By Aparna Sharma & Vaibhav Chaturvedi, Respectively Programme Lead and Senior Fellow, Council on Energy, Environment and Water
The India-European Union Comprehensive Free Trade Agreement (FTA) is being called the “mother of all deals”. The scale justifies the phrase. With over 99% of Indian exports gaining preferential access to the EU, the FTA promises growth amid economic and geopolitical turbulence. India and the EU account for nearly a quarter of global GDP. But beyond tariffs and trade volumes, the FTA does something more consequential—it reframes how India and Europe will manage the Carbon Border Adjustment Mechanism (CBAM) and, by extension, the collision between climate ambition and global trade.
Expectations were high that the FTA negotiations would meaningfully address the EU’s carbon levy on imported goods. Long viewed in India as a unilateral border tax, CBAM now sits at the heart of the new trade relationship. The real question the FTA answers is whether India and the EU have moved towards setting up a framework for engaging with CBAM.
The official announcement on CBAM rests on four pillars—a most-favoured nation (MFN) assurance on flexibilities granted under CBAM; enhanced technical cooperation on recognition of carbon prices; recognition of verifiers and strengthening of measurement, reporting, and verification (MRV) systems; and financial assistance and targeted support to reduce emissions and comply with emerging carbon requirements. This includes a pledge of nearly 500 million euros over the next two years to support India’s emissions reduction efforts and MRV capacity.
At first glance, this looks like a significant win. The MFN assurance appears powerful. If the EU grants CBAM flexibilities to any third country, India would benefit automatically. However, this must be read alongside recent EU trade practice, notably the EU-Mercosur agreement that introduced a “rebalancing mechanism” allowing partners to seek remedies if new EU sustainability regulations, like CBAM or the Deforestation Regulation, undermine negotiated trade benefits.
While such mechanisms are rarely invoked in practice, their inclusion reflects developing countries’ concerns about unilateral EU measures eroding negotiated market access. This raises an important question: if Mercosur countries were to invoke such a rebalancing mechanism in response to EU sustainability measures, could India expect similar treatment under its MFN assurance? The India-EU FTA text leaves room for interpretation and legal and diplomatic debate.
The second pillar is more revealing but risks being misunderstood. This does not mean that the EU has agreed to recognise India’s Carbon Credit Trading Scheme (CCTS) as equivalent to the EU Emissions Trading System (ETS). The design difference remains fundamental. The EU ETS is an absolute cap-and-trade system, whereas India’s emerging system is based on emission intensity targets. The EU has historically struggled to accommodate such systems under CBAM when determining what qualifies as an “effective carbon price paid”. In other words, cooperation may not be recognition.
But in practice, the agreement creates a structured space for research collaboration, methodological alignment, and gradual institutional convergence, without guaranteeing that Indian firms will receive CBAM credit for costs incurred under the CCTS.
The emphasis on MRV systems and recognition of verifiers may be the most immediately practical outcome. CBAM compliance is data-heavy and verification-intensive. For Indian firms, particularly in steel, aluminium, and cement, the burden is both carbon cost and the cost of proving emissions credibly.
EU support to strengthen MRV capacity in India could lower compliance costs while improving system integrity. This also reflects hard lessons from the Clean Development Mechanism era—an earlier international carbon market under the Kyoto Protocol—where weak oversight and conflicts of interest eroded trust in verification regimes. Rebuilding confidence in verification systems will be foundational to the deal’s success.
The final pillar is the least defined, but politically the most telling. Earlier, India’s stance favoured seeking exemptions or deferrals from CBAM. Now, the tone is more cooperative—focused on capacity-building, system-strengthening, and gradual alignment. This implicitly acknowledges that CBAM has moved from a temporary trade irritant to being perceived as part of a structural reordering of trade and climate governance.
A recent study by the Council on Energy, Environment and Water, based on interviews of Indian experts, revealed two schools of thought during the FTA negotiations—one that feared linking CBAM to trade talks could derail the deal, and another that saw the FTA as precisely the leverage needed to shape CBAM outcomes. Negotiators ultimately chose the middle path. CBAM concerns were acknowledged but not allowed to overshadow the strategic and economic gains of the deal.
India has not secured immediate relief from CBAM. Tariffs and reporting obligations will still apply. But India has secured something more durable. MFN-linked flexibility, technical cooperation on carbon pricing and MRV, and a foothold for transition finance now anchor India’s integration into a CBAM-shaped trade order. Broadly speaking, the FTA neither softens climate ambition nor dilutes trade interests. It is a recognition that competitiveness in global markets will increasingly depend on building a credible domestic carbon-pricing architecture and low-carbon industrial pathways.