EU's Carbon Tax To Kick in From Jan 1; May Hurt Indian Steel, Aluminium Exporters: GTRI

The European Union's (EU) carbon tax on certain metals will come into force from Thursday and is expected to hurt India's steel exports, think tank GTRI said on Wednesday. The 27-nation bloc is imposing this tax on goods that emit carbon during the manufacturing process. In steel, emissions are highest for Blast Furnace -- Basic Oxygen Furnace (BF-BOF) routes, lower for gas-based Direct Reduced Iron (DRI), and lowest for scrap-based Electric Arc Furnace (EAF) routes.

Similarly, in aluminium, electricity source and power intensity are critical. Power generated from coal significantly raises the carbon burden and, therefore, the CBAM cost. The Global Trade Research Initiative (GTRI) said that many Indian exporters may have to cut prices by 15-22 per cent so EU importers can use that margin to pay the CBAM (carbon border adjustment mechanism) tax.

Indian exporters will not pay the tax directly as the EU-based importers -- registered as authorised CBAM declarants --have to buy CBAM certificates linked to the embedded emissions in imported goods. But this cost will be pushed back to Indian exporters, it said. "From 1 January 2026, every shipment of Indian steel and aluminium entering the EU will carry a carbon cost as the Carbon Border Adjustment Mechanism (CBAM) moves from reporting to payment phase," GTRI Founder Ajay Srivastava said.

The CBAM's complex data and verification requirements will sharply raise compliance costs, pushing many smaller exporters out of the EU market altogether, he said. He said that accurate emissions measurement becomes the foundation of competitiveness in the EU market. "CBAM is not a corporate sustainability exercise; it is a plant-level emissions accounting regime. Emissions must be calculated for each installation, covering direct fuel combustion and electricity consumption," he added.

He explained that manufacturing exporters have to track fuel use, electricity consumption, production volumes, and emission factors on a quarterly basis. " Records must be auditable and aligned with EU methodologies. Without this discipline, exporters face default emission values set by the EU- intentionally conservative and often 30-80 per cent higher than actual emissions," Srivastava said.

From 2026, he said, independent verification of emissions data becomes mandatory. Only EU-recognised or ISO 14065- compliant verifiers will be accepted. The process will resemble a financial audit, involving document review, emissions validation, and formal certification. He added that low-emission producers that are using cleaner electricity, for them CBAM can become a competitive advantage in the EU market. "Verified low emissions can protect margins and help win market share as higher-emission suppliers lose ground," he said.

He suggested Indian exporters develop an internal CBAM shadow price. This involves calculating embedded emissions per tonne and applying the EU carbon price to it. India's steel and aluminum exports to the EU fell 24.4 per cent from USD 7.71 billion in FY24 to USD 5.82 billion in FY25. The carbon tax is an important issue in the ongoing negotiations for the proposed trade agreement between the two.