Tariffs to carbon, the new rules shaping India’s trade

From 1 January 2026, the European Union's Carbon Border Adjustment Mechanism (CBAM) entered its full enforcement phase, requiring importers to purchase CBAM ...

What Happened

From 1 January 2026, the European Union's Carbon Border Adjustment Mechanism (CBAM) entered its full enforcement phase, requiring importers to purchase CBAM certificates for carbon-intensive goods entering the EU — directly affecting India's exports of steel, aluminium, fertilisers, cement, and electricity.
The Global Trade Research Initiative (GTRI) estimates Indian exporters in affected sectors may need to cut prices by 15–22% to absorb the additional carbon cost, significantly eroding competitiveness.
Simultaneously, India and the United States concluded a framework Interim Trade Agreement in February 2026, reducing US reciprocal tariffs on Indian goods from 25% to 18%, while Section 232 national-security tariffs on steel and aluminium remain in place.
India and South Korea signed a bilateral pact under Article 6.2 of the Paris Agreement in 2026, enabling cross-border carbon credit trading through Internationally Transferred Mitigation Outcomes (ITMOs).
India's domestic Carbon Credit Trading Scheme (CCTS), notified under national legislation, provides the framework for a regulated domestic carbon market that could eventually interact with international mechanisms.

Static Topic Bridges

EU Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) is the EU's policy instrument to prevent "carbon leakage" — the risk that EU industry relocates production to countries with weaker climate regulations, or that EU imports displace low-carbon domestic production. CBAM works by requiring importers of specified goods to purchase CBAM certificates whose price mirrors the weekly average EU Emissions Trading System (ETS) carbon price. Any carbon price already paid in the country of production is deducted. CBAM initially covers six sectors: cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. The transitional reporting phase ran from October 2023 to December 2025; financial obligations commenced January 2026.

Sectors covered (Phase 1): cement, iron and steel, aluminium, fertilisers, electricity, hydrogen
Certificate price: mirrors EU ETS price (varies; has ranged €50–100/tonne CO₂)
Importers must achieve "authorised declarant" status (deadline: 31 March 2026 for existing importers)
Carbon price offset: CBAM certificates reduced proportionally if a carbon price has been paid in the exporting country
India's position: Finance Ministry described CBAM as "unilateral, arbitrary, and a trade barrier"
EU justification: WTO Article XX (environmental exceptions) and Article XIV GATS

Connection to this news: India's steel and aluminium exports to the EU — among its most significant industrial export categories — now carry an embedded carbon cost that competitors from countries with domestic carbon pricing may not face, directly affecting India's export competitiveness.

Article 6 of the Paris Agreement and ITMOs

Article 6 of the Paris Agreement, adopted at COP21 in December 2015, enables countries to cooperate voluntarily in achieving their Nationally Determined Contributions (NDCs) through market-based mechanisms. Article 6.2 allows bilateral and multilateral agreements for transferring Internationally Transferred Mitigation Outcomes (ITMOs) — each representing one tonne of CO₂ equivalent reduced or removed. To prevent double-counting, the country selling ITMOs must make a "corresponding adjustment" in its own NDC accounting. Article 6.4 establishes a centralised, UN-supervised mechanism (the Paris Agreement Crediting Mechanism) open to both countries and private actors. The rules for Article 6 were finalised at COP26 (Glasgow, 2021).

Article 6.2: bilateral/multilateral ITMO transfers; requires corresponding adjustments; country-to-country
Article 6.4: centralised UN mechanism; successor to CDM (Clean Development Mechanism) under Kyoto Protocol
ITMO: Internationally Transferred Mitigation Outcome; 1 ITMO = 1 tonne CO₂e reduced or removed
Corresponding adjustment: ensures emissions reduction is counted only once (avoids double-counting)
COP26 (Glasgow, 2021): Article 6 rulebook finalised after six years of negotiations
India–South Korea bilateral: signed under Article 6.2; enables cross-border carbon credit exchange

Connection to this news: India's Article 6.2 agreement with South Korea is part of a broader strategy to monetise its low-carbon project potential, attract climate finance, and position itself in the emerging global carbon market — even as it contests CBAM as a unilateral trade barrier.

