Rising Climate-Trade Nexus: How Climate Policy is Changing Global Trade

Think of CBAM as a carbon toll booth at Europe’s border. It applies a carbon tax to certain goods imported into the EU, ensuring that imported goods, particularly those at the greatest risk of carbon leakage, face similar carbon-related costs to those produced within the EU. 

The framework works in two steps. First, EU importers must measure and report the carbon emissions embedded in the goods they bring in. Then, from January 2026, they will be required to pay.

Illustration by The Geostrata

In the definitive regime, EU importers must purchase CBAM certificates to cover those embedded emissions and submit annual declarations, the first being due by May 2027 for goods imported during 2026.

CBAM currently applies to cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen sectors that are carbon-intensive and most at risk of carbon leakage.  But the scope is expanding. When fully phased in, CBAM will capture more than 50% of emissions in ETS-covered sectors.

The financial mechanics are directly tied to the EU’s own carbon market. When an Indian exporter ships steel to the EU, if the EU carbon price stands at €100 per tonne and no equivalent carbon cost was paid in India, the EU importer pays the full €100 at customs. That cost almost always gets passed back to the exporter as pressure on price or contract terms. India’s Global Trade Research Initiative estimates that Indian exporters may need to cut prices by 15–22% to absorb this tax burden.

There is one relief valve: if an exporter can prove they already paid a carbon price at home, that amount gets deducted from the CBAM bill. This makes India’s domestic carbon policy a direct trade policy instrument, and why getting it right matters urgently.

CLIMATE MEASURES AS THE NEW TRADE BARRIER REGIME

Starting in January 2027, the United Kingdom will begin applying its own Carbon Border Adjustment Mechanism (CBAM), becoming the second large economy to introduce a carbon-based charge on certain imports. Although its framework broadly mirrors the European Union’s approach by covering sectors such as iron and steel, aluminium, cement, hydrogen, and fertilisers, the UK has chosen to cast a wider net.

Products from the ceramics and glass industries will also fall under the scheme, extending its reach beyond the sectors currently included in the EU model.

The cost implications of the EU’s CBAM are expected to become much more pronounced after 2030, when the bloc gradually removes the free emissions allowances currently available to domestic industries.

As this transition unfolds, exporters with carbon-intensive production processes will face increasingly higher charges when selling into the European market. For countries that establish credible carbon-pricing systems early, part of this cost can be offset. Those that delay, however, will have little protection from the rising levy and will continue paying the full charge on every eligible export entering the EU.

For India, these developments are no longer something to watch from afar. They are already influencing the conditions under which Indian businesses compete in global markets. The debate is no longer about whether climate-related policies will affect international trade; that shift is already underway.

What remains uncertain is how India responds: whether it takes proactive steps to build a framework that reflects its own economic priorities, or adapts to rules and standards that are increasingly being set elsewhere.

IMPLICATIONS FOR DEVELOPING ECONOMIES

The principle of Common but Differentiated Responsibilities (CBDR), introduced at the 1992 Rio Earth Summit, is based on a simple idea: tackling climate change is a shared responsibility, but not all countries have contributed to the problem equally. Nations that industrialised earlier and generated the bulk of historical emissions are therefore expected to shoulder a larger share of the burden and provide greater support in global climate action. 

Developing countries such as India contend that mechanisms like CBAM place additional pressure on economies that are still industrialising and may not have the financial resources or technological capacity needed for rapid emissions reduction.

For this reason, critics often view CBAM as a form of green protectionism that could make it harder for developing nations to compete in global markets.

Many experts also argue that the challenge goes beyond trade. Countries with limited access to finance, technology, and institutional support face greater obstacles in decarbonising their industries. As a result, there have been calls for CBAM frameworks to better reflect the principle of CBDR by offering greater flexibility to poorer nations and using part of the revenue generated to support their transition to low-carbon production.

For countries like India, the message is clear: access to key export markets is increasingly tied to carbon performance. Critics argue that this goes beyond climate action, effectively making market access conditional on meeting standards set by developed economies. As a result, CBAM is often viewed as a trade measure with significant climate implications.

INDIA AT THE CROSSROADS (RISKS TO MANUFACTURERS AND EXPORTERS)

The impact is no longer theoretical. It is already visible in trade flows, compliance actions, and shrinking export orders. India sends around 27% of its exports to the EU, and between January 2025 and January 2026, its unwrought aluminium exports to the bloc fell by 41.7%.

