The European Union (EU) has begun implementing the definitive phase of its Carbon Border Adjustment Mechanism (CBAM), a policy that will attach a carbon-linked cost to imports of carbon-intensive goods such as iron and steel, aluminum, cement, fertilizers, hydrogen, and electricity.

EU says CBAM is meant to put a fair price on carbon emitted during the production of goods entering the EU and to ensure European manufacturers are not undercut by imports made under looser climate rules.

What is CBAM?

The EU designed CBAM to prevent carbon leakage, the risk that carbon-intensive production shifts to countries with weaker climate regulations. That would undermine Europe’s emissions cuts while leaving EU industries at a disadvantage.

CBAM is meant to mirror what European producers already pay under the EU Emissions Trading System. In plain terms, if a product attracts a carbon price inside Europe, the EU wants imports of that product to carry a comparable carbon cost at the border.

For now, CBAM covers six sectors: iron and steel, aluminum, cement, fertilizers, hydrogen, and electricity. These are among the most emissions-intensive and trade-exposed categories.

The EU has also signaled that it could widen the scope over time to include more downstream goods, such as organic chemicals, polymers, glass and ceramics, and pulp and paper. If that expansion occurs, CBAM’s influence will deepen into industrial supply chains and procurement decisions.

What Changes Now for Exporters

CBAM’s core metric is embedded emissions, the greenhouse gases generated during the production of a product. EU importers carry the formal reporting and compliance burden. But exporters sit at the center of the system because they must provide the emissions data that supports those declarations.

That makes measurement and verification almost as important as production cost. EU buyers are already asking suppliers for emissions disclosures during tenders. That is likely to become routine.

Exporters that cannot supply robust data may be assessed using EU default values instead. Those default values are not designed to understate emissions. The EU has argued that CBAM would be undermined if importers could rely on estimates that make high-emissions goods appear cleaner than they are.

For exporters, the immediate risk is clear. Firms that do not measure well can end up paying more than they should. Firms that do not decarbonize will still face rising penalties as Europe tightens carbon pricing. CBAM will behave less like a flat tariff and more like a competitiveness screen. Two suppliers selling the same product at the same price can land very different true costs for the EU buyer once emissions are priced in.

Why Renewable Energy Suddenly Matters

Steel and metals are often framed as problems of coal and process emissions, particularly in blast furnace steelmaking. That remains true. But CBAM’s accounting rules also make electricity a major lever, especially for aluminum and electric arc furnace steel.

Even in blast furnace routes, electricity-related emissions build up across mining, beneficiation, pelletization, rolling, finishing, and auxiliary plant systems. Those stages are power-hungry and sit within the wider footprint that EU buyers increasingly scrutinize.

This is where the EU’s implementing regulation becomes important. For indirect emissions, meaning emissions tied to electricity consumption, the EU links default values to the average grid emission factor of the exporting country. The regulation frames this as a way to reflect decarbonisation efforts, such as higher renewable power generation. It also uses multi-year averages for imported electricity emission factors, which reduces short-term volatility while still reflecting broader policy shifts.

India’s electricity emission factor is listed at 0.726 tCO₂eq/MWh. In practice, that figure becomes a benchmark for exporters relying on grid power who cannot demonstrate cleaner electricity sourcing through auditable proof.

For energy-intensive products, this can quickly turn into a commercial issue. Aluminum is one of the clearest examples. Its emissions profile is closely tied to the electricity mix used to power smelting. A producer running on renewables can offer a materially lower footprint than one relying largely on coal-heavy grid power. That difference will show up in the buyer’s CBAM calculation.

Electric arc furnace steel is also power-intensive. If producers can source cleaner electricity and document it, the emissions profile improves in a way that is both measurable and easier to verify than many process changes. For blast furnace steel, renewables alone cannot transform emissions, but they can still cut the footprint across upstream processing, finishing, and auxiliary systems.

CBAM Does Not Stop at the Plant Gate

A common mistake in CBAM discussions is treating it as a cost that begins and ends at the steel plant. In reality, embedded emissions are shaped across the supply chain.

