Does the EU Carbon Border Adjustment Mechanism reduce India’s engineering exports? Evidence from monthly product-level data
Using monthly product-level data and a difference-in-differences design, this paper finds that the EU Carbon Border Adjustment Mechanism significantly reduced India's engineering exports to Europe by 11.5% during the reporting phase and 18.2% after payments began, with the decline driven largely by compliance demands and data requirements rather than just carbon costs, particularly affecting MSMEs in sectors like fasteners.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
The global economy is increasingly bound by a new kind of accounting, one that counts the invisible weight of pollution embedded in the things we buy. For decades, factories in countries with strict environmental rules faced higher costs than those in places with looser regulations, creating a risk that dirty production would simply move to the weaker jurisdictions. To stop this "carbon leakage," the European Union introduced a system called the Carbon Border Adjustment Mechanism. Think of it as a toll booth at the border: if a product arrives from a country where the factory did not pay for its carbon emissions, the importer must buy a certificate to cover that difference. This mechanism began with a phase where companies simply had to report their data, and it has now moved into a phase where they must actually pay. The question facing the world is whether this new toll is changing the flow of trade, specifically for nations like India, where a vast network of small and medium-sized factories produces the screws, bolts, and metal parts that build the world's infrastructure.
A researcher named Praveenkumar Karuppiah set out to find out exactly how this policy is affecting India's engineering exports. Instead of relying on computer models that guess what might happen in the future, he looked at what has already happened. He gathered official monthly records of India's trade with Europe, stretching from early 2022 to mid-2026. He separated the products that are currently subject to the new carbon rules—such as fasteners, metal structures, and aluminum articles—from similar products that are not yet covered. By comparing the sales of these two groups before and after the rules changed, he could isolate the specific impact of the policy. The data revealed a clear and immediate shift. Once the reporting phase began in late 2023, exports of the covered goods started to drop relative to the uncovered ones. When the payment phase started in January 2026, requiring importers to buy certificates, the decline deepened.
The numbers tell a stark story. During the initial reporting phase, exports of covered engineering goods fell by 11.5 percent compared to the control group. Once payments were required, that drop grew to 18.2 percent. The effect was not uniform across all items; the category of fasteners, which includes screws, bolts, and nuts, suffered the most, seeing a decline of between 22 and 27 percent. Crucially, the drop began before any money was actually paid. This suggests that the burden of the policy is not just the cost of the carbon itself, but also the difficulty of the paperwork. To sell to Europe, a supplier must now provide detailed, verified data about the emissions created to make their product. Many small factories, which make up a large part of India's engineering sector, struggle to measure and report this information. When they cannot provide the data, European buyers, fearing they will be penalized, switch to suppliers who can.
The study also looked at why previous computer simulations had produced such wildly different predictions. Some models suggested India's steel exports to Europe would collapse by nearly 60 percent, while others predicted almost no change at all. Karuppiah found that the difference came down to a single assumption about how easily buyers can switch suppliers. When he used the lower, more realistic estimates of how difficult it is to find a replacement supplier, the model's predictions aligned closely with the actual data he observed. The real-world drop in fastener sales matched the predictions made using these lower numbers, confirming that the market is less flexible than some models assumed. The research also noted that products proposed for future coverage in 2028 showed no change yet, indicating that the shock is happening only where the rules are currently active.
This evidence points to a specific vulnerability for small and medium-sized enterprises. These firms often lack the resources to track the carbon footprint of their raw materials, such as the steel or electricity they buy. Without this data, they are treated as high-polluters by default, making their goods too expensive or too risky for European buyers. The study concludes that the policy is already reshaping trade flows, not just through price, but through the sheer complexity of compliance. It suggests that for India to maintain its place in the European market, support must go beyond simple subsidies. It requires helping these smaller factories build the capability to measure and verify their emissions, turning a bureaucratic hurdle into a manageable part of doing business. The data shows that the wall has already begun to rise, and the speed of the decline suggests that the ability to prove one's environmental record is becoming just as important as the price of the product itself.
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