Indian Steel Industry Faces Mounting Pressure from EU's Stringent Carbon Regulations
India's steel sector, the second-largest globally, is confronting a significant challenge in 2025 as the European Union intensifies its environmental regulations and pushes toward carbon neutrality. This regulatory shift threatens to reshape the competitive landscape of the global steel market, with potentially far-reaching implications for Indian manufacturers and investors.
Critical Threat to Export Markets
According to recent analysis, India's prominent position in the global steel market could be seriously compromised if the industry fails to rapidly adapt to the EU's stricter carbon regulations. With Europe representing 25% of India's steel exports, the stakes are exceptionally high for domestic producers.
Energy intelligence firm Rystad Energy warns that non-compliance with these environmental standards could result in substantial financial penalties, potentially undermining the competitiveness of Indian steel in international markets.
Rising Carbon Costs: A Financial Burden
Steel production in India could face some of the highest carbon costs globally, with potential levies reaching up to $397 per tonne by 2034, according to Rystad Energy's projections. This estimate assumes that carbon prices remain relatively stable over the coming decade.
Alistair Ramsay, Vice President of Supply Chain at Rystad Energy, emphasizes that "reducing carbon emissions could extend beyond regulatory compliance and become a competitive necessity as buyer sentiment continues to evolve." This observation highlights the dual pressure of regulatory requirements and shifting market preferences toward greener products.
EU's Carbon Border Adjustment Mechanism (CBAM)
The EU's Carbon Border Adjustment Mechanism represents a pivotal policy shift that will have profound implications for steel exporters. Set to begin implementation next year and become fully operational by 2034, CBAM will impose carbon costs on imports based on their embedded carbon emissions.
For Indian steel producers, this mechanism could translate to a potential surcharge of up to $80 per tonne by 2030 unless they adopt cleaner production technologies. With India's steel production generating higher carbon emissions than most global competitors according to the EU's Joint Research Centre, the industry faces a particularly steep challenge.
Competitive Landscape Shifts
The increasing carbon costs are jeopardizing India's competitiveness in the European market. As Indian steel becomes less attractive compared to lower-emission alternatives, the country risks losing its position among the top steel producers globally.
Rystad Energy predicts that this situation could lead to South Korea and Turkey replacing India among the top three steel producers—a significant reshuffling of the global steel hierarchy with substantial implications for investors in these markets.
Transition Challenges
India's steelmaking remains heavily reliant on coal, making the transition to low-carbon alternatives particularly challenging. Shifting to natural gas-based ironmaking or green hydrogen will require substantial investment and technological innovation.
"With limited time for transition, India must confront the carbon cost challenge in front of them, as early adopters of greener production methods could gain a stronger competitive edge in global markets," notes Ramsay.
Strategic Adaptations
Both the Indian government and major steel companies are adjusting their strategies in response to these evolving policies:
- In December 2024, India's government launched a green steel classification system within the Production Linked Incentive (PLI) scheme
- Steel producing less than 2.2 tonnes of CO2 per tonne is classified as 'green', while production with emissions below 1.6 tonnes receives a five-star rating
- Discussions are underway to mandate the use of green steel in public sector projects, potentially reshaping domestic demand
Industry Leaders' Response
India's top five steel producers—Tata Steel, JSW Steel, Jindal Steel & Power, Steel Authority of India, and AM/NS India—are implementing various strategies to achieve net-zero carbon emissions by 2045:
Tata Steel's Initiatives
Tata Steel is making significant strides toward low-carbon steel production by:
- Commissioning a 0.75 Mtpa electric arc furnace plant in Ludhiana by March
- Investing in a carbon capture plant in Jamshedpur
- Securing 379 MW of captive renewable power
JSW Steel's Approach
JSW Steel, aiming for net-zero emissions by 2050, has:
- Raised $500 million through sustainability-linked bonds
- Committed $1 billion to decarbonization efforts
- Plans to expand production using low-carbon technologies
- Initiatives to incorporate biomass and hydrogen into steel-making processes
Growth vs. Emissions Reduction
India's domestic steel giants are projected to reach a combined production of 189 Mtpa by 2035 due to major capacity expansions. While this growth is essential to meet both domestic and global demand, it creates tension with emission reduction goals.
Currently, these companies are projected to reduce emissions by just 43% over the next decade—significantly short of the levels required to meet strict EU standards and avoid CBAM-related costs.
If this trajectory continues, Indian steelmakers could face carbon costs of up to $116 per tonne by 2034, assuming a carbon price of $100 per tonne, according to Rystad's estimates.
Investment Implications
For investors in the steel sector, these developments signal important strategic considerations. Companies that lead in adopting green technologies may gain competitive advantages, while those that lag in adaptation could face significant financial penalties and market access restrictions.
The transition toward greener steel production represents both a challenge and an opportunity for forward-thinking investors looking to position themselves advantageously in a carbon-constrained future.
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