Carbon Credits & CBAM

Imagine two factories making the identical product, one that pollutes heavily to keep costs low and one that has invested in cleaner processes at a higher cost. Left alone, the market rewards the polluter, because customers usually cannot see or price the pollution. A carbon credit is an attempt to fix that blind spot by putting an actual price on emitting a tonne of carbon dioxide, so the cleaner factory has something concrete to sell for doing the harder thing.

One carbon credit represents one tonne of carbon dioxide either avoided or physically removed from the atmosphere. There are two broad markets. The voluntary market, where companies buy credits purely to offset their own emissions for reputational or ESG reasons, and the compliance market, where a government legally caps how much a sector can emit and companies must buy credits if they exceed that cap. India has begun building its own compliance market, the Carbon Credit Trading Scheme, or CCTS, starting with a handful of high emission sectors such as aluminium, cement, iron and steel, and chlor alkali, with more sectors expected to be added over time.

CBAM, the Carbon Border Adjustment Mechanism, is Europe's separate but connected move. Starting with sectors like steel, aluminium, cement and fertilisers, the European Union will require importers to pay a carbon price on goods entering the EU that matches what an equivalent European producer would have paid under Europe's own carbon market. In effect, if an Indian steel exporter's production process is more carbon intensive than the European benchmark, that gap gets taxed at the EU border, regardless of how competitive the Indian price looks on paper.

This changes the calculus for India's export focused metal and chemical companies overnight. A lower headline cost of production no longer automatically wins the European order if the carbon intensity behind that cost is high. It also explains why so many Indian industrial groups have suddenly become serious about green hydrogen and green ammonia, not out of pure environmental conviction, but because a genuinely lower carbon manufacturing process is quickly becoming a competitive requirement for selling into Europe, not a marketing slogan.

The next time you read that an Indian steel or aluminium major is investing in green hydrogen, CBAM is very often the commercial reason sitting quietly behind the sustainability language.