Early signs that the EU carbon border adjustment mechanism is reshaping EU–India steel trade

nature climate change Analysis https://doi.org/10.1038/s41558-026-02607-y Early signs that the EU carbon border adjustment mechanism is reshaping EU–India steel trade Received: 11 September 2025 Accepted: 5 March 2026 Published online: 8 June 2026 Check for updates Gian Luca Vriz Luca Taschini , Theodor Cojoianu 1 2,3 , Carolyn Fischer 4,5 & 1 The EU Carbon Border Adjustment Mechanism (CBAM) aims to level carbon-related costs between domestic and foreign producers to avoid carbon leakage. Although most existing CBAM studies focus on country-level or sector-level aggregates, the policy is applied to individual goods, where emissions performance and trade strategies vary widely across producers. Item-level compliance therefore depends on facility-level characteristics, making firm-level analysis critical to understanding actual exposure and early behavioural adjustments. Here early signals of the CBAM on India’s iron and steel exporters are investigated by integrating firm-level export data with independent estimates of manufacturers’ emissions and production. The analysis reveals that high-emission firms significantly reduced both export quantities and revenues to the EU during the CBAM reporting phase, whereas low-emission firms maintained their export levels. Such supply chain adjustments are in line with EU policy intentions, creating opportunities for low-emission producers while reducing reliance on high-emission suppliers to the EU. Climate policies vary widely across countries, with some nations enforcing stringent restrictions on greenhouse gas emissions and others imposing minimal or no constraints. For energy-intensive and trade-exposed industries, such asymmetry can undermine both environmental effectiveness and competitiveness, as firms may shift production to regions with weaker policies or source inputs from such areas, a phenomenon known as carbon leakage1,2. Although the empirical evidence for carbon leakage has been mixed, many studies have looked at circumstances where low emissions prices, free allowances and industrial support mechanisms were present3. As carbon prices rise and ambition grows, so do calls for addressing leakage risks4. Border carbon adjustments address this challenge by levelling carbon-related costs between domestic and foreign producers. They add a levy to imports based on the carbon content of the goods, adjusted for any explicit carbon price paid in the exporting country. The aim is to ensure that consumers in the implementing region face the same carbon price for emissions embodied in the goods they purchase, regardless of origin, and to create incentives for cleaner production5–8. The European Union (EU) introduced the EU Carbon Border Adjustment Mechanism (CBAM) in October 2023, initially covering a select group of carbon-intensive sectors (cement, iron and steel, aluminium, fertilizers, hydrogen, electricity and certain intermediate products) that together account for roughly half of the emissions covered by the EU Emissions Trading System (EU ETS)9. During the transitional phase (to the end of 2025), importers must report embedded emissions in covered goods. In the first reporting phase (until the end of 2024), businesses were able to choose from three reporting methods: the EU methodology, an equivalent approach or default values published by the European Commission. Reporting of actual values was expected starting 1 January 2025, with some streamlining to allow installation Business School, University of Edinburgh, Edinburgh, UK. 2College of Integrative Studies, Singapore Management University, Singapore, Singapore. EU Platform on Sustainable Finance, DG FISMA, European Commission, Brussels, Belgium. 4Development Economics Research Group, World Bank Group, Washington, DC, USA. 5Department of Spatial Economics, Vrije Universiteit Amsterdam, Amsterdam, the Netherlands. e-mail: 1 3 Nature Climate Change | Volume 16 | June 2026 | 737–741 737 Analysis https://doi.org/10.1038/s41558-026-02607-y Indirect (scope 2) Results Direct (scope 1) The aforementioned country-level metrics from aggregated emissions and trade data can be useful to identify those potentially exposed to the EU CBAM, but they are imperfect indicators of actual exposure16. Because the EU CBAM is applied to individual imported goods based on their embedded emissions, actual exposure depends on firm-specific emissions intensities and trade behaviour, not on country averages. Producers may also adjust export strategies in response to changing competitiveness. To capture these dynamics, a new dataset is constructed to link facility-level emissions estimates to shipment-level export records for Indian steel firms. Switzerland Belarus Norway South Korea China USA Country Taiwan, China EU27 Türkiye Ukraine Compiling firm-level data UK Japan Serbia Brazil South Africa Russia India 0 1 2 3 4 5 Emission factor Fig. 1 | Emissions intensity of steel production among the EU’s leading exporters. Direct (scope 1) and electricity-related (scope 2) emission factors (tonnes of CO2e per tonne of goods) among top steel exporters to the EU, calculated as an unweighted average of EU JRC estimates of emissions intensities across listed iron and steel product categories13, avoiding differences attributed to export mix. operators outside the EU to upload and share their emissions data for use across importers. The definitive phase begins in 2026, when importers must also purchase CBAM certificates for their embedded emissions, aligning carbon costs with those borne by EU producers under the EU ETS. The iron and steel sector is of particular interest. It is both highly emissions intensive and deeply integrated into global value chains10, and evidence suggests that steel trade is sensitive to carbon pricing asymmetries11. India is among the EU’s leading suppliers12,13 and ranks among the highest in direct emissions intensity for steel production, roughly double the EU average for an equal product mix. Figure 1 depicts the unweighted average of emissions intensities across listed iron and steel product categories in ref. 13, to avoid differences attributed to export mix rather than emissions intensity estimates across countries. In the three most important product categories for India (harmonized system (HS) codes 7210, 7207 and 7208; Extended Data Fig. 1), India has the highest listed direct emissions intensity, 2.6–2.7 times that of the EU27. These characteristics suggest substantial exposure to CBAM compliance costs when the mechanism is fully operational. Although most existing CBAM studies rely on ex ante numerical modelling at the country or sector level5,14,15, the policy is applied at the level of individual goods, where emissions performance and trade strategies vary widely. Item-level compliance, therefore, depends on facility-level characteristics, making firm-level analysis critical to understanding actual exposure and early behavioural adj (...truncated)