Analysis of Carbon Border Adjustment Mechanism (CBAM) as a Climate Regulatory Barrier for India and the European Union (EU) Trade.

Abstract

The European Union (EU) established Carbon Border Adjustment Mechanism (CBAM) as a regulatory barrier under Regulation (EU) 2023/956 which entered its definitive phase in January 2026. This changed the way how climate policy and international trade are governed. CBAM is an important "live trade issue" because India seeks to achieve its two major objectives. To become Net Zero by 2070 and Viksit Bharat @2047. This paper discusses the legal and economic impacts of CBAM on trade between India and the European Union (EU). It focuses on the industries like iron, steel and aluminium which are highly vulnerable. The study examines that India faced a significant “2024Trade Shock” because exports covered under CBAM decreases from USD 7,369 million in 2023 to USD 6,321 million in 2024.The major reasons for this fall are administrative and reporting challenges during the period of transition. The augmented gravity model and verified EU ETS auction data from 2023 to 2025 shows that adding Scope 2 emissions raises the ad valorem equivalent (AVE) burden up to 15% to 20% for steel and a "catastrophic" 30% to 40% for aluminum. The paper uses the concept of Divisibility Condition Hypothesis (DCH) which is based on 41 stakeholder interviews. It explains how regulatory diffusion happens in different groups. It argues that production divisibility helps Integrated Steel Plants (ISPs) to segregate output by assigning low-carbon products for the EU. The Micro, Small and Medium Enterprises(MSMEs) will face market challenges due to limited financial capacity and data acess. The study also examines that whether CBAM is compatible with the GATT Articles I, III, and XX or not. It considers that providing free subsidies to the European Union(EU) producers is a "protectionism in disguise." The analysis determines that CBAM acts as a regressive non-tariff barrier (NTB) that may result in unequal welfare losses for developing countries like India because they do not have a domestic carbon pricing system recognized by the European Union(EU).