India's Export Sector and Carbon Risks: Navigating the Transition to a Low-Carbon Economy

The global trade landscape is undergoing a seismic shift as carbon regulations tighten in key markets like the European Union and the United States. For India's export sector, particularly in energy-intensive industries such as textiles, steel, and agriculture, this transition presents both existential risks and transformative opportunities. The challenge is no longer just about competitiveness in traditional terms but about aligning with a global imperative to decarbonize. Strategic investment in clean energy and decarbonization technologies is no longer optional—it is a prerequisite for survival and growth in a carbon-constrained world.

The Carbon Tightrope: Risks to India's Export Sector

The European Union's Carbon Border Adjustment Mechanism (CBAM), now in its transitional phase, and the Corporate Sustainability Due Diligence Directive (CS3D) are reshaping trade dynamics. These policies impose carbon costs on imports and mandate stringent environmental, social, and governance (ESG) standards across supply chains. For India, a major exporter of steel, textiles, and agricultural goods, the implications are profound.

In the steel sector, for instance, India's reliance on coal-based production methods results in a carbon intensity 30–40% higher than the EU average. By 2026, when the CBAM enters its full implementation, Indian steel exports could face penalties equivalent to 10–15% of their current value, according to the Centre for Social and Economic Progress. Similarly, the textile industry, responsible for 2–8% of global carbon emissions, faces scrutiny under the CS3D, which demands transparency in water usage, chemical safety, and labor practices.

The U.S. is not far behind. Tariff hikes on Chinese and Mexican imports have temporarily boosted India's competitiveness in the short term, but looming carbon policies and supply-chain scrutiny could erode this advantage. The U.S. Commercial Service has already flagged concerns about carbon data transparency for non-EU suppliers, a challenge India's exporters must address proactively.

India's Response: A Green Industrial Revolution

India's government has recognized the urgency of this transition. The 2025–26 Union Budget allocates $2 billion to the National Green Hydrogen Mission, aiming to position India as a global green hydrogen hub. This initiative is complemented by the Strategic Interventions for Green Hydrogen Transition (SIGHT) schemes, which incentivize electrolyser manufacturing and green hydrogen production. By 2030, India aims to produce 5 million metric tons of green hydrogen annually, a move that could decarbonize sectors like steel and chemicals while creating export opportunities.

In the textile sector, state and federal policies are accelerating adoption of renewable energy. Maharashtra offers capital subsidies for solar installations up to 4 MW, while Haryana supports MSMEs in adopting rooftop solar. The Textile Policy 2024 mandates energy efficiency upgrades and circular economy practices, with companies like Arvind Ltd piloting biomass usage, waste heat recovery systems, and variable frequency drives to reduce emissions.

The government's Production Linked Incentive (PLI) Scheme for textiles, allocated ₹1,148 crore in 2025, further underscores its commitment. This funding is directed toward modernizing machinery and adopting cleaner technologies, reducing the sector's reliance on fossil fuels. Similarly, the National Manufacturing Mission aims to localize production of solar PV cells, EV batteries, and wind turbines, curbing import dependence and enhancing export competitiveness.

Opportunities for Investors: The Green Gold Rush

For investors, India's decarbonization drive represents a unique confluence of policy tailwinds, market demand, and technological innovation. Clean energy infrastructure, green hydrogen, and ESG-compliant manufacturing are not just mitigating carbon risks but unlocking new revenue streams.

1. Green Hydrogen and Electrolyser Manufacturing: India's push to produce 5 million metric tons of green hydrogen by 2030 requires massive investments in electrolyser capacity. Startups like GreenStitch Technologies are already digitizing emissions tracking for factories, while firms like JSW Steel are integrating green hydrogen into their production processes. Investors should monitor companies like Reliance Industries and Adani Green Energy, which are scaling renewable energy and hydrogen projects.
   

2. Renewable Energy Infrastructure: The textile and steel sectors' energy consumption is projected to grow as they scale up production to meet global demand. Solar and wind projects, both on-site and off-site, offer stable returns. The government's viability gap funding for offshore wind projects in Gujarat and its expanded Green Finance Framework (which provides concessional loans for green infrastructure) make this sector attractive.

3. ESG-Compliant Manufacturing: As the EU and U.S. prioritize sustainable supply chains, Indian manufacturers adopting ESG standards will gain a first-mover advantage. Climate-tech startups offering emissions tracking, water efficiency, and waste reduction tools are poised for growth. Bengaluru-based GreenStitch Technologies, for instance, aims to manage one billion tonnes of carbon emissions by 2030.

The Road Ahead: Balancing Ambition and Pragmatism

India's transition to a low-carbon economy is not without hurdles. Infrastructure gaps, financing constraints, and the need for technological leapfrogging remain significant challenges. However, the government's focus on localized manufacturing, coupled with international partnerships like the India-UK Free Trade Agreement and potential U.S.-India green trade deals, offers a pathway to overcome these barriers.

For investors, the key is to align with companies and sectors that are not merely adapting to carbon regulations but actively shaping the future of global trade. The winners will be those who view decarbonization not as a cost but as a catalyst for innovation, efficiency, and long-term value creation.

In conclusion, India's export sector stands at a crossroads. The carbon transition is inevitable, but with strategic investments in clean energy and decarbonization technologies, it can transform from a vulnerable player into a global leader. The time to act is now—for both policymakers and investors.