[Answered] Examine the impact of Carbon Border Adjustment Mechanisms (CBAM) on the global distribution of resource-intensive industries. Evaluate whether building a domestic carbon pricing architecture can enable India to leverage its industrial potential as a ‘green’ competitive advantage.

Introduction

With the EU’s CBAM entering its definitive phase in 2026, rising ETS prices and falling Indian steel exports reveal how climate-linked trade instruments are reshaping global industry, competitiveness, and decarbonisation pathways.

CBAM: Trade-climate linkage

1. Carbon cost internalisation: CBAM extends the EU Emissions Trading System (ETS) to imports, forcing exporters to price embedded carbon, marking a shift from tariff-based to climate-conditional trade governance.
2. Industrial relocation effects and Reallocation pressure: Resource-intensive industries like steel, aluminium, cement face incentives to relocate production to low-carbon jurisdictions, accelerating green industrial clustering in ETS-linked economies like the EU, Korea and Japan.
3. Trade contraction: India’s iron and steel exports to the EU fell over 50% by FY26, reflecting CBAM’s deterrent effect despite India’s ore and labour cost advantages, exposing carbon intensity as the new competitiveness metric.

Global distribution: Carbon clubs

1. Emerging climate blocs: CBAM promotes formation of “carbon clubs”, where countries with comparable carbon pricing gain preferential access, marginalising carbon-intensive exporters and fragmenting global value chains.
2. WTO tensions and Legal uncertainty: While CBAM claims Article XX GATT environmental exceptions, developing countries view it as green protectionism, risking prolonged WTO disputes without resolving underlying decarbonisation gaps.

India’s constraint:

1. Carbon intensity and Technology lock-in: India’s steel sector relies heavily on coal-based blast furnaces, making it vulnerable to CBAM unless rapid transition to DRI-EAF and hydrogen-based processes occurs.
2. Green hydrogen gap and Scale deficit: Against a need of 60–100 GW electrolysers, only ~3 GW capacity awarded by mid-2025, keeping green hydrogen costs three times global benchmarks, slowing decarbonisation.

Domestic carbon pricing

1. Price signal creation: A domestic carbon market or carbon tax aligns production decisions with climate costs, reducing CBAM exposure and improving MRV (Measurement, Reporting, Verification) credibility.
2. CBAM creditability: Carbon prices paid domestically can be credited against CBAM liabilities, preserving EU market access and preventing export erosion, as seen in Korea’s ETS linkage.
3. Green competitiveness: Carbon pricing incentivises energy efficiency, green steel, green cement, enabling India to shift from cost-led to sustainability-led comparative advantage.

Enablers

1. Mission alignment: Integrating carbon pricing with the National Green Hydrogen Mission (5 MMTpa by 2030), PLI schemes, and renewable expansion can accelerate low-carbon industrial ecosystems.
2. Input access: Reducing tariffs on electrolysers, RE components and intermediates—India’s applied tariff averages 11.4% vs global 6%—lowers green transition costs.
3. Green finance mobilisation: Carbon markets can crowd-in capital via green bonds, blended finance, and sovereign transition frameworks, as recommended by World Bank carbon market reports.

Opportunity framing

Green superpower potential: India’s abundant renewables, iron ore base, and scale economies position it to dominate green metals, if carbon pricing accelerates transition instead of delaying it through litigation.

Conclusion

Echoing Justice R.F. Nariman’s climate jurisprudence and India’s LiFE vision, carbon pricing transforms CBAM from coercion into opportunity—aligning growth with climate responsibility and global industrial leadership.