from these areas—a phenomenon known as carbon leakage.

To address this, carbon border adjustments aim to level the carbon cost playing field between domestic and foreign producers. They impose a tax on imports based on their carbon content, adjusted according to the prices already paid in the exporting country. The goal is to ensure that consumers in a region pay the same price for the emissions embedded in the goods they purchase, regardless of origin, while incentivizing cleaner production.

The European Union introduced its Carbon Border Adjustment Mechanism (CBAM) in October 2023, initially targeting highly emitting sectors such as cement, steel, aluminum, fertilizers, hydrogen, electricity, and certain intermediate products. During the transition phase, importers must report the embedded emissions in the relevant goods. Starting in 2026, they will also need to purchase certificates for these emissions, thereby aligning carbon costs with those borne by European producers.

The steel industry, a major emitter and deeply integrated into global value chains, is at the heart of this measure. India, one of the EU’s main suppliers, has a direct carbon intensity for steel production roughly twice as high as the European average for an equivalent product mix. This situation suggests significant exposure to CBAM compliance costs once the mechanism is fully operational.

A recent study analyzed shipment-level trade data and facility-level emission estimates for Indian steel producers. It reveals that high-carbon-intensity firms significantly reduced their export volumes and revenues to the EU during the reporting phase, while low-carbon-intensity firms maintained their export levels. These supply chain adjustments align with the intentions of the EU policy, creating opportunities for low-emission producers while reducing reliance on high-emission suppliers.

The findings show early differentiation in market outcomes due to the mechanism. At the shipment level, high-carbon-intensity firms appear to adjust primarily through lower prices, while low-carbon-intensity firms maintain their volumes and slightly increase their prices, reflecting a gain in relative competitiveness. On a monthly basis, evidence points to more persistent declines in total volumes and revenues for high-carbon-intensity firms. These trends likely reflect emerging structural adjustments, such as a reduction in shipment frequency.

The analysis confirms that the mechanism has already begun to redirect Indian steel exports to the EU, shifting away from the most polluting producers toward relatively cleaner ones. These effects remain modest and should be interpreted as short-term adjustments during the transitional reporting phase. They do not yet account for potential trade diversions or global reallocations, which would require a broader analytical framework and a longer post-policy period.

While specific to India, these findings show that the mechanism can create both challenges and opportunities: firms with cleaner production maintain or improve their market position, while more carbon-intensive producers face pressure to adapt. To support global industrial decarbonization, addressing differences between countries in access to low-carbon technologies, energy, and financing will be essential.

Our References

Reference Work

DOI: https://doi.org/10.1038/s41558-026-02607-y

Title: Early signs that the EU carbon border adjustment mechanism is reshaping EU–India steel trade

Journal: Nature Climate Change

Publisher: Springer Science and Business Media LLC

Authors: Gian Luca Vriz; Theodor Cojoianu; Carolyn Fischer; Luca Taschini