Steel presents a very similar picture.

The EU buys between 32% and 45% of India’s steel exports, amounting to roughly 2 to 4 million tonnes each year. By January 2026, at least 10 Indian shipments had been delayed at European ports due to missing or incomplete CBAM compliance documentation.

The financial strain is substantial. According to the Global Trade Research Initiative, Indian exporters may have to lower prices by 15–22% to remain competitive in the EU market. Meanwhile, the Centre for Science and Environment estimates that CBAM could impose an additional cost burden of around 25% on affected steel and aluminium exports.

The greatest challenge falls on MSMEs. An estimated 25,000 - 30,000 firms linked indirectly to EU exports, along with 3,000 - 4,000 direct exporters, are now exposed to CBAM-related risks. Many of these businesses lack the systems and expertise needed to accurately track and report emissions in line with EU requirements.

The reach of CBAM is also set to expand. In April 2026, the European Parliament proposed extending the mechanism to around 180 additional steel- and aluminium-based products from 2028, including fabricated metals, pipes, fasteners, machinery components, and a range of engineering goods. India is not just facing a carbon levy. It is facing a structural reshaping of who gets to compete in global markets.

INDIA'S EXISTING CLIMATE AND CARBON TRANSITION EFFORTS

India, however, has already made notable progress on its climate commitments. By March 2026, non-fossil fuel sources accounted for 53.21% of the country’s installed power generation capacity, achieving a key 2030 target years ahead of schedule. At the same time, the emissions intensity of India’s GDP fell by 37.38% between 2005 and 2022, exceeding its nationally determined target well before the deadline.

India has also begun strengthening its domestic carbon market. The Carbon Credit Trading Scheme (CCTS), operational from 2025–26, replaced the earlier Perform, Achieve and Trade mechanism and initially covered nine energy-intensive sectors, including steel and cement. Under the scheme, industries are required to meet emissions-intensity reduction targets ranging from 2.8% to 15%, encouraging a gradual shift toward cleaner production. 

Further, India is laying the groundwork for a green hydrogen economy. Through the National Green Hydrogen Mission, the country aims to produce 5 million tonnes of green hydrogen annually by 2030, with a focus on reducing emissions in sectors that are difficult to decarbonise, such as refineries and fertiliser production.

India’s intensity-based carbon market may be better suited to the needs of a developing economy, but it differs significantly from the EU’s cap-and-trade system. Bridging this gap is no longer only about climate policy; rather, it is increasingly important for maintaining competitiveness in global trade.

THE WAY FORWARD (STRENGTHENING INDIA'S COMPETITIVENESS IN THE ERA OF CLIMATE-BASED TRADE MEASURES)

As climate-linked trade measures become more widespread, India will need to strengthen its support for domestic manufacturers and exporters. A well-functioning carbon market can help businesses adjust to carbon pricing over time while encouraging cleaner production practices.

Alongside this, continued investment in renewable energy, green hydrogen, and other low-carbon technologies can help industry remain competitive as global trade increasingly incorporates climate considerations.

Greater investment in modern technologies and energy-efficient production will be crucial for lowering emissions while improving industrial competitiveness. At the same time, India should remain actively engaged in international climate and trade negotiations to ensure that emerging climate policies account for the realities and development needs of developing economies.

India should also broaden its export base to reduce reliance on markets with increasingly stringent carbon requirements. At the same time, environmental objectives must be pursued alongside the country’s growth and employment priorities. By aligning sustainability with industrial development, India can strengthen its position in global value chains and transform climate-related trade challenges into opportunities for innovation and long-term economic resilience.

CONCLUSION

Climate policy is increasingly shaping the rules of international trade. Measures such as carbon pricing and the European Union’s Carbon Border Adjustment Mechanism (CBAM) illustrate how environmental considerations are becoming closely linked to market access and global competitiveness. While these initiatives are designed to support emissions reduction, they also present significant challenges for developing economies such as India.

Adapting to this changing landscape will require continued investment in cleaner technologies, greater energy efficiency, and stronger alignment between climate and trade policy. With a proactive and well-planned approach, India can safeguard its export competitiveness, navigate emerging trade barriers, and pursue sustainable economic growth in an increasingly carbon-conscious world.

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BY SHRUTI GIRDHAR

CENTRE FOR TRADE AND DEVELOPMENT

TEAM GEOSTRATA

info@thegeostrata.com