CBAM Liability for Indian Merchant Exporters and Trading Houses: Who Really Pays?

The Carbon Border Adjustment Mechanism (CBAM) is reshaping global trade, and for Indian merchant exporters and trading houses, understanding its financial implications is paramount. While the immediate reporting burden falls on the EU importer, the economic cost of CBAM will inevitably trickle down the supply chain, directly impacting Indian manufacturers and their intermediaries. This article provides a comprehensive, practical guide for Indian businesses navigating the complexities of CBAM liability, ensuring you're prepared for both the transitional reporting phase and the definitive financial phase starting in 2026.

Key Takeaways

• EU Importer is Legally Liable: Under Regulation (EU) 2023/956, the EU importer is legally responsible for purchasing and surrendering CBAM certificates.
• Economic Burden Shifts to Exporter: In practice, the cost of CBAM certificates (the "EU carbon tax") will be passed back to the Indian exporter through price negotiations, surcharges, or reduced purchase prices.
• Merchant Exporters are Critical: Indian merchant exporters and trading houses act as crucial intermediaries. They must ensure their manufacturing partners provide accurate emissions data to avoid default values and maintain competitiveness.
• Data is King: Accurate, verified emissions data from the manufacturing facility is the only way to mitigate CBAM costs. Default values are significantly higher.
• 2026 is the Financial Deadline: From January 1, 2026, actual financial payments for CBAM certificates will begin, making cost management and data accuracy critical.
• Proactive Compliance is Essential: Indian businesses must start preparing now by understanding their supply chains, collecting data, and engaging with expert CBAM compliance services like CarbonSettle.

Understanding CBAM: A Brief Overview for Indian Exporters

The Carbon Border Adjustment Mechanism (CBAM) is the European Union's landmark climate policy designed to prevent "carbon leakage." Carbon leakage occurs when EU companies move carbon-intensive production abroad to countries with less stringent climate policies, or when EU products are replaced by more carbon-intensive imports. CBAM aims to level the playing field by imposing a carbon cost on certain imported goods equivalent to the carbon price paid by EU domestic producers under the EU Emissions Trading System (ETS).

For Indian exporters, this means that goods falling under CBAM scope – primarily iron and steel, cement, aluminium, fertilisers, hydrogen, and electricity – will incur a carbon cost when entering the EU. The transitional period, which began on October 1, 2023, requires EU importers to report embedded emissions without financial payment. However, from January 1, 2026, the definitive phase will commence, requiring EU importers to purchase and surrender CBAM certificates corresponding to the reported emissions.

This regulation, outlined in Regulation (EU) 2023/956, directly impacts thousands of Indian manufacturers across industrial hubs like Ludhiana (steel), Gujarat (cement, chemicals), Pune (engineering goods), and Jamshedpur (steel), as well as the merchant exporters and trading houses that facilitate their access to the lucrative European market.

Who is Legally Responsible for CBAM Compliance? The EU Importer's Role

Under the explicit terms of Regulation (EU) 2023/956, the legal obligation to comply with CBAM – including reporting emissions during the transitional phase and purchasing/surrendering CBAM certificates during the definitive phase – rests squarely with the EU importer. This is a critical distinction. An "EU importer" is defined as the entity that declares the goods for release for free circulation in the EU.

This means that an Indian manufacturer or a merchant exporter in Mumbai or Chennai will not directly submit reports to the EU Commission or directly purchase CBAM certificates. Their direct responsibility is to provide accurate and timely data to their EU counterpart.

However, this legal framework does not absolve Indian exporters of the economic burden. The EU importer will not absorb these costs; they will pass them back down the supply chain.

The Economic Reality: How CBAM Costs Flow Back to Indian Exporters

While the EU importer holds the legal liability, the economic reality is that the cost of CBAM will ultimately be borne by the Indian exporter. This happens through several commercial mechanisms:

1. Price Renegotiation: EU importers will factor in the CBAM cost when negotiating purchase prices with their Indian suppliers. If an Indian steel manufacturer in Jamshedpur exports to Germany, the German importer will offer a lower price to account for the CBAM certificates they will need to buy.
2. CBAM Surcharge: Alternatively, EU importers might introduce a separate "CBAM surcharge" on their invoices or purchase orders, explicitly passing on the cost.
3. Supplier Selection: Importers will favour suppliers who can provide accurate, low-emission data, as this directly reduces their CBAM certificate purchasing costs. Suppliers unable to provide data, or those with high emissions, will become less attractive.
4. Market Competitiveness: If an Indian exporter's product has high embedded emissions, the additional CBAM cost will make it less competitive compared to EU-produced goods or imports from countries with lower carbon footprints.