India's Carbon Credit Trading Scheme (CCTS)

India's Carbon Credit Trading Scheme (CCTS) was notified by the Ministry of Power under the Energy Conservation (Amendment) Act 2022, creating a regulated domestic carbon market. The scheme operates through the Bureau of Energy Efficiency (BEE), which designates "obligated entities" in energy-intensive industries required to meet emission intensity reduction targets. Entities exceeding targets earn Carbon Credit Certificates (CCCs) tradeable on power exchanges. The CCTS is India's first mandatory domestic carbon market and is designed to be eventually linked with international carbon trading mechanisms under Article 6.

Legal basis: Energy Conservation (Amendment) Act 2022
Nodal body: Bureau of Energy Efficiency (BEE), Ministry of Power
Trading platform: Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL)
Carbon Credit Certificate (CCC): 1 CCC = 1 tonne CO₂e
Obligated entities: energy-intensive industries (initially cement, aluminium, pulp and paper, chlor-alkali, textiles, etc.)
India's NDC: 45% reduction in emission intensity of GDP by 2030 (over 2005 levels); 50% non-fossil electricity by 2030

Connection to this news: A functional CCTS with a credible domestic carbon price is India's strongest tool to reduce the CBAM adjustment — CBAM certificates are offset by domestic carbon prices already paid, incentivising India to strengthen its own carbon market.

India–US Trade: Section 232, Reciprocal Tariffs, and the BTA

The India–US Bilateral Trade Agreement (BTA) negotiations were formally launched in February 2025, building on the Trade Policy Forum (TPF). The US subsequently imposed broad "reciprocal tariffs" citing trade deficit concerns; the rate on Indian goods initially set at 25% was reduced to 18% under a February 2026 Interim Agreement. Section 232 of the US Trade Expansion Act 1962 allows the President to impose tariffs on national security grounds — applied to steel (25%) and aluminium (10%) globally in 2018. India received a preferential tariff rate quota for automotive parts under the 2026 Interim Agreement, while Section 232 tariffs on steel and aluminium remain in place for Indian exports.

Section 232 (Trade Expansion Act 1962): national-security-based tariff authority
Steel tariff under Section 232: 25%; aluminium: 10%
US reciprocal tariff on India (initial): 25%; reduced to 18% under February 2026 Interim Agreement
India–US BTA: launched February 2025; full agreement under negotiation
Trade Policy Forum (TPF): ministerial mechanism for India-US trade dialogue
India's export sectors most affected by Section 232: steel, aluminium, copper
India's export sectors most affected by CBAM: steel, aluminium, fertilisers, cement

Connection to this news: India simultaneously faces CBAM-driven carbon costs on EU-bound exports and residual Section 232 tariffs on US-bound industrial exports — a dual squeeze on its most carbon-intensive manufacturing sectors that requires both domestic carbon market development and active multilateral negotiation.

Key Facts & Data

EU CBAM full enforcement: 1 January 2026
CBAM sectors: cement, iron and steel, aluminium, fertilisers, electricity, hydrogen
CBAM certificate price: tracks EU ETS price (~€50–100/tonne CO₂ range)
GTRI estimate: Indian exporters may need to cut prices by 15–22% to absorb CBAM costs
India–South Korea Article 6.2 pact: signed 2026 (cross-border ITMO trading)
ITMO: 1 unit = 1 tonne CO₂e; requires corresponding adjustment to prevent double-counting
Article 6 rulebook: finalised COP26 (Glasgow), 2021
CCTS legal basis: Energy Conservation (Amendment) Act 2022
US reciprocal tariff on India: reduced from 25% to 18% (February 2026 Interim Agreement)
Section 232 tariffs: steel 25%, aluminium 10% (remain in place for India)
India crude oil import bill: ~$90–100 billion/year (context for energy trade exposure)
India's NDC emission intensity target: 45% reduction by 2030 over 2005 baseline