CBAM, From Friction to a New Framework in India-EU Trade Relations
The India-European Union Comprehensive Free Trade Agreement is being called the “mother of all deals.” The scale justifies the phrase. With over 99% of Indian exports gaining preferential access to the EU, the FTA promises growth amid economic and geopolitical turbulence. India and the EU account for nearly a quarter of global GDP.
But beyond tariffs and trade volumes, the FTA does something more consequential—it reframes how India and Europe will manage the Carbon Border Adjustment Mechanism (CBAM) and, by extension, the collision between climate ambition and global trade.
Expectations were high that the FTA negotiations would meaningfully address the EU’s carbon levy on imported goods. Long viewed in India as a unilateral border tax, CBAM now sits at the heart of the new trade relationship. The real question the FTA answers is whether India and the EU have moved towards setting up a framework for engaging with CBAM.
The Four Pillars of Engagement
The official announcement on CBAM rests on four pillars that together create a structured pathway for managing this complex issue.
First, a most-favoured nation assurance on flexibilities granted under CBAM. If the EU grants CBAM flexibilities to any third country, India would benefit automatically. This appears powerful at first glance. However, this must be read alongside recent EU trade practice, notably the EU-Mercosur agreement that introduced a “rebalancing mechanism” allowing partners to seek remedies if new EU sustainability regulations, like CBAM or the Deforestation Regulation, undermine negotiated trade benefits.
While such mechanisms are rarely invoked in practice, their inclusion reflects developing countries’ concerns about unilateral EU measures eroding negotiated market access. This raises an important question: if Mercosur countries were to invoke such a rebalancing mechanism in response to EU sustainability measures, could India expect similar treatment under its MFN assurance? The India-EU FTA text leaves room for interpretation and legal and diplomatic debate.
Second, enhanced technical cooperation on recognition of carbon prices. This pillar is more revealing but risks being misunderstood. It does not mean that the EU has agreed to recognise India’s Carbon Credit Trading Scheme as equivalent to the EU Emissions Trading System. The design difference remains fundamental. The EU ETS is an absolute cap-and-trade system, whereas India’s emerging system is based on emission intensity targets.
The EU has historically struggled to accommodate such systems under CBAM when determining what qualifies as an “effective carbon price paid.” In other words, cooperation may not be recognition. But in practice, the agreement creates a structured space for research collaboration, methodological alignment, and gradual institutional convergence, without guaranteeing that Indian firms will receive CBAM credit for costs incurred under the CCTS.
Third, recognition of verifiers and strengthening of measurement, reporting, and verification systems. This may be the most immediately practical outcome. CBAM compliance is data-heavy and verification-intensive. For Indian firms, particularly in steel, aluminium, and cement, the burden is both carbon cost and the cost of proving emissions credibly.
EU support to strengthen MRV capacity in India could lower compliance costs while improving system integrity. This also reflects lessons from the Clean Development Mechanism—an earlier international carbon market under the Kyoto Protocol—where weak oversight and conflicts of interest eroded trust in verification regimes. Rebuilding confidence in verification systems will be foundational to the deal’s success.
Fourth, financial assistance and targeted support to reduce emissions and comply with emerging carbon requirements. This includes a pledge of nearly 500 million euros over the next two years to support India’s emissions reduction efforts and MRV capacity. This pillar is the least defined but politically the most telling.
A Shift in Approach
Earlier, India’s stance favoured seeking exemptions or deferrals from CBAM. Now, the tone is more cooperative—focused on capacity-building, system-strengthening, and gradual alignment. This implicitly acknowledges that CBAM has moved from a temporary trade irritant to being perceived as part of a structural reordering of trade and climate governance.
A recent study by the Council on Energy, Environment and Water, based on interviews of Indian experts, revealed two schools of thought during the FTA negotiations. One school feared that linking CBAM to trade talks could derail the deal. The other saw the FTA as precisely the leverage needed to shape CBAM outcomes.
Negotiators ultimately chose the middle path. CBAM concerns were acknowledged but not allowed to overshadow the strategic and economic gains of the deal.
What India Has and Has Not Secured
India has not secured immediate relief from CBAM. Tariffs and reporting obligations will still apply. The carbon levy will continue to affect Indian exports in sectors like steel, aluminium, and cement. Compliance costs will remain.
