Context

• The European Union’s Carbon Border Adjustment Mechanism (CBAM), implemented on January 1, 2026, represents a significant shift in the intersection of global trade and climate policy.
• Marketed as a tool of fairness, CBAM seeks to equalise carbon costs between European producers and foreign exporters.
• While this principle appears equitable in theory, its practical application reveals structural imbalances, particularly for developing economies such as India.
• The policy raises broader concerns about fairness, climate justice, and economic sovereignty in the global green transition.

CBAM and the Question of Fair Competition

• Unequal Carbon Cost Burden
  • CBAM requires importers to pay a carbon price equivalent to that faced by EU producers under the Emissions Trading System (ETS).
  • However, European industries continue to benefit from extensive state support, including subsidies for decarbonisation, concessional financing, and the gradual phase-out of free emission allowances between 2026 and 2034.
  • These measures significantly reduce their effective carbon costs.
  • In contrast, Indian exporters face the full burden of CBAM charges without comparable domestic support.
• Concerns Under Global Trade Norms
  • This imbalance appears inconsistent with the spirit of GATT Article III, which discourages internal measures that indirectly protect domestic industries.
  • By maintaining support for its own producers while imposing full carbon costs on imports, the EU risks undermining the principle of non-discriminatory trade.

India–EU FTA: Limited Openings

• No Exemption from CBAM
  • The India–EU Free Trade Agreement (FTA), concluded on January 27, 2026, does not provide India with any exemption or special treatment under CBAM.
  • The EU has maintained a uniform approach, refusing country-specific flexibility.
• Significance of Annex 14-A
  • Despite this, Annex 14-A of the FTA establishes a formal technical dialogue on CBAM implementation.
  • It allows for:
    • Recognition of carbon pricing in the country of origin
    • A most-favoured-nation clause ensuring equal treatment if flexibility is granted to others
  • Though limited, this provision offers India a critical institutional mechanism to negotiate the recognition of its domestic carbon policies.

The Deeper Issue: Climate Justice and Sovereignty

• By shifting part of its decarbonisation burden onto developing countries while retaining the associated revenues, the EU creates a structural imbalance.
• For India, this translates into a loss of policy autonomy.
• Without control over carbon pricing or revenue utilisation, countries risk becoming passive participants, rule-takers rather than rule-makers, in the global climate regime.

India’s Domestic Preparedness: The CCTS

• Establishing a Carbon Market
  • India’s Carbon Credit Trading Scheme (CCTS), introduced in 2023, provides a foundation for domestic carbon pricing.
  • It requires industrial installations to hold tradable carbon credits against verified emissions, creating a measurable carbon cost.
• Leveraging CBAM Article 9
  • CBAM’s Article 9 allows importers to deduct carbon costs already paid in the country of origin.
  • This creates a legal pathway for India to ensure that its domestic carbon price is recognised at the EU border.
• Avoiding Double Pricing
  • Crediting CCTS under Article 9 would:
    • Prevent double carbon pricing
    • Maintain environmental integrity
    • Ensure fairness in trade
  • However, this requires strong monitoring systems, transparent pricing mechanisms, and safeguards against policy distortions.

The Case for an India Border Adjustment Mechanism (IBAM)

• A Strategic Countermeasure
  • India can respond proactively by introducing an IBAM, which would impose a carbon-based charge on exports destined for CBAM-regulated markets.
• Need for Coordinated Implementation
  • IBAM should not be implemented unilaterally. Instead, it must be developed through the institutional framework of Annex 14-A to ensure:
    • Recognition under CBAM Article 9
    • Seamless offsetting of CBAM liabilities
    • Policy credibility and international acceptance
• Capping the Carbon Burden
  • If properly aligned with CBAM, IBAM can ensure that Indian exporters do not face any higher net carbon cost than what CBAM would impose alone.

Retaining Carbon Revenues for Domestic Transition

• Shifting the Revenue Base
  • A key advantage of IBAM is that it allows India to retain carbon revenues domestically rather than transferring them to the EU.
• Investing in Green Development
  • These revenues should be channelled into a dedicated, transparent fund supporting:
    • Industrial decarbonisation (e.g., cleaner steel production)
    • Renewable energy expansion
    • Hydrogen and low-carbon technologies
    • Worker transition and social protection
  • Such investments would strengthen India’s long-term climate and economic resilience.

Conclusion

• While CBAM presents challenges for developing economies, it also offers opportunities for strategic adaptation.
• By leveraging the provisions of the India–EU FTA and CBAM’s legal framework, India can transform a potential disadvantage into a policy advantage.
• The combined use of CCTS and IBAM enables India to maintain control over carbon revenues, protect its exporters, and actively participate in the global green transition.
• Ultimately, IBAM-ing the CBAM reflects a broader vision: engaging with a carbon-constrained world on equitable terms while preserving national sovereignty and developmental priorities.