Consider an Indian aluminium producer in Gujarat exporting to the Netherlands. If their embedded emissions are 10 tonnes of CO2e per tonne of aluminium, and the EU carbon price is, say, €80 per tonne of CO2e, the EU importer faces an additional cost of €800 per tonne of aluminium. This €800 (approximately ₹72,000 at an exchange rate of ₹90/€) will be directly deducted from the price they are willing to pay the Indian exporter or charged as a surcharge. This is a significant financial hit that directly impacts the Indian producer's profitability and market share.

Specific Challenges for Indian Merchant Exporters and Trading Houses

Indian merchant exporters and trading houses play a pivotal role in connecting thousands of MSMEs and larger manufacturers to global markets, including the EU. Their business model often involves sourcing goods from multiple producers and consolidating shipments. This structure presents unique CBAM challenges:

1. Data Aggregation from Multiple Suppliers

A trading house in Delhi might source steel pipes from three different manufacturers in Ludhiana, Pune, and Gujarat. Each manufacturer will have different production processes, energy mixes (e.g., relying on MSEDCL in Maharashtra, UGVCL in Gujarat, or TANGEDCO in Tamil Nadu, each with varying grid emission factors), and thus different embedded emissions. The merchant exporter must collect this data accurately from each supplier for each consignment.

2. Lack of Direct Control Over Manufacturing Processes

Unlike a vertically integrated manufacturer, a merchant exporter has limited direct influence over the production methods or energy efficiency of their supplier factories. Their leverage is primarily commercial – incentivising suppliers to provide data and improve efficiency.

3. Risk of Default Values

If a supplier cannot provide actual emissions data, the EU importer (and by extension, the merchant exporter) will be forced to use default values. These default values are intentionally high, often representing the average of the 10% worst-performing EU installations for that product, or even higher if no reliable data is available. This can lead to a 20-40% higher CBAM cost compared to using actual, well-calculated emissions. For a typical shipment of steel worth €100,000, this could mean an extra €2,000-€4,000 in avoidable CBAM costs, directly impacting the profitability of the entire supply chain.

4. Supply Chain Due Diligence

Merchant exporters need to perform robust due diligence on their manufacturing partners not just for quality and price, but now also for carbon footprint. This includes understanding their energy consumption, fuel types, and production processes.

5. Communication and Education

Many Indian MSMEs, especially those not directly exporting, may be unaware of CBAM. Merchant exporters will need to educate their supplier base, explain the necessity of data collection, and potentially assist them in the process.

Operational Steps for Indian Merchant Exporters to Manage CBAM Liability

To effectively navigate CBAM, Indian merchant exporters need a proactive, structured approach.

Step 1: Identify CBAM-Affected Products and HS/CN Codes

The first step is to identify which products in your export portfolio fall under CBAM. This requires cross-referencing your product list with the specific Combined Nomenclature (CN) codes listed in Annex I of Regulation (EU) 2023/956. For example, specific grades of steel (e.g., under HS Chapter 72), aluminium products (HS Chapter 76), and certain fertilisers (HS Chapter 31) are covered. You can use resources like the CBAM CN code directory to verify your products.

Step 2: Map Your Supply Chain and Engage Manufacturers

For each CBAM-affected product, identify every manufacturing facility in your supply chain. This includes direct suppliers and, where relevant, suppliers of significant precursor materials (e.g., clinker for cement, pig iron for steel). Initiate communication with these manufacturers immediately. Explain CBAM, its implications, and the critical need for their emissions data.

Step 3: Understand Data Requirements for Emissions Calculation

Manufacturers will need to provide data on:

• Direct Emissions (Scope 1): Emissions from fuel combustion on-site (e.g., coal, natural gas, diesel used in furnaces, boilers, captive power plants). This requires fuel consumption records and emission factors.
• Indirect Emissions (Scope 2): Emissions from purchased electricity, heat, or steam. This requires electricity bills (e.g., from MSEDCL, UGVCL, TANGEDCO) and the corresponding grid emission factors or supplier-specific emission factors if available.
• Precursor Material Emissions: For complex products like steel, emissions embedded in key inputs like pig iron or ferroalloys also need to be considered.

Step 4: Establish Data Collection Protocols

Work with your manufacturing partners to set up a robust system for collecting the necessary data. This might involve:

• Monthly or quarterly collection of utility bills, fuel purchase records, and production volumes.
• Training factory staff on what data to record and how.
• Implementing internal checks to ensure data accuracy.

Step 5: Calculate Embedded Emissions

This is the most technical part. For each product, the embedded emissions (in tonnes of CO2e per tonne of product) must be calculated according to EU methodologies. This involves:

• Assigning appropriate emission factors to fuels and electricity.
• Allocating emissions to specific products if a factory produces multiple goods.
• Accounting for any recycled content or specific production routes.

