Early signs that the EU carbon border adjustment mechanism is reshaping EU–India steel trade

Abstract

The EU Carbon Border Adjustment Mechanism (CBAM) aims to level carbon-related costs between domestic and foreign producers to avoid carbon leakage. Although most existing CBAM studies focus on country-level or sector-level aggregates, the policy is applied to individual goods, where emissions performance and trade strategies vary widely across producers. Item-level compliance therefore depends on facility-level characteristics, making firm-level analysis critical to understanding actual exposure and early behavioural adjustments. Here early signals of the CBAM on India’s iron and steel exporters are investigated by integrating firm-level export data with independent estimates of manufacturers’ emissions and production. The analysis reveals that high-emission firms significantly reduced both export quantities and revenues to the EU during the CBAM reporting phase, whereas low-emission firms maintained their export levels. Such supply chain adjustments are in line with EU policy intentions, creating opportunities for low-emission producers while reducing reliance on high-emission suppliers to the EU. The EU Carbon Border Adjustment Mechanism (CBAM) was introduced to curb carbon leakage, but its impact is debated. Using export and emissions data from Indian steel plants, researchers show early evidence that the CBAM could penalize high-emission producers, rather than act as a blanket trade barrier.