India backs carbon capture push to shield steel exports from EU carbon tax

The Union budget for FY27 has allocated ₹20,000 crore for carbon capture, a move expected to benefit steelmakers the most. The government is positioning the scheme as a potential safeguard against the EU’s Carbon Border Adjustment Mechanism (CBAM), which imposes extra taxes on carbon-intensive imports. CBAM came into effect on 1 January 2026.

In 2025, India exported 8.6 million tonnes of steel, with the European Union accounting for a little over 40% of those shipments, according to commodities market intelligence firm BigMint.

“Carbon capture in India costs between ₹1,900 and ₹2,400 per tonne of carbon dioxide, or about $20 to $26,” H.D. Kumaraswamy, union steel minister, told Mint in an interview. “A policy study shows that at least a 50% government subsidy will be needed to make it commercially viable for steel companies.”

India’s steel plants emit over 250 million tonnes of carbon dioxide every year and are mostly coal-fed. Carbon capture allows companies to trap carbon dioxide before it enters the atmosphere. For steelmakers, this will emerge as one of the cheapest and fastest ways to reduce pollution without shutting down existing plants, Kumaraswamy said.

The initial focus will be large steel plants, where carbon is easier to trap. Over time, the plan is to build shared infrastructure for transport and storage.

Carbon pricing and CBAM recognition

Alongside subsidies, India is setting up a domestic carbon trading system under which 253 steel companies will be required to meet emission targets or buy carbon credits. The aim is to gradually push companies to become cleaner while putting a price on pollution.

A key objective is to secure recognition of India’s carbon pricing system by the EU. If that happens, Indian exporters may not have to pay the EU’s carbon tax, Kumaraswamy said. “The EU allows recognition of a carbon price paid in the country of origin, as long as it is under a mandatory system.”

While green hydrogen is being promoted as a long-term solution, the government sees carbon capture as unavoidable in the near term.

“Coal-based plants make up about 93% of India’s iron production and typically run for around 40 years,” the minister said. “Studies show that more than half of their emissions can only be reduced through carbon capture.”

With steel capacity expected to keep rising till at least 2030, the government believes carbon capture will remain central to its decarbonization strategy for decades.

On criticism that retrofitting plants would be expensive, Kumaraswamy described carbon capture as a practical middle path.

“Carbon capture allows companies to reduce emissions now, prepare for global climate rules, and avoid sudden shocks from trade barriers like CBAM,” Kumaraswamy said, adding that carbon capture and carbon trading are not temporary fixes but part of a long-term strategy.

“When combined with green hydrogen, better energy efficiency and more recycling of scrap, these measures will help Indian steel stay competitive,” he said.

Industry response

Experts said the move signals policy intent but may offer limited near-term relief.

“The government’s move to subsidise carbon capture is a step in the right direction. However, it is unlikely to deliver immediate relief to steelmakers seeking to cut emissions and shield themselves from the looming carbon tax,” said Sachin Shetty, BigMint’s consulting partner and chief executive officer Quesrow.

“For carbon capture to meaningfully reduce emissions at scale, the sector will require significantly higher investment and stronger research and development capabilities. Developing a scalable, commercially viable prototype is critical,” Shetty added.

Suman Kumar, assistant vice-president for metals and mining at brokerage Philip Capital, said the allocation is modest in scope.

“The ₹20,000 crore allocation is not exclusively for the steel sector. It also covers sectors such as cement. Moreover, this allocation is spread over five years, as per the budget documents. It is not an annual outlay,” he said. “This is a small positive development, but it will not reduce carbon capturing costs for steelmakers beyond a very small portion.”

Steelmakers have already begun early experiments.

In 2021, Tata Steel started a 5 tonnes per day carbon capture plant at its Jamshedpur facility and plans to reuse the captured carbon dioxide within the plant.

In 2025, an industry consortium of leading steelmakers including ArcelorMittal Nippon Steel India, JSW Steel, Hyundai Steel Company, BHP, Chevron and Mitsui & Co. began a pre-feasibility study to assess the development of carbon capture hubs across Asia.

“We have identified about 21 hubs in India where the captured carbon dioxide from various plants will be taken to a common location,” said Arvind Bodhankar, chief sustainability officer at AM/NS India, during a press conference last week. “It will then be submerged or injected into either defunct oil wells or basalt formations.”

“So phase one will assess the cost of capture, transportation and sequestration,” Bodhankar said. “These studies will be completed by the third quarter of FY27.”