The EU CBAM: Responses from India and China

Abstract

The Carbon Border Adjustment Mechanism (CBAM) entered its definitive regime at the beginning of 2026. However, its implementation continues to face significant backlash from major trading partners. The primary challenges include the “green protectionist” narrative, concerns regarding compliance with the Most-Favoured-Nation (MFN) principle, the potential undermining of the EU’s credibility as a trading partner and the risk of retaliatory trade responses. This policy brief examines the responses of China and India to the CBAM by analysing the concerns they have raised within the WTO forum. To address these challenges, this brief proposes preliminary solutions that include increased transparency, more collaborative approaches and the recycling of collected revenues into the green transitions of third countries.

Keywords: CBAM, EU-India Relations, EU-China Relations, European Union.  

Introduction

As of January 2026, the Carbon Border Adjustment Mechanism (CBAM) transitioned from its preliminary phase (2023 – 2025) into its definitive regime (European Commission, n.d.-a). The mechanism’s underlying objective is to prevent carbon leakage. This occurs when production is relocated from countries with strict environmental rules to nations with lax climate policies in order to avoid emissions costs, resulting in the transfer or increase of global CO2 emissions (European Commission, n.d.-b). The mechanism also seeks to incentivise the reduction of production emissions in third countries. This is encouraged through a “carrot and stick” approach that penalises high CO2 emissions. With this system, EU importers must purchase carbon certificates corresponding to the price that would have been paid if the goods were produced in the EU (European Commission, 2021). Lastly, since producers within the EU are already obliged to purchase “emission allowances” through the Emissions Trading System (ETS), the CBAM price adjustment addresses the competitive disadvantage that EU producers faced due to increasing imports from countries with weaker climate regulations (Dutch Customs, 2025). Because the mechanism targets carbon-intensive industries, its impact is concentrated amongst a specific group of countries; in fact, the main exporters of “CBAM-covered” goods to the European Union include China, India, Taiwan, Vietnam, Canada and Turkey (European Commission, 2026). This “concentration” is evident within specific industries, as shown in the first reporting window (1 st – 6 th January), where the trade volume of declared CBAM imports revealed that the iron and steel industry accounted for 98% of total “CBAM-covered” volumes (European Commission, 2026). Hence, as China and India are the primary trade partners for iron and steel with the European Union (Pereira, 2025), they represent significant case studies for evaluating how the CBAM is perceived by partnering nations. The relationship between the EU and China is currently characterised by an increasingly politicised economic environment, where the EU’s perspective on China shifts between partner, systemic rival, and competitor (European Commission, n.d.-c). Facing a prominent trade deficit in goods (European Commission, n.d.-c), the Union has committed to a long-term strategy of “de-risking” from China in order to reduce critical dependencies and vulnerabilities while diversifying its supply chains (European Commission, n.d.-c). In contrast, the CBAM’s definitive regime affects India at a pivotal moment, given that the EU and India concluded a Free Trade Agreement in late January 2026 (European Commission, n.d.-d). This agreement aims to eliminate or reduce tariffs on around 96% of EU goods exports while providing enhanced investment protections and promoting non-discrimination (European Commission, n.d.-d).

Policy Description

In essence, the CBAM functions as a carbon adjustment on imports of designated goods into the EU (Dutch Customs, 2025), applying directly to importers of these goods. As hinted above, one of its underlying objectives is to mirror the EU Emission Trading System (ETS), as the price of CBAM certificates reflects the cost paid by EU producers (European Commission, 2025b). This alignment is intended to preserve the effectiveness of the mechanism as a tool to prevent carbon leakage (European Commission, 2025b). From 2026, the European Commission calculates the price of the CBAM certificates based on the “quarterly averages of EU ETS allowance prices” (European Commission, 2025b). However, to ensure higher market alignment, this calculation will shift to a “weekly average of EU ETS allowance prices”, starting January 1, 2027 (European Commission, 2025b).

Regarding methodology, importers are required to report both direct and indirect emissions associated with their imported goods. In accordance with the European Commission (2024), operators can monitor direct emissions via two primary methods: the calculation-based approach, which uses the quantities of all fuels and relevant materials consumed, in addition to specific emission factors based on the carbon content (European Commission, 2024); and the measurement-based approach, which involves measuring the concentration of the greenhouse gases and flue gas for each emission source (European Commission, 2024). Indirect emissions are classified as emissions that occur during the production of electricity consumed during manufacturing (European Commission, 2024). These are calculated by multiplying electricity consumption by the appropriate emission factor. The latter depends on whether the electricity comes from the grid, whether the operator is an auto-producer, or whether the operator received electricity under a power purchase agreement (European Commission, 2024).

