New Delhi: The European Union’s Carbon Border Adjustment Mechanism tax will remain unchanged for India, even after the EU-India Free Trade Agreement is signed. Called the “mother of all deals” by Indian Prime Minister Modi, the free trade agreement negotiations ended on 27 January — opening up trade between the two blocs and reducing tariffs on 90 per cent of Indian exports to Europe.
While textiles, gems and jewellery, chemicals, marine products, and even wines and beer will see reduced tariffs, there was little change in the way the EU’s carbon levy, CBAM, will play out for Indian manufacturers and exporters.
“CBAM is a horizontal regulation which applies to all partner countries of the EU. Under the FTA, we have agreed to certain provisions like setting up technical dialogues to address how our industries can access the market despite CBAM,” said Rajesh Agrawal, Secretary, Ministry of Commerce, during Tuesday’s press conference.
“In case there is any flexibility under CBAM for any partner country in the world, it will flow to India too,” Agrawal added.
CBAM is a tax levied by the EU on emissions-heavy imports like steel, aluminium, cement, and fertilisers, equivalent to what European producers pay in the domestic Emissions Trading Scheme. It is also an attempt to reduce carbon leakage, namely by ensuring firms don’t shift their production to other countries with lower carbon emissions rules and escape carbon costs in the EU.
The carbon tax was announced by the EU in 2023 and has been a point of contention with India for a while. Commerce Minister Piyush Goyal had, in the past, raised objections about the EU’s irrational standards and how CBAM goes against the principle of “common but differentiated responsibilities”.
With the new FTA now ready to be signed by the end of 2026, and no mention of changes to CBAM implementation, some experts have cautioned against seeing the FTA as a “total win’”.
“Since CBAM is not resolved, EU goods could enter India duty-free, while Indian goods will still face carbon taxes in the EU,” Ajay Srivastava, founder of Global Trade Research Initiative, told ThePrint.
“Right now, it is a few products, but soon every product entering the EU will be taxed,” said Srivastava.
In agreement with Srivastava on the immediate effects of CBAM, other experts, such as Manuj Bhardwaj, climate trade policy analyst and founding faculty member of Dhirubhai Ambani University’s School of Law, also see CBAM as an opportunity.
According to Article 9 of the CBAM document, the EU will also take into account “at-home carbon pricing” while imposing CBAM. This means that if companies importing to the EU have already paid a carbon price in their own country, that amount will be adjusted in the final CBAM cost they have to pay.
This will ensure that producers don’t pay twice for the same amount of carbon emissions.
“The signal is clear – trade is now increasingly happening in a carbon-constrained economy. The sooner Indian companies factor in emissions tracking and carbon accounting, the better,” Bhardwaj told ThePrint.
“The good thing is that the FTA will enable us to get EU support on carbon management, and help reduce Indian exporters’ exposure to CBAM over time,” Bhardwaj added.
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What is CBAM?
From 1 January 2026, the EU began imposing the CBAM on six high-carbon emitting goods – iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen. India falls in the top 5 list of countries impacted by this tax, along with China, Canada, Turkey, and Taiwan.
This levy is extracted in the form of certificates; importers in the EU need to report the emissions that are embedded in their products, and buy certificates by paying a price that is equivalent to the carbon tax they would have paid if the product had been manufactured in the EU.
While, in theory, CBAM is a measure for EU importers, the cost eventually shifts onto the foreign producers that are making the goods.
“They want to make their industry clean by putting carbon prices on all manufactured goods. But if that’s the case, why not ban the imports of dirty iron and steel,” questioned Srivastava.
“They’re admitting everything but just collecting tax on it. At the end of the day, its a way to collect tax.”
The main criticism of CBAM emerges from countries like India and Brazil, which argue that the measure seeks to impose unilateral trade sanctions and unfair carbon pricing on economies that haven’t yet developed their clean technology and low-carbon manufacturing pipelines.
Moreover, experts like Srivastava and Bhardwaj point out that it will be the Micro, Small, and Medium-sized Enterprises (MSMEs) of India that will be the hardest hit by CBAM. While larger firms are more used to ESG compliance and can afford carbon audits, for Indian MSMEs, the compliance required for CBAM is itself a barrier.
“In many ways, what the EU is doing through CBAM can be termed as ‘reverse climate finance’,” said Bhardwaj, who has been a policy analyst and advisor with experience in carbon markets for over a decade. “They’re taking money from developing countries as CBAM levy, and using it to fund climate action in their own country.”
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How can India comply?
Some Indian think-tanks and experts, however, think that complying with CBAM would help increase research and innovation into preventing carbon leakage, and also help achieve the 2015 Paris Agreement’s goal of maintaining global temperature rise below 2 degrees Celsius of pre-industrial levels. A working paper by the Centre for Social and Economic Progress (CSEP) released in February 2025 said that the EU’s CBAM is a way for India to “accelerate its transition to a greener economy.”
It also identified ways in which India can begin to comply with the CBAM regime. The first measure, it said, is to properly set up the Carbon Credit Trading Scheme (CCTS).
The CCTS, which is India’s mechanism for industries to trade carbon credits, needs to be defined and regulated effectively. Currently, this measure is “unattractive” to Indian companies because they’re unsure about how the credits will be generated, priced or enforced, and how this will in turn comply with the EU’s CBAM regulations.
Another report by the Council on Energy, Environment and Water (CEEW) in October 2025 also said that Indian policymakers need to help MSMEs meet the EU’s CBAM requirements by first establishing an Indian carbon monitoring, reporting and verification (MRV) system.
While the government has fast-tracked CCTS implementation, it is yet to begin issuing any credits under the system. Other countries, however, have jumped on the bandwagon of carbon markets already.
The World Bank’s State and Trends of Carbon Pricing 2025 report found that global carbon markets have surpassed $100 billion, and now 28 per cent of carbon emissions in the world are accounted for in carbon pricing. While the report flagged India as an “emerging market”, the CCTS implementation is now all the more urgent with the signing of the new EU FTA.
“I think CBAM is an opportunity in disguise. In a country like India, climate action and development need to be parallel. Establishing and adopting our own credible carbon market system will only be beneficial in the long run,” concurred Bhardwaj.
(Edited by Insha Jalil Waziri)