For generations in India, the phrase ‘Export Quality’ represented the highest benchmark of manufacturing excellence, reflecting superior quality, precision, reliability and global competitiveness. Traditionally, success in international trade was determined by familiar economic factors such as price, productivity, labour costs, logistics efficiency, product quality and tariff advantages. This prompted nations to pursue Free Trade Agreements (FTAs) to expand market access and strengthen their export positions.
Today, however, the rules of global commerce are undergoing a fundamental transformation. Environmental sustainability and climate-related risks are rapidly emerging as critical determinants of trade and investment decisions. Competitive advantage is no longer defined solely by cost and operational efficiency. Increasingly, it is shaped by a country’s ability to produce goods with lower carbon emissions, adopt sustainable manufacturing practices and comply with evolving environmental standards. In the emerging global economy, ‘Export Quality’ is being redefined to encompass not only what a product delivers, but also how responsibly it is produced.
Competitive Paradigm
At the forefront of this shift is the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), a landmark policy designed to ensure that imported products bear a carbon cost comparable to that incurred by European manufacturers. While presented as a climate-policy instrument aimed at preventing carbon leakage, CBAM has implications extending far beyond environmental regulation. It is reshaping the economics of global trade, influencing investment decisions and redefining market access.
For countries such as India, this marks the emergence of a new competitive paradigm, where carbon efficiency increasingly complements cost efficiency as a determinant of export success. Businesses must now evaluate not only what they produce and at what cost, but also the carbon footprint embedded in their manufacturing processes.
To understand the significance of CBAM, it is necessary to examine the climate strategy underpinning the EU’s economic policy. The EU has legally committed to becoming the world’s first climate-neutral continent by 2050, supported by interim targets to reduce greenhouse gas emissions by 55 percent by 2030 and 90 percent by 2040. Achieving these objectives requires a fundamental transformation of the EU’s energy, transport and industrial sectors under the broader framework of the European Green Deal.
A key instrument supporting this transition is the EU Emissions Trading System (EU ETS), the world’s largest carbon-pricing mechanism. The ETS operates on a cap-and-trade principle. The EU establishes an overall cap on emissions from covered industries and issues a limited number of emission allowances. Each regulated company must surrender allowances equivalent to its actual emissions. Companies that reduce emissions below their allocation can sell surplus allowances, while those exceeding their limits must purchase additional allowances from the market.
By placing a market price on carbon emissions, the ETS embeds environmental costs directly into production economics, rewarding cleaner technologies and penalising carbon-intensive manufacturing.
However, this creates a competitiveness concern. European manufacturers bear carbon costs under the ETS, whereas producers in jurisdictions without comparable carbon-pricing mechanisms may not. This could allow imports to gain a pricing advantage and encourage businesses to relocate production to lower-cost jurisdictions, a phenomenon known as carbon leakage.
To address this risk, the EU introduced CBAM. Unlike a conventional customs duty, CBAM applies a carbon-related adjustment to specified imports, including iron and steel, aluminium, cement, fertilisers, hydrogen and electricity. Importers must account for the embedded emissions in these products and purchase CBAM certificates corresponding to the applicable carbon cost, subject to adjustments for any eligible carbon price paid in the country of origin.
Together, the EU ETS and CBAM create an integrated framework that makes carbon efficiency a critical determinant of industrial competitiveness, market access and long-term trade advantage.
Trade Paradox
The interaction between CBAM and the India-EU Free Trade Agreement (FTA) highlights how the rules of global trade are evolving. While the FTA aims to improve market access through lower tariffs, simpler trade procedures and stronger economic cooperation, CBAM introduces a new carbon-related cost for certain products entering the European market.
As a result, lower customs duties alone may not guarantee a competitive advantage. An Indian exporter could benefit from tariff concessions under the FTA but still face additional costs if its products have a higher carbon footprint.
Recognising this challenge, the FTA includes Annex 14-A on Carbon Border Adjustment Measures, which provides a framework for cooperation on carbon pricing, emissions measurement, reporting standards, compliance mechanisms and industrial decarbonisation. However, the annex does not exempt Indian exports from CBAM. The full benefits of the FTA will therefore depend not only on tariff reductions but also on India’s ability to reduce carbon intensity and meet emerging sustainability requirements in global trade.
Parallelly, while the India-UK Comprehensive Economic and Trade Agreement (CETA) provides significant tariff benefits and improved market access for Indian exporters, it does not remove emerging carbon-related trade barriers. The UK is scheduled to introduce its own CBAM from January 2027, covering sectors such as iron and steel, aluminium, cement, fertilisers and hydrogen.
Like the EU mechanism, it aims to ensure that imported carbon-intensive products bear a carbon cost comparable to that faced by domestic producers. However, the UK CBAM differs in its design. The EU mechanism is linked to the EU ETS and operates through the purchase of carbon certificates, whereas the UK CBAM is proposed as a tax-based carbon charge on imports.
Consequently, compliance with EU requirements will not automatically satisfy UK obligations. Indian exporters serving both markets may therefore need to comply with two distinct carbon-border regimes, making robust carbon-accounting and compliance capabilities increasingly critical for sustaining export competitiveness.
The challenge is particularly relevant for India, where a significant portion of manufacturing remains dependent on coal-based energy and carbon-intensive production processes. Steel and aluminium are especially exposed because of their relatively high emissions footprints. Given the importance of European markets for these sectors, carbon-related adjustments could increase landed costs and affect export competitiveness.
Beyond the direct financial impact, exporters will need to invest in emissions measurement, reporting, monitoring and verification systems. Over time, buyers are likely to favour suppliers with lower emissions and credible carbon-accounting capabilities.
CBAM is therefore not merely an additional levy but a structural shift in global trade, where carbon efficiency is becoming as important as cost, quality, productivity and technological capability in determining long-term export success.
Strategic Response
India’s response to CBAM must be guided by pragmatism rather than protectionism. While India should continue engaging with the EU and the UK on issues of fairness, transparency, WTO compatibility and the principle of Common but Differentiated Responsibilities (CBDR-RC), diplomacy alone will not be sufficient.
The more sustainable response lies in strengthening industrial competitiveness through accelerated decarbonisation. This requires investments in renewable energy, green hydrogen, low-carbon manufacturing, credible carbon markets, emissions-monitoring systems and affordable transition finance. Equally important is securing recognition of India’s carbon-accounting frameworks.
As carbon considerations become embedded in global trade, competitiveness will increasingly depend not only on production costs but also on carbon intensity and sustainability performance. For India, the path to Viksit Bharat 2047 will be defined not only by higher exports or additional FTAs, but by its ability to build a globally competitive, technology-led, low-carbon industrial ecosystem that commands market access, investment flows and long-term economic resilience.
(The writer is a Chartered Accountant with a leading Mumbai-based company. Views personal.)