Mining and beneficiation draw electricity at scale. Pelletization and sintering add heavy energy loads. Rolling and finishing are typically electricity-driven and can often be decarbonised faster than primary steelmaking through renewable power procurement.

Renewable energy stands out because it offers one of the fastest routes to measurable emissions cuts across multiple stages. Companies can deploy captive renewable generation, procure power through green tariffs where available, or sign long-term power purchase agreements. Pairing renewables with efficiency upgrades and electrifying diesel-powered equipment can deepen those reductions, though capital and planning constraints remain real.

Sector Impacts Beyond Metals

CBAM’s first phase covers six sectors, but it will not affect them equally.

Cement exports face a structural challenge because emissions are driven by both fuel combustion and process emissions tied to clinker production. Clinker ratio, kiln efficiency, and alternative fuels all matter. EU buyers may increasingly prefer lower-clinker products or suppliers that can demonstrate lower emissions intensity.

Fertilizers also face intense scrutiny, particularly ammonia, nitric acid, and nitrogen-based fertilizers. Their emissions profile depends heavily on feedstock and process pathways. For ammonia, hydrogen sourcing is a central variable. For nitric acid, nitrous oxide emissions can be decisive. In both cases, verified process data will carry weight.

Hydrogen is a connector sector. It is directly covered and also shapes the footprint of products like ammonia and, over time, low-carbon steel pilots. Under CBAM, green hydrogen becomes a commercial advantage, while carbon-intensive brown or gray hydrogen locks in higher embedded emissions.

Electricity is similar. Imported electricity is directly covered under CBAM. Cross-border power trade into the EU will increasingly favor low-carbon generation, while fossil-heavy electricity exports face higher carbon-linked costs and weaker buyer appetite.

Data is Now Part of the Product

CBAM places a premium on measurement. Exporters that cannot provide robust, verified emissions figures risk being assessed using EU default values. Exporters that do not decarbonise will face higher compliance costs regardless.

That creates a double hit. Firms that do not adequately measure their emissions can be penalized even if their real emissions are lower than assumed. Firms that do not reduce emissions face an unavoidable competitiveness penalty as buyers compare suppliers based on verified footprints.

Renewables sit at the center of this shift because renewable electricity contracts, and the metering behind them, are among the simplest decarbonization steps to audit. They are no longer just an energy strategy. They are increasingly part of export documentation.

If CBAM expands into organic chemicals, polymers, glass and ceramics, and pulp and paper, measurement demands will become even more complex. These sectors involve multi-step production chains and diverse energy sources, which make product-level accounting more difficult. Exporters that invest early in measurement systems and verification will face less disruption if the scope widens.

What Does CBAM Mean for India

India has opposed CBAM as a trade-restrictive measure that shifts climate burdens onto developing economies, and the political debate will continue. But for companies exporting to Europe, the near-term reality is simpler. If you want to sell to the European market, you must operate under the EU’s rulebook.

The strategic question is not only whether CBAM is fair. The question is whether Indian producers can adapt fast enough, and whether some can turn decarbonization into a competitive advantage.

The signal from the regulation is consistent. Indirect emissions values are tied to electricity grid emission factors and intended to reflect decarbonization efforts. For India’s exporters, that points to the direction they must travel. Cleaner electricity across the value chain supports a stronger embedded emissions profile.

The exporters that will do best will be those that can show a credible emissions-reduction plan from raw materials to finished products. That plan must be backed by measurement, verification, and demonstrably cleaner power. In effect, CBAM is turning carbon intensity into a trade attribute.

Exporters that treat emissions data as part of the product, and renewable power as part of the proof, will be best placed to remain competitive in Europe.

As regulatory and market pressures around carbon intensity grow, Mercom India’s multicity C&I Clean Energy Meet series is helping commercial and industrial energy buyers understand clean energy pathways and cost implications. The next C&I Clean Energy Meet is scheduled for Nashik on January 9, 2026.