CBAM and carbon markets: how China and India are responding

The introduction of the European Union's Carbon Border Adjustment Mechanism (CBAM) marks a tectonic shift in global trade policy, building environmental standards into commercial relations. The mechanism, which entered into force on 1 January 2026,^[2] aims to reduce the risk of "carbon leakage" and encourage industrial decarbonisation outside the EU. However, its impact reaches far beyond Europe's borders, prompting significant reactions from key trading partners, notably China and India. These countries, among the world's largest steel producers (over 60% of global crude steel output) and export-oriented economies for which Europe is a major trading partner, see CBAM not only as a challenge but also as a catalyst for developing their own carbon pricing mechanisms.

How are China and India responding to CBAM?

Beijing's and New Delhi's response to CBAM is multifaceted. On the one hand, there is potential for trade frictions, as both countries have previously raised concerns about CBAM's compatibility with World Trade Organization (WTO) rules. On the other hand, CBAM is pushing them to accelerate the introduction of domestic carbon markets and strengthen their climate policies. Research shows that when China and India adopt stronger carbon pricing policies, the trade impact of CBAM decreases, although asymmetries between major trading partners remain. This highlights CBAM's role as a lever for raising international ambition in climate policy.

Building China's carbon market

China, the world's largest emitter of greenhouse gases, is actively building its national carbon market. This initiative is a key part of its decarbonisation strategy and, at the same time, a response to external incentives such as CBAM. Introducing its own carbon pricing mechanisms allows China to control domestic emissions and potentially reduce the financial burden associated with exports to the EU. Alternative domestic measures, such as national carbon pricing, may exempt non-EU countries from CBAM.^[7] This gives Beijing a direct incentive to further develop and strengthen its national CBAM-compatible mechanism.

China's exports in June 2026 grew at the fastest pace since 2021, rising by 27% in dollar terms year on year. Such strong export capacity makes the country particularly sensitive to external trade barriers, including carbon levies. Despite earlier trade wars, China has largely held its ground: the weighted average tariff on Chinese goods has remained roughly the same. This points to the resilience of China's economy to external pressure, but also underlines the need to adapt to the new rules of the game by developing domestic mechanisms.

CBAM and India's integration into the new trade order

For India, CBAM is a particularly significant development. It links international trade to verified carbon intensity, signalling a decisive shift towards carbon-based trade and placing new operational demands on energy-intensive sectors. India, like China, is a major exporter to the EU and one of the world leaders in steel production. According to estimates, the introduction of CBAM could cost some developing countries, such as Mozambique, up to 1.6% of GDP, which illustrates the scale of the potential risks for economies that fail to adapt in time.

India, however, is already showing a desire to integrate into the new trade architecture. Flexibility under the most-favoured-nation (MFN) regime, technical cooperation on carbon pricing and on monitoring, reporting and verification (MRV), and access to transition finance now anchor India's integration into the trade order shaped by CBAM.^[11] This reflects a strategy of turning potential trade frictions into opportunities for cooperation and for developing its own decarbonisation mechanisms.

Parallel carbon markets and trade frictions

The development of parallel carbon markets in China and India in response to CBAM is creating a complex but potentially effective system of global emissions governance. These domestic mechanisms, if robust enough and comparable in ambition to the European Emissions Trading System (EU ETS), could allow their exporters to avoid additional CBAM charges. This not only drives industrial decarbonisation in these countries but also supports the harmonisation of international carbon pricing standards.

However, despite the potential synergies, there are challenges too. Current trade frictions between India and the United States, caused by differences in economic policy, point to the general instability of the global trading environment. In this context, CBAM adds a new dimension to existing complexities, requiring exporting countries to adapt quickly and develop effective domestic mechanisms.

Geopolitical context

The introduction of CBAM and of corresponding mechanisms in China and India is inseparable from wider geopolitical trends in the Indo-Pacific region, where regional tensions can affect economic and trade relations and complicate cooperation on climate policy.

CBAM is not just an environmental instrument: it is becoming a catalyst for rethinking global trade and geopolitical alliances. Industrial decarbonisation, CBAM's central goal, requires significant investment and technological change. China's and India's success in creating effective domestic carbon markets will not only determine their competitiveness in the European market but will also shape new global standards in tackling climate change.

Analytical conclusion

China's and India's response to CBAM is characterised by a drive to introduce and strengthen their own carbon pricing mechanisms. The process is complex, combining adaptation to the EU's new trade rules with national decarbonisation strategies and geopolitical interests. While CBAM may cause trade frictions, it also acts as a powerful incentive for these countries to raise their climate policy ambitions and develop parallel carbon markets. The success of these efforts will determine not only their economic competitiveness but also the trajectory of global decarbonisation.

Sources

• [1] CBAM Kohlenstoffpreis berechnen 2026: Formel, ETS-Preis
• [2] EU CBAM Guide 2026 — Free Carbon Border Adjustment Mechanism Resource
• [3] Brief on the EU Carbon Border Adjustment Mechanism (CBAM)
• [4] CBAM: EU-CO2-Zoll verändert Welthandel 2026
• [5] EU Tariff Verification Hub | SinoSource
• [6] Daily CBAM Cost Index Gives China Exporters Earlier Price Signals
• [7] CBAM CO2-Preis-Anrechnung: Artikel 9 im Entwurfsstatus 2026
• [8] EEX erweitert Indizes für Kohlenstoffmärkte um CBAM-Referenzpreis
• [9] CBAM 2026 für China-Importe: 50-t-Schwelle & Ablauf
• [10] Kohlepreis Live: Analyse & Preisentwicklung
• [11] EU carbon credit integration: what it means for the future of India
• [12] Between India and the EU, a carbon gap and an FTA bridge
• [13] Carbon Border Adjustment Mechanism CBAM — The Economic Times
• [14] Carbon Border Adjustment Mechanism — European Hydrogen Observatory