When verified data from suppliers is unavailable or unreliable, default values are utilised in place of actual values based on real emissions (European Commission, 2025a), as a penalty for lack of transparency. According to the European Commission (2025c), the use of default values is required for determining embedded emissions in goods other than electricity, as in imported electricity, and for determining indirect embedded emissions. Furthermore, this calculation is based on the average of the ten exporting countries with the highest emission intensities (European Commission, 2025c). These values use a conservative approach to ensure that embedded emissions are not underestimated (European Commission, 2025c). To ensure environmental integrity, default values include a mark-up to account for installations where emission levels exceed the relevant average emission intensity of the producer country (European Commission, 2025c). Therefore, the proposed mark-up is based on existing deviations of Union installations with respect to the Union average (European Commission, 2025c). For indirect embedded emissions, the default value is calculated based on the average of the emission factor of the country-of-origin electricity grid (European Commission, 2025c). Furthermore, for cement, aluminium, iron and steel, the markup increases by 10% in 2026, 20% in 2027, and 30% from 2028 onwards (European Commission, 2025c). Lastly, if a non-EU producer has already paid a carbon price in a third country on the embedded emissions of the imported goods, the corresponding cost can be fully deducted from the CBAM obligation (European Commission, 2023a).

Problem Statement

In accordance with the Draghi Report, the CBAM is a crucial instrument for ensuring European competitiveness (European Union, 2025), but its success cannot be taken for granted. In this sense, three potential issues have been identified. Firstly, due to its punitive nature, the CBAM may be interpreted as a green protectionist measure that undermines the Most-Favoured-Nation (MFN) principle of the World Trade Organization (WTO). In addition, in a geopolitical environment characterised by the deterioration of the Liberal International Order (LIO), the undermining of multilateral institutions, and the weaponisation of trade, the EU’s deployment of the CBAM risks further eroding the credibility of international trade governance and straining relations with key partners such as China and India.

Secondly, although designed to prevent carbon leakage and incentivise global decarbonisation, the mechanism’s punitive nature could prove counterproductive. The logic of the CBAM assumes that by increasing costs for high-carbon imports (through the certificates), European buyers will pivot to greener alternatives, pressuring third-party producers to “green” their operations in order to retain market access. However, if the costs of a sustainable “transformation” outweigh the value of the European market, high-emitting producers may instead pivot away from the European market. This withdrawal could undermine the EU’s credibility as a trading partner.

Thirdly, from a scenario planning perspective, while the EU’s Economic Security Strategy aims to “de-risk” from China (European Commission, 2023b), the CBAM could inadvertently increase dependency on other markets, such as the United States. In the case that EU domestic production fails to scale quickly enough to replace Chinese imports. This scenario rests under the assumption that high carbon costs might drive Chinese exporters out of the European market or trigger retaliatory trade barriers. In this sense, the EU risks overestimating its market leverage, a concern echoed by Draghi (2025), which could provoke retaliatory responses. These might range from the weaponisation of trade through targeted tariffs, as was seen between the US and China, to diplomatic boycotts or fractured negotiations with blocs like Mercosur, where India exerts significant influence as a “leading voice” of the Global South (Bava, 2026).

Policy Research

Despite the EU stating that the “CBAM, regardless of what people try to push for, is not a penalty for importers to the EU, but an incentive for decarbonisation” (European Commission, 2023d), the diplomatic responses to the mechanism have been characterised by consistent objection from the EU’s primary trade partners, namely China and India. A dialogue was opened within the World Trade Organization (WTO) regarding the CBAM, where China was amongst the Members that raised the concern, and India acted as a supporting member (World Trade Organization, n.d.).

During the preliminary meetings in April 2023, China highlighted that the CBAM lacked a scientific basis for implementation, even declaring that “studies have pointed out that the European Emission Trading System (EU ETS) does not lead to carbon leakage, and CBAM makes little contribution to global emission reductions” (World Trade Organization, n.d.). China argued that the mechanism’s underlying objective was not to eliminate carbon leakage, but to protect European enterprises from international competition while imposing an “inadequate burden” of measuring emissions on exporters (World Trade Organization, n.d.). China also  defends that Members require more capacity and funding in order to collect the carbon emission data of their products (World Trade Organization, n.d.). Furthermore, the question was raised about whether the mechanism aligns with “the fundamental WTO principle of non- discrimination” (World Trade Organization, n.d.). India supported this narrative by describing the CBAM as a unilateral and protectionist measure (World Trade Organization, n.d.).

By March 2024, the critiques expanded to address the negative spillover effects of the mechanism. China began its statement by reaffirming that the CBAM is inconsistent with WTO fundamental principles and noted that developing nations are impacted more by the negative spillover effects of the CBAM than developed Members (World Trade Organization, n.d.). The reasoning behind such an affirmation is that the progress of energy transformation in developing nations is slow due to socioeconomic, financial, and technological constraints. Consequently, carbon intensity per unit of output is higher (World Trade Organization, n.d.). China warned that the formation of an “exclusive carbon club” based on the CBAM would lead to global trade distortions, a decline in global trade volume, and would “exacerbate global inequality” (World Trade Organization, n.d.).

