CBAM Made Simple: What Indian Exporters Need to Know (2024-2034)

The global drive toward decarbonization has brought about the introduction of the Carbon Border Adjustment Mechanism (CBAM), a landmark regulation by the European Union (EU). CBAM aims to combat carbon leakage and foster sustainable production practices, with a direct impact on high-carbon industries such as iron and steel, hydrogen, cement, fertilizers, and electricity.

For companies exporting these high-carbon products to the EU, understanding and adapting to CBAM is no longer optional—it’s essential for staying competitive in the global market.

The graph below highlights the contribution of the Iron and Steel Industry to CBAM, underscoring its pivotal role

https://www.cer.eu/publications/archive/policy-brief/2024/learning-cbams-transitional-impacts-trade.
Graph 1: Top exporters of CBAM applicable products to the EU in 2023.

India’s Role in the CBAM Sector and Associated Challenges

India, with its substantial share of aluminum and steel exports to the EU, holds a noteworthy 19% share of the total CBAM sector. As the third-largest Asian exporter of steel to the EU, according to the World Bank’s Relative CBAM Exposure Index, India is projected to bear the highest additional costs under CBAM. These costs are estimated to start at US $4.36 per ton of emissions in the steel sector, amounting to an overwhelming US $14.38 million.

This emphasizes India’s critical position in the global steel market, heavily reliant on the EU for its exports. The total carbon liability of aluminum, iron, and steel exports from India to the EU is projected to reach US $1.47 billion by December 31, 2034. With the Indian iron and steel industry accounting for 78% of CBAM exports from the country, it is essential for businesses in this sector to grasp the economic and market implications of CBAM thoroughly.

Despite its significant role, India faces major challenges in adapting to CBAM. These include, absence of comprehensive data architecture and vulnerability to higher CBAM taxes due to its dependence on coal-based electricity which increases the carbon intensity of production.

Furthermore, the Government of India has expressed its opposition to CBAM, labeling it a discriminatory measure that creates a substantial trade barrier between the nation and the EU.

What is CBAM?

CBAM or Carbon Border Adjustment Mechanism by European Unions is a carbon tariff  designed to impose a carbon price on high-carbon industries, often referred to as “hard-to-abate” sectors, such as iron and steel, hydrogen, cement, fertilizers,and electricity. While in its transitional phase from October 2023, CBAM will be fully implemented by January 2026. The primary objective of CBAM is to address carbon leakage and manage the shift away from EU ETS allowances.

If your company is involved in exporting Iron and Steel to the European Union (EU), it is critical to prepare for the progressive implementation of CBAM. As CBAM gradually rolls out, your company will be required to pay the carbon price differential between the Indian market and the EU for exporting steel into the EU market.

To meet CBAM requirements, your number one priority would be to assess the embedded emissions in your production process: 

  1. Direct emissions (Scope 1): These are the emissions released directly during your steel production process – think fuel combustion or chemical reactions in your facility.
  2. Indirect emissions (Scope 2): These are emissions from the electricity you use during production. Even if you didn’t produce the electricity, it’s part of your carbon footprint.

The key focus being to measure greenhouse gas (GHG) emissions, specifically carbon dioxide (CO2), across these two categories. By understanding and reporting these emissions accurately, you’ll not only comply with CBAM but also position your company as a leader in sustainable production.

Reporting Under CBAM: What You Need to Know

During the transition period, companies are required to report on a quarterly basis, using actual greenhouse gas (GHG) emissions data. In cases where actual data is unavailable, default emission values may be utilized; however, relying on these defaults entails potential uncertainties and challenges. These default values will be based on the category of the worst-performing EU ETS installations and further its use will gradually be limited by a certain factor until 31 December 2034. It is important to note that relying on default values may result in a higher carbon price under the Carbon Border Adjustment Mechanism (CBAM).

Furthermore, the total declared emissions must undergo verification by the Measurement, Reporting, and Verification (MRV) system, as mandated under the CBAM framework, to ensure both accuracy and compliance.Your business can enroll in the CBAM Transitional Registry via the CBAM portal. As part of this process, your company would benefit by focusing on developing a robust monitoring and evaluation system to support the accurate reporting of the declared emissions. 

Post-2026: Compliance and the Cost of CBAM Certificates

Post January 2026, your company will need to report only the direct emissions of the steel that is imported into the EU market and will be obligated to pay the carbon price in the form of CBAM certificates for the reported embedded emissions within the steel. This process is similar to established carbon credit systems, where 1 tonne of embedded CO2 emissions, or the equivalent emissions from other greenhouse gases, must be offset through the purchase of CBAM certificates. The carbon price will be determined in accordance with the weekly average auction price of steel products within the EU ETS system. This pricing mechanism is designed to reflect the carbon intensity of the goods being exported, ensuring that the emissions associated with its production are properly accounted for in the EU market.

Penalties and the Importance of Accurate Reporting

The European Commission (EU) will manage a central platform for the sale and repurchase of CBAM certificates. If your company fails to report emissions during the transitional period (2023–2025), penalties ranging from EUR 10 to EUR 50 (US $10.2 to US $51.43) per tonne of unreported emissions will apply. These penalties will be subject to upward adjustments based on the European Consumer Price Index. It is essential for your company to accurately measure embedded emissions during this period, as inaccurate data could lead to significant financial consequences. Not only would you face higher carbon costs through the purchase of additional CBAM certificates, but your product’s price in the EU market will also increase, putting your company at a competitive disadvantage compared to producers with lower carbon emissions.

Engaging Suppliers in Accurate Emission Assessment and Reporting

If your company relies heavily on the Iron and Steel industry, such as in the auto components sector, it is essential to make your suppliers aware of the need for accurate emission assessment, reporting, and verification in line with EU requirements. By assisting your suppliers in understanding the importance of accurate emissions tracking and reporting, you ensure the transparency and accuracy of your entire supply chain’s carbon footprint. This collaboration will help in achieving full compliance with CBAM regulations, mitigating risks associated with penalties and excessive carbon costs.

Conclusion: Adapting to CBAM for Long-Term Success

The Carbon Border Adjustment Mechanism (CBAM) is more than just a regulatory framework—it signals a transformative shift in how companies exporting high-carbon goods to the EU must address their emissions. For businesses, this means adopting a proactive approach to accurately assess, report, and verify both direct (Scope 1) and indirect (Scope 2) emissions.

By taking these steps, companies can ensure compliance with CBAM regulations while maintaining their competitive edge in a market that is rapidly transitioning towards sustainability.

To simplify and streamline this process, platforms like Bevolve offer robust tools for comprehensive reporting of emissions across your supply chain. Utilizing such platforms allows your company to not only meet regulatory requirements but also demonstrate a commitment to sustainability—enhancing your reputation in a decarbonizing global economy.

Finally, aligning your suppliers with CBAM’s reporting standards will strengthen your entire value chain, enabling your business to navigate the carbon-pricing landscape with confidence. Embracing these measures now will position your company for success in a future where carbon accountability is not just a mandate but a core driver of business value.

catalyst@bevolve.ai

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