EU’s CBAM may disrupt India’s steel industry, says study

NEW DELHI: A recent study by researchers from the Indian Institute of Management (IIM)-Lucknow and the Institute of Management Technology (IMT)-Ghaziabad has highlighted potential challenges posed by the European Union’s Carbon Border Adjustment Mechanism (CBAM) for India's small- and medium-sized steel enterprises (SMEs).

The CBAM, implemented in October 2023, aims to levy carbon content-based charges on imports of emission-intensive products, such as steel, from countries with less stringent climate regulations, including India. While the EU justifies the policy as a means to prevent carbon leakage and promote decarbonisation, the study critically examines its implications in terms of equity and feasibility.

The study, co-authored by Kaushik Ranjan Bandyopadhyay, chairperson of IIM-Lucknow’s Centre for Business Sustainability, and Kasturi Das, a professor at IMT-Ghaziabad and a Fulbright-Kalam Climate Visiting Fellow at Yale University, is the first to test whether the EU’s regulatory influence, known as the "Brussels Effect," could drive decarbonisation in India's steel sector through the CBAM. It was published in the International Environmental Agreements: Politics, Law and Economics journal.

The findings indicate that while large integrated steel plants may adapt their processes to produce lower-carbon steel for the EU market, SMEs could struggle due to financial, technological, and capacity constraints. This could lead to a dual-speed decarbonisation process, favoring larger corporations while leaving smaller players vulnerable.

"The research team found that while large integrated steel plants might adapt their production to supply lower-carbon steel for the EU market, smaller and medium-sized enterprises could face challenges due to financial, technological, and capacity constraints," Bandyopadhyay told news agency PTI. "This might create a dual-speed decarbonisation process, favouring the larger players and leaving the smaller ones vulnerable. The lack of adequate support for smaller and medium-sized enterprises to tackle their emissions reduction could lead to unequal outcomes within the industry," he added.

The study also warns that the unilateral implementation of CBAM-like policies across different jurisdictions may increase costs for exporters, complicate trade relations, and potentially hinder global climate cooperation. Given India’s status as the world's second-largest steel producer, ensuring that CBAM policies align with principles of equity and fairness is essential for achieving global climate goals.

The research, based on qualitative analysis and insights from 41 key stakeholders—including steel industry representatives, government officials, academics, and civil society members—urges the EU and other nations considering similar mechanisms to provide adequate support, such as technology transfers and capacity-building assistance, to ensure a fair and effective decarbonisation process.

These findings hold significant relevance in India-EU negotiations underway on the CBAM within the broader Free Trade Agreement discussions, highlighting the need for balanced and cooperative climate policies in a fragmented global order.

"If the EU is keen to advance the decarbonisation efforts in its trading partners from the Global South like India, it is essential to complement regulatory measures such as CBAM with supportive initiatives, including technology transfer and capacity-building assistance," said Das.

"In a fragmented global order, fostering collaborative decarbonisation strategies is essential for meaningful climate action," she added.