- The trade agreement between India and the European Union is likely to come into force early next year.
- With the EU’s carbon border tax operational from January 2026, the question is how tariff liberalisation and carbon tariffs will affect exports on the ground.
- As more countries contemplate border carbon adjustment measures, pursuing long-term green industrialisation remains urgent to future-proof India’s trade and economic growth.
- The views in this commentary are those of the authors.
The India-European Union Free Trade Agreement was agreed upon in early 2026 after more than two decades of negotiations. Recently, the Union commerce and industry minister Piyush Goyal said India and the EU are expected to sign the FTA in December, and it is likely to come into force early next year.
The agreement signalled cooperation amid geopolitical tensions, but it also came amid contestation over the EU’s Carbon Border Adjustment Mechanism (CBAM), which imposes a tax on the greenhouse gas content of imported goods, which became fully operational in January this year.
As the union minister Goyal said, the FTA will give India the opportunity to increase exports to European countries, but export-oriented industries will also face pressure to reduce the emission intensity of their exports to comply with CBAM.
The opposing impacts of tariff liberalisation and carbon tariffs on exports call for a closer look at the interaction between the CBAM and the FTA, especially in the Indian iron and steel sector, which remains one of the most exposed to the CBAM. It raises the question: how will the interaction between the FTA and the CBAM impact India’s export opportunities compared to those of its competitors? Moreover, is India’s long-term export competitiveness increasingly being tied to its industrial emissions?
Climate action or trade-protectionism
CBAM currently targets six carbon-intensive sectors, including iron and steel. These sectors account for around 10% of India’s exports to the EU and about 1.64% of total Indian exports. However, the EU is planning a major expansion of its CBAM, which could sharply increase the carbon tax cost on Indian manufactured exports to Europe, according to Global Trade Research Initiative (GTRI), a New Delhi-based think tank.
In the CBAM’s new draft released on April 10, the EU proposed five major changes, including extending the carbon border tax to around 180 additional steel- and aluminium-based products. The European Parliament has also asked the European Commission to study the future inclusion of other materials, such as organic chemicals and polymers. The EU’s justification is to prevent carbon leakage that may result from carbon-intensive production relocating outside the EU, and to enhance the EU’s economic competitiveness.
However, the move towards CBAM has drawn criticism for disguising trade-protectionism as climate action. Developing countries have emphasised the discriminatory and market-distorting nature of CBAM. India has argued that, contrary to its goal, CBAM will have a limited effect in mitigating emissions and will increase trade costs for developing countries. Research shows that replacing highly polluting technologies with green technologies is easier in the EU than in developing countries. Therefore, unless CBAM is coupled with targeted support measures tailored to local needs, it will run counter to the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) as enshrined in the UNFCCC.
CBAM remained a bone of contention during the India-EU FTA negotiations as well. While India sought exemptions or relief from potential revenue loss due to CBAM, the EU did not cede ground. However, the FTA did extend a forward-looking most favoured nation status to India, assuring that any future exemptions granted to other countries will also apply to India.
Can the FTA offset CBAM’s impact?
In 2025, India was the fourth-largest iron and steel exporter to the EU (€3.21 bn), after China (€4.19 bn), Turkey (€3.79 bn), and South Korea (€3.39 bn). However, Indian exports are the most carbon-intensive, followed by China, South Korea, and Turkey. Moreover, South Korea and Turkey enjoy preferential access to the EU market, respectively due to an FTA and a membership in the Customs Union. Once implemented, the FTA would help India close its competitive gap with these countries in the EU markets.
In terms of export composition, flat products accounted for 96.6% of India’s finished steel exports to the EU in 2024. India stands second in the category, while South Korea and Turkey ranked first and third, respectively, making them strong competitors with advantages arising not only from preferential access but also lower emissions intensity. Thus, for India to further strengthen its export competitiveness would entail pairing tariff liberalisation with a shift towards low-carbon production.
Notably, CBAM is not the only sticking point in the FTA talks. The EU has also announced a separate 50% tariff on steel imports, along with a 47% reduction in its annual steel import quota to 18.3 million tonnes. It is not yet clear whether the FTA will lead to a significant share of the import quota for India, but, according to industry experts, the steel tariffs combined with CBAM may cause a double setback for Indian exporters.
The emerging landscape and way forward
With more countries contemplating border carbon adjustment measures, the pressure on developing countries to transition to low-carbon development is likely to grow. For instance, the UK, with which India recently signed an FTA, plans to announce its own CBAM from 2027. As the date of India-EU FTA implementation comes closer, India needs to focus on the specificities of CBAM compliance and formulate substantive measures to enhance the competitiveness of sectors where free trade overlaps with carbon levies.
As a policy response, India created its own domestic carbon pricing regime — the Carbon Credit Trading Scheme (CCTS). But the lack of clarity on how it will reconcile India’s intensity-based carbon pricing with the EU’s absolute emissions-based design poses a major technical challenge.
Additionally, it is anticipated that India’s carbon price will start at $10, and future price discovery will occur as the market evolves, so it remains to be seen how much it can offset the high carbon price in the EU market.
The India-EU FTA paves the way for strengthening cooperation between the two countries in an evolving regulatory environment. For India’s iron and steel exports, the FTA promises preferential access to the European market compared with non-FTA exporters. Optimism about the FTA notwithstanding, CBAM challenges the competitiveness of carbon-intensive exports, as competitors in iron and steel offer low-carbon products with comparable market access. The €500 million announced by the EU to help India reduce its greenhouse gas emissions is unlikely to bring about any significant changes to industrial emissions.
The task at hand for India’s carbon-intensive industries is to urgently assess the expected CBAM costs and the impact of tariff liberalisation on offsetting those costs. Doing so should provide a credible estimate of the investments needed for industrial decarbonisation and, in turn, expand India’s share of exports to the EU.
In addition to addressing the technical, financial, and institutional dimensions of CBAM compliance, it remains crucial that India push for stronger institutional and policy mechanisms to improve export competitiveness by enabling industries to reduce their emissions in line with the phased tariff reductions. With more countries moving towards greener imports, pursuing long-term green industrialisation remains urgent to future-proof India’s trade and economic growth and build a low-carbon, resilient future.
Banner image: Labourers work in an iron and steel factory on the outskirts of Jammu. (AP Photo/Channi Anand, File)
Soutrik Goswami is Research Associate and Isha Sharma is Research Lead, Climate Policy, at the Sustainable Futures Collaborative, a New Delhi-based research organisation.
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