Climate change is influencing international trade, with EU and Britain leading efforts to introduce carbon taxes on imports under a Carbon Border Adjustment Mechanism (CBAM). While the concept is not new, it takes on fresh urgency in the context of ongoing India-EU FTA negotiations. With a mutually agreed timeline of finalising the deal by end-2025, this is an opportune moment to examine potential implications of CBAM for India's merchandise trade and manufacturing - and how policy could possibly turn this challenge into an opportunity for growth, development and green jobs.
From January 1, 2026, the EU is set to impose full compliance and carbon costs on six carbon-intensive imports: iron and steel, aluminium, electricity, cement, fertilisers, and hydrogen. India exports about 27% of its total iron, steel and aluminium exports to the EU, valued at around $8 bn. These, according to GTRI, are estimated to become 20-35% costlier in the EU market due to the proposed carbon tax.
As CBAM expands to other sectors - in line with the EU's overarching goal of net-zero emissions by 2050 - it will likely impact other Indian exports such as minerals, machinery, chemicals, auto parts, pharmaceuticals and textiles. It is, therefore, viewed as a serious non-tariff barrier for India.
While the official objective is to eliminate the cost advantage that foreign producers enjoy over EU-based green manufacturers, the measure will increase the cost of imports from developing countries while generating significant revenue for the EU.
India has raised concerns about CBAM, advocating for exemptions - especially for MSMEs - and calling for more equitable alternatives to 'unilaterally imposed standards'. At the same time, FTA is important for India, offering access to the EU's 27-member market of nearly 450 mn consumers. Key sectors like textiles, leather, pharmaceuticals, automobiles, IT services and agriculture are expected to benefit from increased exports. The agreement could also boost foreign investor confidence and facilitate access to advanced technologies, strengthening India's domestic manufacturing ecosystem and supporting globally competitive exports and employment creation.
On the other hand, FTA offers the EU access to India's large, fast-growing market, and supports efforts to diversify supply chains in a geopolitically sensitive environment. European companies are expected to invest in manufacturing linkages, fostering ancillary industries and joint ventures - particularly with MSMEs. India-EU cooperation on climate goals could also contribute to global progress toward net-zero targets.
But India and other developing countries view CBAM as WTO-incompatible and unfair, especially as the EU's methodology for calculating embedded emissions remains under scrutiny. During CBAM transition phase, Indian exporters of carbon-intensive goods are using default values published by European Commission as benchmark figures.
To respond effectively, India must develop scientific, sector-specific tools for reliable measurement of embedded emissions based on actual data. It must also establish a domestic carbon-pricing mechanism to assign a financial value to the carbon content of goods. With the EU recently considering carbon credits from overseas projects as part of its climate strategy, India could tap into this opportunity - once institutional mechanisms for pricing and trading carbon emissions are in place.
A long-term strategy is essential for a successful green transition, which will hinge on access to advanced technologies, climate finance and incentives for the private sector to adopt clean energy, and produce green steel, cement and other materials.
Meanwhile, one suggestion to neutralise CBAM is to introduce a domestic carbon tax that could be offset against the EU's CBAM under a double-taxation avoidance framework. Besides aligning with India's trade interests and climate commitments, a phased domestic carbon tax could also serve as a revenue source for financing green initiatives.
While addressing the CBAM barrier is critical for India to realise the benefits of FTA, it also presents a broader strategic opportunity. This could be a defining moment for India to pilot sustainable manufacturing on a wider scale, aligning with its national emissions reduction goals.
Furthermore, India can emerge as a key voice for the developing world in climate governance. It could spearhead a consortium of like-minded nations to promote tech transfer, establish a climate fund to support decarbonisation - especially in hard-to-abate sectors - and advocate for phased, equitable implementation of CBAM-like policies.
The writer is former secretary, ministry of labour and employment, GoI.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
From January 1, 2026, the EU is set to impose full compliance and carbon costs on six carbon-intensive imports: iron and steel, aluminium, electricity, cement, fertilisers, and hydrogen. India exports about 27% of its total iron, steel and aluminium exports to the EU, valued at around $8 bn. These, according to GTRI, are estimated to become 20-35% costlier in the EU market due to the proposed carbon tax.
As CBAM expands to other sectors - in line with the EU's overarching goal of net-zero emissions by 2050 - it will likely impact other Indian exports such as minerals, machinery, chemicals, auto parts, pharmaceuticals and textiles. It is, therefore, viewed as a serious non-tariff barrier for India.
While the official objective is to eliminate the cost advantage that foreign producers enjoy over EU-based green manufacturers, the measure will increase the cost of imports from developing countries while generating significant revenue for the EU.
India has raised concerns about CBAM, advocating for exemptions - especially for MSMEs - and calling for more equitable alternatives to 'unilaterally imposed standards'. At the same time, FTA is important for India, offering access to the EU's 27-member market of nearly 450 mn consumers. Key sectors like textiles, leather, pharmaceuticals, automobiles, IT services and agriculture are expected to benefit from increased exports. The agreement could also boost foreign investor confidence and facilitate access to advanced technologies, strengthening India's domestic manufacturing ecosystem and supporting globally competitive exports and employment creation.
On the other hand, FTA offers the EU access to India's large, fast-growing market, and supports efforts to diversify supply chains in a geopolitically sensitive environment. European companies are expected to invest in manufacturing linkages, fostering ancillary industries and joint ventures - particularly with MSMEs. India-EU cooperation on climate goals could also contribute to global progress toward net-zero targets.
But India and other developing countries view CBAM as WTO-incompatible and unfair, especially as the EU's methodology for calculating embedded emissions remains under scrutiny. During CBAM transition phase, Indian exporters of carbon-intensive goods are using default values published by European Commission as benchmark figures.
To respond effectively, India must develop scientific, sector-specific tools for reliable measurement of embedded emissions based on actual data. It must also establish a domestic carbon-pricing mechanism to assign a financial value to the carbon content of goods. With the EU recently considering carbon credits from overseas projects as part of its climate strategy, India could tap into this opportunity - once institutional mechanisms for pricing and trading carbon emissions are in place.
A long-term strategy is essential for a successful green transition, which will hinge on access to advanced technologies, climate finance and incentives for the private sector to adopt clean energy, and produce green steel, cement and other materials.
Meanwhile, one suggestion to neutralise CBAM is to introduce a domestic carbon tax that could be offset against the EU's CBAM under a double-taxation avoidance framework. Besides aligning with India's trade interests and climate commitments, a phased domestic carbon tax could also serve as a revenue source for financing green initiatives.
While addressing the CBAM barrier is critical for India to realise the benefits of FTA, it also presents a broader strategic opportunity. This could be a defining moment for India to pilot sustainable manufacturing on a wider scale, aligning with its national emissions reduction goals.
Furthermore, India can emerge as a key voice for the developing world in climate governance. It could spearhead a consortium of like-minded nations to promote tech transfer, establish a climate fund to support decarbonisation - especially in hard-to-abate sectors - and advocate for phased, equitable implementation of CBAM-like policies.
The writer is former secretary, ministry of labour and employment, GoI.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
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