2 days ago
India and EU need to talk more about carbon tax
By Nancy Gupta
India and the European Union (EU) are aiming to finalise their long-pending Free Trade Agreement (FTA) by the end of 2025. As of May, 11 rounds of negotiations have closed chapters on regulatory practices, customs, intellectual property, and mutual assistance, but there's been no progress on the contentious subject of the EU's Carbon Border Adjustment Mechanism (CBAM). With CBAM's implementation from January 2026, the clock is ticking for both sides to address this looming issue within their trade pact.
The recent India-UK FTA, concluded in May 2025, notably sidestepped CBAM and carbon border taxes. This omission leaves Indian exports exposed to future UK carbon taxes (the UK's CBAM will arrive in 2027), although India has reserved the right to retaliate if its exports suffer. This approach — keeping CBAM outside formal trade negotiations — may not serve India's long-term interests, especially as the EU pushes ahead with CBAM as the bedrock of its climate and trade policy. The EU's firm stance includes expanding CBAM's reach across industries and streamlining compliance, even as many developing countries protest its 'unilateral, punitive, and discriminatory' character.
Trade patterns already suggest CBAM's impact. The EU's imports of CBAM-regulated goods fell by 28 per cent in 2023 and dropped another 6 per cent in 2024, with trade flows shifting toward slightly modified versions of regulated products to circumvent CBAM. India, a top 10 exporter of CBAM-covered goods to the EU, has seen such exports grow 7.4 per cent annually over the past six years — faster than its overall EU-bound exports. In 2024, about 24 per cent of these CBAM goods by value went to the EU. Clearly, India's export interests are substantial, and with its share in the EU's import basket rising from 4.61 per cent in 2019 to 5.41 per cent in 2024, inaction on CBAM is no longer strategic.
Many developing nations, including India, Brazil, South Africa, Russia, and China, see CBAM as an infringement on their right to development and a threat to climate equity principles. But unlike others, India stands out for its determined green transition. It hit its 2030 target for 50 per cent installed non-fossil electricity five years early and is rapidly scaling up hydrogen and solar infrastructure. These achievements position India to credibly negotiate better CBAM terms and showcase domestic climate ambition. However, global climate governance remains inequitable. The US withdrew from the Paris Agreement (effectively from January 2026), reducing its climate funding obligations, while the EU has declined to exempt even the LDCs from CBAM. As other major economies, such as Japan, Australia, and Canada, move toward similar carbon border measures, the burden on less-developed economies will inevitably grow.
India has criticised CBAM as violating multilateral norms and called for such measures to be debated in broader international forums, not imposed by one trading bloc. Yet, without proactive FTA negotiation on CBAM, India risks losing leverage and export competitiveness. Instead, India must prioritise a dual strategy: Cementing its own green transition and seeking integration into global green value chains. A major criticism of the EU's CBAM from developing countries is the lack of a binding commitment to direct CBAM revenues toward supporting their green transitions. While EU officials insist CBAM is a climate tool, not a revenue-raiser, the absence of financial support exacerbates climate injustice. Rather than accepting the costs imposed by CBAM, India should consider implementing a domestic carbon tax or export levy, echoing the EU's system, to retain revenue and fund its own green transition. This approach would also foster policy parity and potentially qualify Indian exporters for deductions on CBAM liabilities at the EU border if verified carbon costs are already paid domestically.
India is already laying the groundwork for a robust carbon pricing regime. Its carbon pricing instruments include a coal cess (now under the GST), climate levies under the Extended Producer Responsibility (EPR) system, and the ongoing development of a Carbon Credit Trading Scheme (CCTS). For example, current policy translates to an implicit carbon cost of ~$15-17/ton on Indian aluminium, and a transparent accounting of these levies could help Indian exporters avoid double taxation under CBAM.
India's Perform Achieve and Trade (PAT) scheme has advanced energy efficiency but falls short of full CBAM equivalence. Strengthening domestic measurement, reporting, and verification frameworks and aligning Indian carbon pricing with the EU Emissions Trading System (EU ETS) will be key to gaining CBAM recognition.
Learning from Thailand, which embedded its carbon tax within existing fuel taxes to minimise economic disruption, India can pursue a harmonised, trade-compliant climate policy while protecting its export interests.
Globally, as other major trading partners, like China and Turkey, consider their own CBAM-like policies, India, the world's sixth-largest supplier of CBAM-regulated goods to the EU, cannot afford to wait. The impending expansion of CBAM's sectoral scope will expose more of India's CBAM-affected exports. Multilateral engagement, robust domestic climate measures, and assertive FTA negotiations are essential to ensure India's economy remains resilient and competitive in a rapidly changing green trade order.
The author is Research Associate, Centre for Social and Economic Progress
