The European Union moved the Carbon Border Adjustment Mechanism (CBAM) into its definitive regime on January 1, 2026. For Indian exporters in carbon-intensive sectors, CBAM is now a measurable trade exposure. It is no longer only an environmental compliance problem.
When two suppliers quote similar prices, the supplier with a lower, verified carbon footprint can win market access and buyer preference. That shifts the competitive rules for steel, aluminium, cement and fertilisers, and for electricity- and hydrogen-linked value chains that increasingly feed European procurement filters.
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Budget 2026-27, CCUS, but CBAM readiness
Union Budget 2026–27 signalled that decarbonisation is now part of industrial policy. It announced an outlay of ₹20,000 crore over five years for Carbon Capture, Utilisation and Storage (CCUS), aimed at high-emission sectors such as power, steel, cement, refineries and chemicals.
This matters because CCUS is being positioned as an industrial-scale pathway where alternatives are costly, slow, or constrained by process chemistry. In markets that are beginning to attach a price to embedded emissions, this is not a reputational add-on. It is a cost and market access variable.
The Budget also hinted at transition-oriented industrial intent through customs-duty and manufacturing measures that support clean-tech supply chains and strategic inputs, including moves linked to critical minerals and related capital goods.
CBAM compliance rests on three capabilities
A CCUS push is a welcome step. But it will not, by itself, make Indian exports CBAM-ready at scale. CBAM compliance rests on three practical capabilities that need strengthening across India’s export ecosystem.
First, measurement, reporting and verification (MRV). Many smaller firms still lack product-level emissions accounting that can withstand buyer scrutiny in Europe.
Second, credible certification and reporting infrastructure. Even when firms want to comply, verified documentation can be costly and complex. Without verified emissions, importers may fall back on default values, raising the effective carbon bill.
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Third, transition finance beyond large corporates. Most decarbonisation investments are front-loaded, while commercial benefits arrive slowly. That mismatch hits MSMEs hardest.
CBAM as a supply-chain discipline
India’s export strength is built on supply chains, not isolated firms. If the EU importer needs verified carbon data for a product, the burden travels backwards into the supplier network.
Many MSMEs do not know their baseline emissions, let alone how to reduce them. Lenders, meanwhile, have not embedded carbon performance into credit decisions in a way that rewards early movers with cheaper capital. The trade obligation is arriving faster than the financing system is adapting.
The result is predictable: compliance costs and documentation risks concentrate at the weakest links of the chain, even when the final exporter has the intent to comply.
India-EU trade deal does not neutralise CBAM
This adds urgency. India and the European Union have concluded a trade deal, but CBAM sits in a different policy lane from tariff negotiations. Preferential duty rates will not offset a buyer’s need to minimise CBAM liabilities through verified low-carbon sourcing.
Even if CBAM flexibilities expand, they would apply broadly. Exemptions are likely to remain rule-based, such as linkage to the EU emissions trading system, not negotiated carve-outs. Meanwhile, CBAM’s definitive phase is live from 2026, even as operational mechanics phase in.
Need a green trade competitiveness fund
CCUS is a useful starting point. The next step is an export-facing complement that converts climate compliance into industrial competitiveness.
India should set up a Green Trade Competitiveness Fund for sectors exposed to carbon-conditioned trade, with a simple objective: protect export viability by making compliance and transition faster and cheaper.
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At the firm level, the fund should:
- Lower the cost of transition finance for clean process upgrades and energy-efficiency investments.
- Subsidise MRV and verification costs, especially for MSMEs in export clusters.
- Expand access to credible certification and reporting support, so firms are not priced out because they cannot afford global compliance ecosystems.
- Use existing institutions, avoid new bureaucracy
- The architecture largely exists. The missing piece is a focused bridge between trade competitiveness and carbon compliance.
- EXIM Bank can anchor trade-linked credit lines.
- SIDBI can reach smaller firms with tailored finance.
- DGFT and export promotion councils can organise practical help on documentation, templates, and verification pathways so firms can comply without reinventing systems firm by firm.
The risk is gradual loss, not a single shock
The risk of inaction is subtle but serious. If Indian firms do not decarbonise with institutional support, products can be slowly priced out of Europe as buyers shift to suppliers who can prove carbon performance. By the time the impact shows up clearly in export orders, the adjustment will be more expensive and harder.
Budget 2026–27 has begun to fund decarbonisation through CCUS. Now India needs to fund CBAM readiness as export competitiveness policy: MRV, verification, and transition finance across supply chains, so the invisible tariff does not become a visible loss of market.
Nida Rahman is Assistant Professor at IILM Lodhi Road, and Krishan Sharma is Assistant Professor at Bennett University.