EU’s CBAM poses challenges for Indian steel sector

The EU’s Carbon Border Adjustment Mechanism (CBAM) poses challenges for India’s small and medium-sized steel enterprises due to financial and technological constraints, while larger plants may adapt more easily, according to an IIM-Lucknow study. The study recommends supportive measures such as technology transfer and capacity-building to ensure fair decarbonization. It also highlights that unilateral CBAM-like mechanisms could raise export costs, complicate trade relations, and weaken global climate collaboration.

A study by IIM-Lucknow, in collaboration with IMT-Ghaziabad and Yale University (U.S.), examines the impact of the EU’s Carbon Border Adjustment Mechanism (CBAM) on India’s steel industry. CBAM, implemented since October 2023, imposes carbon content-based charges on imports of emission-intensive products like steel from countries with less stringent emission norms, including India.

Kaushik Ranjan Bandyopadhyay, Professor at IIM-Lucknow, stated, “In this first-of-its-kind study in India, the researchers tested the hypothesis whether the EU’s ability to extend its regulation beyond borders, commonly known as the ‘Brussels Effect’, will drive decarbonisation in India’s steel industry through the CBAM.”  

The study finds that while large integrated steel plants may adapt to produce lower-carbon steel for the EU market, small and medium-sized enterprises (SMEs) face financial, technological, and capacity-related constraints. This could lead to unequal impacts within the industry.

Although the EU justifies CBAM as a measure to prevent carbon leakage and encourage decarbonisation, the study critically assesses its real-world feasibility and equity. The lack of adequate support for SMEs could make compliance difficult, potentially harming their competitiveness. Additionally, unilateral CBAM-like mechanisms could increase costs for exporters, complicate trade relations, and undermine collaborative global climate efforts.

While India has policy frameworks for steel decarbonisation, the study argues that expecting CBAM to accelerate this process rapidly is unrealistic due to the complexities of the sector. The researchers recommend that policymakers ensure fairness in implementation and consider the impact on smaller players. These recommendations are vital for India-EU negotiations on CBAM within Free Trade Agreement discussions.

The study, based on qualitative research from 41 key stakeholders, stresses India’s critical role in global climate action as the world’s second-largest steel producer. It warns that unilateral regulations like CBAM could exacerbate trade and geopolitical tensions. Instead, fostering collaborative decarbonisation strategies would be more effective in addressing climate challenges.

The European Commission is expected to release an Omnibus Proposal by the end of February to streamline CBAM processes and reporting requirements.