What are policies? And what do they do? Are they just guidelines, or much more? How does climate change fit in that context ?
Consider an overflowing bathtub. There are certain rules we can follow to reduce the overflowing. These rules include reducing the tap flow to prevent more water from pouring in, which is mitigation. We can also use the mop to deal with the water that’s already on the floor, which is adaptation. And finally, figuring out how to pay for the already-ruined floorboards, which is managing risk. In our case, the bathtub is Earth’s atmosphere, the rules act as policies and the water flowing in is greenhouse gas emissions. This is a super simplified analogy, but hopefully it gives you a little idea of how policies function.
The impact of climate policy on a global level: CBAM
The European Union acts as a massive global market that enforces its climate policies because of its huge purchasing power. Why do other countries comply? It’s because of an effect called the Brussels Effect. The EU is such a lucrative export destination that if foreign companies want to sell goods in the European market, they have to abide by EU rules, otherwise they face intense financial penalties. Companies can maintain their own separate systems and production lines, but it’s often easier for global manufacturers to simply adopt EU standards and apply them everywhere.
In this section of Climate AI Decoded’s Current Events, we’re going to talk about one of these European Commission policies: CBAM, the Carbon Border Adjustment Mechanism, which came into effect this year on January 1st, 2026.
What does that mean?
It means certain goods that fall under this category are subject to taxes while entering European markets. Because of this, developing countries like India are now facing up to a 25 percent extra tax burden on affected exports. The policy targets highly carbon-intensive sectors such as iron, steel, aluminum, cement etc. These sectors account for nearly 10 percent of India’s total exports to the European Union, and within that category, iron and steel make up a 90 % of the total which is approximately $4.4 to $4.6 billion annually in 2023 and 2024. That means these sectors will be the ones most heavily influenced by the policy.
The main reason for CBAM implementation was to stop carbon leakage in the EU. When carbon-intensive goods like steel or iron are made in the EU, companies are charged a carbon tax on the goods. This raises their price and it might lead to buyers turning to a different country that can offer the same product cheaper. Even if a buyer purchases carbon-intensive goods from a different country, that lower-priced, higher-emitting product gets penalized at the border. So by the time it’s actually purchased, its price ends up higher, or at least comparable to the home-country product.
While the EU calls this a necessity, the Global South calls it something else: industrial protectionism. At the heart of the fight is a concept called embedded emissions.
Think of embedded emissions as a carbon receipt attached to every product coming out of a factory. The EU wants that receipt to show a price was paid for the carbon released during production. No receipt, or a bad one, and the company gets charged a heavy levy at the border instead.
For a country like India, this is a squeeze from two directions. On one side, the EU wants payment for embedded carbon. On the other, the U.S. Inflation Reduction Act is pumping $369 billion into domestic clean industries, with “Buy American” rules that box Indian exporters out entirely. UNCTAD called it: green policy being used to protect the industrial dominance of rich nations. The fight boiled over at COP30, where India and other developing nations said that this isn’t really about the climate. It’s about who gets to stay ahead economically.
So why is India actually fighting the European Commission on this?
The whole argument stands on accountability. India is responsible for roughly 3.4% of cumulative global emissions. The EU is responsible for around 22%. Also an average Indian emits about 1.9 tonnes of CO2 a year. The average EU citizen emits nearly 7. Developed nations burned through most of the world’s carbon budget building their own economies over the last two centuries. Now they’re asking everyone else to stop before getting the same chance.
The High Price of Missing Data
CBAM’s new phase comes with something called default values. Say an Indian steel exporter can’t prove exactly how much carbon went into their product, a common problem for small and medium manufacturers who don’t have the verification infrastructure in place. They are then hit with a default value instead, and that number can reach 30% extra tax by 2028.
Here’s what that looks like on paper. An Indian steel plant with verified emissions of 2.5 tonnes of CO2 per tonne of steel pays a certificate price based on that number. But if they can’t prove it, the default value can push that estimate above 5 tonnes. Same steel, same factory, same actual emissions, hundreds of dollars more per tonne, purely because the paperwork wasn’t there.
Small and medium manufacturers are the ones who get hit hardest here, since they’re the ones least able to afford the verification process. And without it, money that could have gone into India’s own green transition ends up in a European treasury instead.