But India has secured something more durable. MFN-linked flexibility, technical cooperation on carbon pricing and MRV, and a foothold for transition finance now anchor India’s integration into a CBAM-shaped trade order.
Broadly speaking, the FTA neither softens climate ambition nor dilutes trade interests. It is a recognition that competitiveness in global markets will increasingly depend on building a credible domestic carbon-pricing architecture and low-carbon industrial pathways.
The Path Forward
For Indian industry, the message is clear: the era of seeking exemptions from climate-related trade measures is ending. The future belongs to those who can demonstrate credible emissions reductions and robust verification systems.
The 500 million euros in EU support is a welcome start, but it is a drop in the bucket compared to the investment needed to decarbonise Indian industry. The real work lies ahead—in building the institutions, systems, and capabilities that will allow Indian firms to compete in a carbon-constrained world.
The FTA provides a framework for that work. It creates channels for cooperation, spaces for dialogue, and mechanisms for gradual alignment. But the heavy lifting must be done in India, by Indian firms, with Indian innovation and Indian capital.
Conclusion: A New Framework for a New Era
The India-EU FTA marks a turning point in how India engages with the intersection of climate and trade. Instead of resisting CBAM as an unfair imposition, India has chosen to engage constructively, building the systems and capabilities that will allow it to thrive under the new rules.
This is not a surrender to European demands. It is a recognition that the world is changing, and that India’s long-term competitiveness depends on adapting to that change. The FTA provides the framework. Now comes the work of implementation.
Q&A: Unpacking CBAM in the India-EU FTA
Q1: What are the four pillars of the CBAM framework in the India-EU FTA?
The four pillars are: (1) MFN assurance on flexibilities granted under CBAM, meaning India automatically benefits if the EU grants any third country CBAM concessions; (2) enhanced technical cooperation on recognition of carbon prices, creating space for research collaboration and methodological alignment; (3) recognition of verifiers and strengthening of MRV systems to lower compliance costs; and (4) financial assistance, including nearly 500 million euros over two years to support India’s emissions reduction and MRV capacity.
Q2: Has the EU agreed to recognise India’s Carbon Credit Trading Scheme as equivalent to its own system?
No. The EU has not agreed to recognise India’s CCTS as equivalent to the EU Emissions Trading System. The fundamental design difference remains—the EU ETS is an absolute cap-and-trade system, while India’s system is based on emission intensity targets. The EU has historically struggled to accommodate such systems under CBAM. Cooperation on carbon pricing creates space for gradual institutional convergence but does not guarantee that Indian firms will receive CBAM credit for costs incurred under the CCTS.
Q3: Why is strengthening MRV systems considered the most immediately practical outcome?
CBAM compliance is data-heavy and verification-intensive. For Indian firms, particularly in steel, aluminium, and cement, the burden includes both carbon costs and the cost of proving emissions credibly. EU support to strengthen MRV capacity can lower compliance costs while improving system integrity. This also addresses lessons from the Clean Development Mechanism, where weak oversight eroded trust in verification regimes. Rebuilding confidence in verification is foundational to the deal’s success.
Q4: How has India’s approach to CBAM shifted through these negotiations?
Earlier, India’s stance favoured seeking exemptions or deferrals from CBAM. The new approach is more cooperative—focused on capacity-building, system-strengthening, and gradual alignment. This implicitly acknowledges that CBAM has moved from a temporary trade irritant to being perceived as part of a structural reordering of trade and climate governance. Negotiators chose a middle path, acknowledging CBAM concerns without allowing them to overshadow the strategic gains of the FTA.
Q5: What has India actually secured from the CBAM provisions, and what remains unresolved?
India has not secured immediate relief from CBAM—tariffs and reporting obligations will still apply. But it has secured MFN-linked flexibility, technical cooperation on carbon pricing and MRV, and a foothold for transition finance. These anchor India’s integration into a CBAM-shaped trade order. The fundamental design differences between India’s intensity-based system and the EU’s absolute cap system remain unresolved. The work of building credible domestic carbon-pricing architecture and low-carbon industrial pathways now lies ahead.
