The future of business and international trade depends on adopting lower carbon economic models and climate-conscious pathways. As climate risk is becoming deadlier for companies and legacy businesses across the globe, consumers and investors are preferring for products with lower carbon emissions associated with them. Market trends and local traders’ attitude is also shifting towards products that care for the environment and global sustainability.
In simpler terms, assessing climate risk and accounting for the carbon footprint of any business is taking the centrestage. And the topic in the spotlight today, which is causing unprecedented ripples in the business world is the European Union Carbon Border Adjustment Mechanism (EU CBAM).
Carbon Border Adjustment Mechanism is already disrupting businesses that have tangible export presence in the European Union Market. These economic impacts will only become intense and bigger after the world enters the definitive regime of CBAM compliance from January 2026. India particularly is set to witness financial impacts due to CBAM. For example, India GDP could decline by 0.02 per cent to 0.03 per cent between 2026 and 2030 if CBAM continues to be implemented in absence of a domestic carbon pricing mechanism, as per Centre for Social and Economic Progress (CSEP).
This means severe impacts on household consumption of carbon-intensive products. Although the export of CBAM-covered goods to the EU account for only 0.2% of its GDP, the iron and steel industry comprise 90% of these exports. This makes the iron and steel industry extremely vulnerable to maintain trade continuity with the European Union.
It also means erosion of India’s export competitiveness, high product pricing, decrease in trade volume and revenue prospects. However, this possible price spike can be decreased if India implements its own carbon tax to keep the revenue limited to the country and let it go out. In other words, this means having revenue equal to 1 per cent of Indian GDP by 2030, which can be used for domestic decarbonisation goals.
Past studies have suggested that the CBAM tax will cost dearly to developing countries all over the world. The CBAM will be a severe blow for countries like India, China, Mozambique, Turkey, Ukraine and Georgia due to reasons such as their high trade dependency on the EU, bigger volume of trade, high carbon intensity in their exports, lack of emissions data gathering systems, etc.
In a study conducted by the Task Force on Climate, Development and the International Monetary Fund (IMF), CBAM could cause an annual welfare gain of US $141 billion for developed countries, while pushing developing countries towards an annual welfare loss of US $106 billion.
If we look at the country wise data, Ukraine, Egypt, Mozambique and Turkey could witness an economic loss of $1 billion to $5 billion. If we look at the specifics, China will be under compulsion to CBAM tax of €150 per tonne on exports, India €173.8 per tonne, Russia €168.7 per tonne, Turkey €59.6 per tonne, and the USA €65.7 per tonne after the CBAM is fully implemented by 2030. This is as per the Foundation for European Progressive Studies.
CBAM To Prevent Carbon Leakage
The Carbon Border Adjustment Mechanism is a climate policy introduced by the European Union Commission to prevent carbon leakage, a situation where companies outsource their production to any other country with lax climate policies to evade carbon tax and decarbonisation responsibilities. The EU also introduced the CBAM to create a level playing field for all businesses and traders from across the world.
The entire mechanism is a replica of the European Union Emissions Trading System (EU ETS). Currently, CBAM is applicable to six highly carbon-intensive sectors such as Iron and Steel, Cement, Aluminium, Electricity, Fertilisers and Hydrogen. Although CBAM is only applicable to six carbon-intensive sectors currently, it is expected to expand to more sectors in the future.
How to Minimise Your CBAM Tax?
The European Union Commission has officially confirmed that the Carbon Border Adjustment Mechanism (CBAM) will be made mandatory from January 1, 2026 without any compromise and leniency for importers and suppliers across the globe, suppliers have been busy trying to understand how CBAM tax can be minimised and avoided for uninterrupted trade with the EU.
Amid this, starting early CBAM reporting can help in minimising and avoiding CBAM tax as it enables timely error detection, improves data accuracy, and future-proofs operations against evolving EU carbon regulations.
Early error detection in CBAM reporting allows suppliers to prepare a better response to EU CBAM. It helps in aligning data collection methods to help in early resolution of challenges and gaps. For instance, if you can start your data collection processes early, then you can ensure timely error elimination, conducting practical gap analysis and generating accurate reports on time.
It is critical to establish streamlined processes for monitoring, reporting, and verification (MRV) to improve data quality, and cut down future administrative hassles. Moreover, starting early on your CBAM reporting gives you a competitive edge over your rivals who could still be figuring out the EU carbon pricing mechanism.
Furthermore, it also allows time to prepare a roadmap of strategies to make the systems efficient and safeguard businesses. Early detection also helps in pinpointing different emission hotspots and setting the targets. This also means enhancement in business operations, efficiency and saving expenditure.
Combination of all these timely actions as a response to the EU CBAM helps in reducing financial risk, which is CBAM tax. There could be fines in the form of penalties and financial risks due to late CBAM reporting. Delayed starting of the compliance causes delays in report submissions and unwanted errors. All such fines and sanctions can be avoided if importers and suppliers both start early.
