Carbon chickens are coming home to roost, and India has nowhere to hide

For years, any conversation around Environmental, Social, and Governance (ESG) frameworks felt like an unnecessary diversion in Indian boardrooms; a glossy chapter in annual reports meant to soothe finicky Scandinavian pension funds and tick a regulatory box. But as of 1 January 2026, that luxury phase is over.

In the new year, the European Union’s Carbon Border Adjustment Mechanism (CBAM) has entered its definitive phase. What began on 1 October 2023 as a reporting-only exercise is now a financial obligation. From now on, EU importers must purchase carbon certificates covering the embedded emissions in imported goods. The first annual surrender of certificates will take place in May 2027, based on 2026 imports.

For Indian companies, this is no longer a future risk, but a present cost. Buyers in the EU are already demanding price cuts from Indian exporters to offset expected carbon liabilities. For exporters whose margins are already thin, that’s a big competitive cliff.

Early targets

Steel, aluminium, cement, fertiliser, electricity and hydrogen are among the first sectors covered, reflecting the EU’s focus on energy-intensive goods. For Indian steel, in particular, the impact is stark since our integrated steel’s carbon intensity is much higher than the EU’s benchmark, largely because of reliance on coal-fired blast furnaces.

Exporters in other countries have an advantage. Turkey, for instance, benefits from a steel sector dominated by electric arc furnaces. China, while still coal-heavy, has shifted aluminium smelting to power grids rich in hydropower, lowering embedded emissions in some regions.

India’s metals production remains heavily coal-dependent. The Global Energy Monitor notes that India is responsible for around half of new coal-based blast furnace capacity under development globally, underscoring ongoing reliance on coal-intensive production. What’s more, India does not currently have a fully implemented, economy-wide carbon pricing system comparable to EU’s Emissions Trading System (ETS). CBAM allows deductions if exporters can prove they have already paid a domestic carbon price equivalent to the EU ETS. In practical terms, that means Indian exporters cannot meaningfully offset CBAM liabilities with domestic carbon payments.

Transition

It’s not just the EU. In the United States, proposals such as the Clean Competition Act echo CBAM’s logic of penalising imports whose carbon intensity exceeds domestic norms. While that bill hasn’t become law yet, its momentum signals a broader shift in industrial policy logic.

Sure, some Indian companies are already positioning for this transition. Tata Steel Ltd. is investing in electric furnace capacity abroad, including in the United Kingdom, partially subsidised by local government programmes. Hindalco Industries Ltd. has started marketing low-carbon aluminium products to capture premium, sustainability-focused buyers.

But these moves are isolated and incremental. The real danger awaits MSME exporters in clusters from Ludhiana to Coimbatore, since compliance costs can be high. Verified emissions reporting requires plant-level data, third-party validation and process transparency. Even basic third-party verification can cost ₹1-5 lakh annually, depending on the complexity.

Shifting sands

India’s metals and materials sector grew in an era when energy cost and scale determined competitiveness. The next phase will be shaped by carbon intensity and energy mix. Without accelerated grid decarbonisation, green hydrogen scale-up and a credible domestic carbon pricing framework, exporters will remain exposed to foreign carbon regimes over which they have no control.

The EU policy shift is part of a broader global trend. Companies with high embedded emissions face higher input costs in the form of carbon levies, tougher access to markets and, increasingly, higher cost of capital. Global banks and institutional investors are starting to price carbon risk into lending and equity valuations.

In the new geopolitics of energy, 2026 is a wake-up call for Indian business: carbon will no longer be a footnote in annual reports, or a checkbox for institutional investors. It is now a line item on export contracts and balance sheets. Indian companies face the hard choice of investing in decarbonisation and embedding sustainability into their industrial strategy, or a future where global markets increasingly up the ante on coal-powered factories.

In Company Outsider, Sundeep Khanna distills more than three decades of his experience writing on India Inc. into a thousand words of context and insights that few can bring to the table. Want this newsletter delivered in your inbox? Subscribe here.