The European Commission has proposed significantly expanding its Carbon Border Adjustment Mechanism (CBAM) to include approximately 180 additional steel and aluminium-intensive downstream products, marking a major escalation in the bloc’s efforts to prevent carbon leakage across global value chains. The expansion aims to address a critical regulatory gap: the risk that manufacturers simply shift emissions-intensive production outside EU borders rather than genuinely reducing their environmental footprint.
CBAM, which entered a transition phase in October 2023, currently covers direct emissions from cement, steel, iron, aluminium, fertilisers, and electricity production. The mechanism functions as a carbon tax on imported goods, requiring foreign producers to purchase EU carbon allowances if their products lack equivalent carbon pricing at source. By extending CBAM to downstream products—manufactured items that incorporate these base materials—the Commission seeks to close loopholes that allow companies to import cheaper, carbon-intensive components and assemble finished goods within the EU, effectively circumventing the system’s original intent.
This expansion carries substantial implications for global supply chains and carries particular weight for India and South Asian manufacturers. Indian steel, aluminium, and chemical exporters have already faced scrutiny under the existing CBAM framework. The addition of 180 downstream products—potentially including machinery, automotive components, construction materials, and appliances—would extend compliance obligations deeper into the value chain. Companies currently exempt from direct CBAM requirements could find themselves subject to the mechanism if their imported inputs are deemed carbon-intensive. For Indian exporters, this creates dual pressure: either invest in decarbonising production or face higher costs when selling to EU markets, one of the world’s largest consumer economies.
The Commission’s approach reflects growing concern that the current CBAM, while pioneering, remains insufficient to meet EU climate targets under the European Green Deal. By limiting CBAM to primary materials, the system inadvertently incentivises firms to shift processing operations abroad—producing steel sheets outside the EU, then importing them for final manufacturing. The downstream expansion directly targets this behaviour. Aluminium foil, steel tubes, rolled metal products, and semi-finished chemicals represent the categories most likely to be captured, according to preliminary Commission analysis. This expansion is expected to take effect in 2026, following a transitional period that allows businesses to adjust compliance procedures and supply chain strategies.
For multinational corporations with operations spanning Europe and Asia, the expanded CBAM presents a complex puzzle. Companies must decide whether to relocate production to EU jurisdictions with stringent emissions standards, invest heavily in clean technology retrofits at existing facilities, or absorb higher import costs. Indian producers face a particularly acute dilemma: the cost of transitioning to renewable energy and low-carbon manufacturing remains significantly higher than in some competitor nations. Small and medium enterprises (SMEs), which dominate India’s export-oriented manufacturing sectors, lack the capital reserves of larger conglomerates to fund rapid decarbonisation programmes. Industry associations in India have already raised concerns about CBAM’s competitiveness impact; the expansion threatens to exacerbate these tensions.
EU member states and environmental advocates view the expansion as essential climate policy architecture. Without extending CBAM to downstream products, they argue, the mechanism becomes a partial solution to a systemic problem. Carbon-intensive producers would merely restructure global supply chains, relocating the most polluting stages beyond EU jurisdiction while maintaining access to European markets through less-regulated components. However, trading partners—particularly developing economies reliant on exports of primary materials and semi-finished goods—contend that CBAM effectively exports the cost of EU climate ambitions to nations with lower current emissions profiles and limited responsibility for historical climate change.
The expansion also signals intensifying competition between regulatory regimes. The United States, under both previous and current administrations, has considered carbon border mechanisms. Other major trading blocs may follow suit, fragmenting global trade into carbon-differentiated zones. For India’s export-dependent economy, this regulatory multiplication creates uncertainty and compliance costs that smaller competitors may better absorb. The forward outlook hinges on three dynamics: whether the Commission finalises the 180-product list by late 2024 or early 2025, whether third countries successfully negotiate exemptions or preferential treatment, and whether major trading partners establish compatible carbon pricing systems that CBAM recognises as equivalent. India’s capacity to influence these negotiations—either through bilateral EU engagement or World Trade Organization forums—will determine whether the expansion becomes a trade lever or a genuine environmental mechanism.
