Context

• The European Union (EU) and India’s New Strategic EU–India Agenda, announced on September 17, 2025, marks a significant milestone in their evolving partnership.
• Structured around five key pillars; prosperity and sustainability, technology and innovation, security and defence, connectivity and global issues, and cross-cutting enablers, the agenda seeks to deepen collaboration across economic and geopolitical domains.
• Among its most consequential features lies a seemingly technical but transformative proposal: linking India’s Carbon Market (ICM) with the EU’s Carbon Border Adjustment Mechanism (CBAM).

The Promise of the Linkage and the Structural Weakness of India’s Carbon Market

• The Promise of the Linkage
  • At its core, the proposed linkage between the Indian Carbon Market and CBAM offers a pragmatic solution to a pressing challenge: the risk of double carbon penalties for Indian exporters.
  • Under CBAM, the EU imposes a carbon levy on imports based on the embedded emissions in goods, ensuring a level playing field with domestic producers who already pay carbon prices under the EU Emissions Trading System (ETS).
  • By allowing carbon costs paid within India to be deducted from CBAM charges at the EU border, exporters would be spared the unfair burden of dual payments.
  • This arrangement could incentivise early decarbonisation, align domestic emissions reductions with global trade competitiveness, and reflect a rare case of climate justice in practice, recognising rather than penalising developing country efforts in carbon pricing.
• The Structural Weakness of India’s Carbon Market
  • Yet this vision rests on a shaky institutional foundation. India’s Carbon Credit Trading Scheme (CCTS), commonly called the Indian Carbon Market (ICM), remains underdeveloped compared to the EU’s mature ETS.
  • While the EU ETS has a two-decade track record of auction mechanisms, strict emission caps, and independent verification, India’s system is fragmented and experimental.
  • Its current credits often rely on project-based offsets or efficiency improvements rather than binding absolute emission caps.
  • For CBAM’s tonne-for-tonne accounting to work credibly, the EU must trust that India’s carbon credits represent verifiable emission reductions.
  • However, the absence of strong regulators, transparent registries, and compliance enforcement undermines that trust.
  • Unless India upgrades its carbon market to a compliance-grade mechanism with legal enforceability, the EU is unlikely to accept Indian carbon prices as valid deductions.

The Carbon Price Gap and Political Economy Risks

• Even if institutional reforms succeed, a major price disparity The EU ETS carbon price fluctuates between €60 and €80 per tonne, while India’s nascent market trades at €5 to €10 per tonne.
• Without price parity or alignment, EU regulators will deduct only minimal amounts, undermining the intended relief for exporters.
• This creates serious political and industrial risks in India. Exporters could face double burdens, paying both the domestic compliance cost and the full CBAM levy, leading to industrial resistance and pressure to dilute carbon rules.
• The resulting political economy tension, between industrial competitiveness and environmental ambition, is a central obstacle.
• Possible solutions such as sectoral carbon contracts or a negotiated carbon price floor are technically feasible but politically delicate, requiring long-term coordination between New Delhi and Brussels.

The Geopolitical Contradictions of CBAM and the Way Forward

• The Geopolitical Contradictions of CBAM
  • Beyond economics, the CBAM–ICM linkage raises geopolitical and sovereignty concerns.
  • India, along with other developing nations, has opposed CBAM at the World Trade Organization (WTO) and in international climate dialogues, labelling it unilateral and protectionist.
  • By agreeing to integrate its carbon market with CBAM, India risks legitimising a mechanism it has formally resisted.
  • This contradiction could trigger future disputes: if the EU deems India’s carbon prices insufficient, exporters may face partial or full CBAM penalties, prompting political escalation or legal challenge.
• The Way Forward: Toward a Cooperative Future
  • Despite its challenges, the CBAM–ICM linkage holds transformative potential.
  • If implemented successfully, it could become a global model for North–South carbon market cooperation.
  • It would protect Indian exporters, accelerate industrial decarbonisation, and strengthen EU–India climate diplomacy.
  • Achieving this outcome requires a phased and transparent approach, where India strengthens its market integrity and the EU provides technical and policy support.
  • Only through collaborative design, clear equivalence criteria, and joint monitoring mechanisms can the two sides translate ambition into action.

Conclusion

• The proposed linkage between India’s carbon market and the EU’s CBAM represents both a visionary step toward global carbon fairness and a minefield of practical and political challenges.
• Its success depends on reconciling divergent regulatory standards, closing price gaps, and navigating geopolitical sensitivities.
• Without careful coordination, this breakthrough risks remaining a symbolic gesture, a promising clause buried in diplomacy.
• But if India and the EU commit to mutual trust, transparency, and shared responsibility, this initiative could redefine global climate cooperation and set a precedent for equitable transitions in the 21st century.