Carbon pricing at home could keep revenue in India, shield key sectors from CBAM blow

India can soften the impact of the European Union’s Carbon Border Adjustment Mechanism (CBAM) by imposing a domestic carbon tax at a lower rate and retaining the proceeds, says a new report by the Centre for Social and Economic Progress (CSEP).

From 2026, the CBAM will tax carbon-intensive imports from countries with weaker climate rules, a move that will hit India’s iron and steel, cement, aluminium and fertiliser exports. While CBAM-covered goods account for just 0.2 per cent of India’s GDP, iron and steel make up 90 per cent of these shipments, making the sector most exposed.

Without a domestic levy, India could see GDP shrink up to 0.03 per cent as tariff revenue flows to Brussels, the study warns. Using a computable general equilibrium model, researchers found that a domestic carbon tax, the ‘PCARBON’ scenario, could raise about 1 per cent of GDP in revenue by 2030, funding green subsidies, industry support and household compensation.

A blended ‘PCARBON + CBAM’ model, with both taxes applied at half rates and revenue split, would yield around 0.5 per cent of GDP for India while limiting GDP losses to near zero. By contrast, under the EU-only CBAM scenario, India gains little fiscal benefit and sees sharper declines in household consumption, especially in urban areas.
Carbon pricing, the report notes, could also drive investment in renewables and low-emission technologies, turning CBAM into a catalyst for India’s net zero transition.

The authors recommend diversifying exports, negotiating fairer CBAM terms, boosting energy efficiency, and giving targeted support to vulnerable industries and households. With the right domestic policies, they argue, India can turn the EU’s border tax from an economic burden into a green growth opportunity.