What Happened
- The India-EU Free Trade Agreement, concluded on 27 January 2026, does not grant Indian exporters exemption from the EU's Carbon Border Adjustment Mechanism (CBAM), despite Indian industry lobbying
- A critical shortcoming in the FTA text: local Indian verification agencies are not recognised as CBAM accreditors — only EU-based agencies can verify the carbon footprint data required for CBAM compliance, creating both a cost burden and a bottleneck for Indian exporters
- The EU's chief commission spokesperson confirmed: "There is no commitment on the part of the EU to change our obligations with regard to CBAM, or grant India more favourable treatment"
- A technical working group has been agreed to work toward recognition of Indian verifiers and potential recognition of India's future carbon pricing system — but no concrete commitment or timeline is specified in the FTA text
- CBAM entered its definitive (fully operative) phase on 1 January 2026, meaning Indian exporters in steel, aluminium, cement, fertilisers, and other covered sectors must immediately comply
Static Topic Bridges
EU Carbon Border Adjustment Mechanism (CBAM) — What It Is and How It Works
The EU's Carbon Border Adjustment Mechanism (CBAM) is the world's first carbon border tax — a levy on the embedded greenhouse gas emissions of imports into the EU from countries that do not impose equivalent carbon pricing domestically. CBAM is designed to prevent "carbon leakage": the phenomenon where EU companies lose competitiveness to imports from countries with weaker climate regulations, incentivising relocation of carbon-intensive production abroad.
- Legal basis: Regulation (EU) 2023/956; entered into force May 2023
- Transitional phase: October 2023 to December 2025 (reporting requirements only, no financial payments)
- Definitive phase: 1 January 2026 — EU importers must purchase CBAM certificates equivalent to the carbon price their imports would have paid under the EU's Emissions Trading System (ETS)
- Sectors covered (initial phase): Cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen (approximately 303 product codes; ~3% of EU imports by value)
- By 2030: All sectors covered under the EU-ETS will be brought under CBAM
- Certificate price: Linked to the weekly average auction price of EU-ETS allowances (currently approximately €50-70 per tonne of CO2 equivalent)
- Exemption threshold: Importers bringing in 50 tonnes or less (cumulative net mass) of CBAM-covered goods per year are exempt
Connection to this news: CBAM applies to all non-EU exporters regardless of any FTA — the India-EU FTA cannot override this WTO-compatible (EU claims) trade measure, meaning Indian steel, aluminium, and fertiliser exporters face an additional cost burden even under the FTA's preferential tariff rates.
India's Carbon Pricing Gap — The Accreditation Problem
Under CBAM's definitive phase, EU importers must submit CBAM declarations using actual emissions data from their suppliers. This data must be verified by a third-party verifier accredited by an EU national accreditation body. The problem: all accredited CBAM verifiers are currently based in Europe. Indian companies must either pay expensive European verifiers (travel + audit costs) or use default worst-case emission values (higher, leading to higher CBAM certificate costs).
- Actual emissions data (verified): Allows Indian exporters to use the actual carbon intensity of their production — typically lower than CBAM's default values for sectors where India has modernised production
- Default values: Set conservatively high by the EU; using defaults could make Indian exports significantly more expensive than their actual carbon footprint warrants
- The FTA's technical working group commitment: Would allow an Indian accreditation body to certify local verifiers, reducing the cost of CBAM compliance for Indian companies — but no binding commitment or timeline in the FTA text
- India's carbon pricing landscape: India has the Perform, Achieve and Trade (PAT) Scheme (an energy efficiency trading mechanism under the Bureau of Energy Efficiency) and is developing a Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act 2022 — but neither currently constitutes a carbon price comparable to the EU-ETS that would qualify for CBAM offset credit
- If India establishes a recognised carbon pricing mechanism, CBAM payments already made could be offset — reducing the double taxation concern
Connection to this news: The FTA's failure to deliver on CBAM accreditor recognition means Indian exporters cannot easily access the most cost-effective compliance pathway. The technical working group is a placeholder — the hard negotiation on carbon pricing equivalence remains ahead.