This is where specialist services become invaluable. An end-to-end CBAM compliance service like CarbonSettle can take this entire burden off your shoulders, from data collection to calculation and report generation.

Step 6: Prepare for Reporting (Transitional Phase)

While the EU importer submits the report, they will rely entirely on the data you provide. Ensure you can furnish them with:

• Total quantity of goods imported (in tonnes).
• Total embedded emissions (in tonnes of CO2e) for each type of good.
• The methodology used for calculation (actual emissions, estimated, or default values).
• Any carbon price paid in India (though this is currently not applicable for most Indian industries).

Step 7: Plan for Verification (Definitive Phase)

From 2026, emissions reports will need to be verified by an accredited verifier. Start preparing your documentation and data trails now to ensure smooth verification later.

2026 Regulatory Impact for Indian Exporters: The Definitive Phase and Financial Obligations

The transition from the reporting-only phase to the definitive financial phase in January 2026 marks a significant shift. This is when the "EU carbon tax" becomes a tangible financial cost.

Financial Obligations

From 2026, EU importers will be required to purchase CBAM certificates. The price of these certificates will be linked to the weekly average auction price of EU ETS allowances, expressed in €/tonne of CO2e. Historically, EU ETS prices have fluctuated significantly, often ranging from €60 to over €100 per tonne of CO2e.

Let's consider an example: An Indian steel manufacturer in Pune exports 1,000 tonnes of steel to Italy. If the embedded emissions are 2.0 tonnes CO2e per tonne of steel, the total emissions are 2,000 tonnes CO2e. If the CBAM certificate price is €85/tonne CO2e, the total CBAM cost for this shipment would be €170,000 (approx. ₹1.53 Crore). This substantial cost will be passed back to the Indian exporter.

Impact on Competitiveness

Indian exporters with high embedded emissions, or those unable to provide accurate data (thus incurring default values), will face a significant competitive disadvantage. Their products will effectively become more expensive for EU buyers. This will drive a strong incentive for Indian manufacturers to:

1. Measure and report actual emissions accurately.
2. Invest in decarbonisation technologies to reduce their carbon footprint. This could include shifting to renewable energy sources (solar, wind), improving energy efficiency, or adopting cleaner production processes.

Importance of Accurate Data

The difference between using actual emissions data and default values can be stark. If the actual emissions for a product are 2.0 tCO2e/tonne, but the default value is 2.8 tCO2e/tonne, the exporter effectively pays for an extra 0.8 tCO2e/tonne. At €85/tonne, this is an avoidable cost of €68 per tonne of product. For a 1,000-tonne shipment, that's €68,000 (approx. ₹61 Lakhs) in unnecessary costs. This highlights why accurate data collection and calculation are not just compliance tasks but critical financial strategies.

For a deeper dive into potential costs, refer to our India CBAM Cost Index.

How CarbonSettle Can Help

Navigating the complexities of CBAM can be daunting for Indian merchant exporters and manufacturers. The need for precise data collection, accurate emission calculations, and seamless reporting requires specialized expertise. This is where CarbonSettle, India's #1 end-to-end CBAM compliance service, steps in.

We understand that you don't want to become a CBAM expert, hire new compliance staff, or struggle with complex EU regulations. Our mission is to take your entire CBAM headache away. We provide a complete hand-holding service, ensuring your compliance is seamless, accurate, and cost-effective.

Here’s how CarbonSettle, your dedicated CBAM team, works for you:

• End-to-End Managed Service: We are not a software or a platform; we are your dedicated team of CBAM experts. We handle everything from start to finish.
• Effortless Data Collection: We work directly with your factory teams to collect all necessary data – from electricity bills (MSEDCL, UGVCL, TANGEDCO, etc.) and fuel invoices to production logs and raw material consumption. You don't need to learn any new systems; we integrate with your existing data sources.
• Accurate Emission Calculations: Our experts meticulously calculate embedded emissions for your specific products, adhering strictly to EU methodologies, ensuring accuracy and avoiding costly errors.
• Supplier Data Chasing & Management: For merchant exporters, we manage the complex task of collecting data from multiple manufacturing partners, ensuring all necessary information is gathered and validated.
• EU XML Report Generation: We prepare all required reports in the EU-mandated XML format, ready for submission by your EU importer.
• Audit Preparation & Verifier Coordination: We help you prepare for future verification requirements and coordinate with accredited verifiers to streamline the process.
• EU Importer Handoff: We ensure all necessary documentation and data are perfectly prepared and handed off to your EU importer, making their reporting