Such concerns were restated by India, which affirmed the fuelling of trade fragmentation due to Members taking unilateral trade measures applied with extra-territorial effect (World Trade Organization, n.d.). Moreover, India highlighted that the mechanism impinges on sovereign decisions by forcing an emissions reduction path and disregarding the “Nationally Determined Contributions” of trading partners (World Trade Organization, n.d.). The country specifically raised concerns about “Micro, Small and Medium-Sized Enterprises (MSMEs),” stating that they would be unable to meet the complexities of tracking, measuring, and reporting emissions, and would eventually be replaced by large firms, thereby undermining the sustainable development objectives of the Marrakesh Agreement (World Trade Organization, n.d.). India also stated that trade-related environment measures should be designed in a way that keeps international cooperation as a central consideration while considering the different national socio-economic environments of trading partners (World Trade Organization, n.d.). Lastly, India restated that the CBAM “constitutes an arbitrary or disguised restriction and unjustifiable discrimination to trade” (World Trade Organization, n.d.).

In the last sessions in 2025, dialogue focused on the relevance of transparency and international climate pacts. China affirmed that the way to address climate change, which is a challenge for all, is to “uphold multilateralism and work together […] through promoting trade and investment in green industries and reducing relevant trade barriers” (World Trade Organization, n.d.). In addition, China urged the EU to improve the transparency of the CBAM and raised the concern that “firms outside the European Union may be asked to part with information which may be business-critical in nature;” consequently, there is apprehension about how this information will be “stored and used and who will have eventual access to it” (World Trade Organization, n.d.). India concluded its interventions by reaffirming that the CBAM shifts the EU’s responsibility and commitment to meet its NDCs onto trading partners, which was not the intended purpose under the Paris Agreement (World Trade Organization, n.d.).  

Policy Recommendations

To address the multifaceted concerns surrounding the CBAM, the European Union should focus on implementing a more collaborative and transparent communication strategy. To mitigate the aforementioned “green protectionist” concerns, the Union could increase transparency by offering expanded discussion windows for trading partners while providing country-specific consultations to clarify impending questions. This approach would not only help partners better understand the regulation, possibly leading to increased compliance and adherence, but it would also demonstrate the Union’s commitment to ensuring that the mechanism serves as a genuine incentive for global decarbonisation rather than an exclusive protectionist tool.

On the other hand, the EU should reconsider the financial logic behind the mechanism to address the “carbon club” narrative and the economic strain placed on developing members. Currently, 75% of CBAM revenues are allocated to the EU budget, while Member States retain the remaining 25% (European Commission, 2023c). A strategic solution would be to transform CBAM costs into co-investment opportunities. By recycling collected revenues into green initiatives in exporting countries, the EU can directly support its trading partners and effectively prevent carbon leakage. This approach would provide the necessary financial incentive for developing nations to reduce their carbon footprint. Furthermore, such a strategy would likely reinforce the EU’s credibility as a trading partner by resolving a problem of its own making. Ultimately, this addresses discrimination and unfairness claims while fostering multilateral cooperation to combat climate change.

Possible constraints to these measures include reaching a consensus on percentage allocation; for instance, it is unclear if Member States would agree to recycling 100% of collected revenues, or if only 75% would be made available. Moreover, this would require a significant legislative shift, as it redirects funds away from the EU budget into external aid.

Conclusion

As illustrated by the CBAM, a strategy centred exclusively on punitive measures risks alienating key global partners and undermining the very objectives it seeks to achieve. As the responses from China and India highlight, the EU’s “carrot and stick” approach is perceived more as a protectionist, unilateral measure that penalises developing nations than as an instrument for decarbonisation. By demanding rigorous emissions data and imposing carbon costs on industries like iron and steel, which account for 98% of CBAM-covered volumes, the mechanism may trigger retaliatory trade barriers, drive trade fragmentation, undermine multilateral efforts and push major economies towards more protectionist approaches.

To ensure the CBAM’s long-term objectives of preventing carbon leakage and promoting global decarbonisation, the Union must transition from “regulator” to collaborator. This can be set into motion by providing increased transparency, fostering more collaborative communication and support, and implementing revenue recycling into green initiatives within third countries. Ultimately, the CBAM can only work if there is a palpable commitment to international cooperation.  

Note on AI use: AI was utilised in two separate instances: To analyse extensive policy documents in order to pinpoint information, and to highlight any incoherencies or grammar mistakes throughout the editing process. All written output is original.  

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