India-EU Free Trade Agreement — Landmark and Context
The India-EU FTA, concluded on 27 January 2026 after nearly two decades of negotiations (launched in 2007, suspended in 2013, relaunched in 2022), is described by both sides as the largest bilateral trade deal ever concluded. It covers goods, services, investments, and government procurement.
- Concluded: January 27, 2026 (negotiations); requires ratification by EU member states and Indian Parliament before coming into force
- Tariff liberalisation: India will eliminate or reduce tariffs on 96.6% of EU exports by value; EU will reduce tariffs on 99.5% of Indian exports
- Tariff line basis: India: 86% of tariff lines; EU: 90%+ of tariff lines
- Key sectors for India: Textiles, apparel, leather, footwear, marine products, gems and jewellery, pharmaceuticals — all to attract zero EU duties
- Key sectors for EU: Agri-food, chemicals, pharmaceuticals, machinery, automotive, medical devices
- Sensitive protections: EU maintains tariffs on beef, sugar, rice, chicken; India maintains some protection in dairy, automobiles
- Economic impact projection (European Commission): $4.7 billion in annual duty savings; potential doubling of bilateral trade by 2032
- Bilateral trade (current): EU is India's largest trading partner group; India-EU trade was approximately €135 billion in 2023
Connection to this news: The CBAM gap in the FTA text risks partially undermining the tariff gains for Indian exporters in carbon-intensive sectors (steel, aluminium) — the very sectors India hoped would see the largest export gains from the deal.
WTO Compatibility of CBAM and Implications for Developing Countries
CBAM has been criticised by developing countries — including India, China, South Africa, and Brazil — as a form of "green protectionism" that discriminates against exports from countries at different stages of economic development. The WTO's GATT framework prohibits border measures that discriminate between "like products" based on production methods in the exporting country.
- EU's CBAM justification under WTO: The EU argues CBAM is WTO-compatible under GATT Article XX (general exceptions) — specifically under Article XX(b) (necessary to protect human life or health) and Article XX(g) (relating to conservation of exhaustible natural resources)
- India's WTO challenge: India, along with other developing countries, has raised concerns at the WTO Committee on Trade and Environment; India has argued CBAM violates the UNFCCC principle of "Common But Differentiated Responsibilities and Respective Capabilities" (CBDR-RC)
- CBDR-RC: Under UNFCCC Article 3, developed countries bear primary responsibility for historical emissions and must take the lead in climate action; CBAM is seen by India as a developed-country mechanism imposing costs on developing-country exporters
- Carbon leakage concept: The EU's stated rationale for CBAM — preventing companies from relocating production to avoid EU carbon costs — has legitimate economic basis but asymmetrically affects exporters who lack domestic carbon pricing
- India's exports to EU in CBAM-covered sectors: Indian steel exports to EU approximately $3-5 billion annually (major vulnerability)
Connection to this news: The India-EU FTA's failure to resolve CBAM's accreditation issue reflects the broader tension between climate trade measures and development equity — a debate that will increasingly shape India-EU relations beyond the FTA.
Key Facts & Data
- CBAM definitive phase: 1 January 2026 (transitional: October 2023 to December 2025)
- Sectors covered: Cement, iron and steel, aluminium, fertilisers, electricity, hydrogen
- Certificate cost: Linked to EU-ETS price (~€50-70/tonne CO2e)
- Exemption threshold: 50 tonnes or less (cumulative net mass) per year
- India-EU FTA concluded: January 27, 2026
- Tariff coverage: India eliminates/reduces on 96.6% of EU exports by value; EU on 99.5% of Indian exports
- EU's projected duty savings from FTA: $4.7 billion annually
- India-EU bilateral trade: ~€135 billion (2023)
- India's PAT Scheme: Under Bureau of Energy Efficiency (BEE); sector-specific energy efficiency targets
- Carbon Credit Trading Scheme (CCTS): Established under Energy Conservation (Amendment) Act 2022
- CBDR-RC: UNFCCC Article 3 — common but differentiated responsibilities; central to India's climate diplomacy