Editorial 1: ​​​​A start for North-South carbon market cooperation

Context

Linking the Carbon Border Adjustment Mechanism (CBAM) with the Indian carbon market is significant, but key hurdles still remain.

Introduction

On September 17, 2025, the European Union (EU) and India unveiled a New Strategic EU-India Agenda outlining a comprehensive roadmap for cooperation. The agenda focuses on five pillars — prosperity and sustainability, technology and innovation, security and defence, connectivity and global issues, and cross-pillar enablers. Hidden within the section on clean transition is a noteworthy commitment: the EU’s plan to link the Indian Carbon Market (ICM) with its Carbon Border Adjustment Mechanism (CBAM).

• In simple terms, the carbon price paid in India will be deducted from the CBAM charges at the EU border.
• This marks a major breakthrough, potentially protecting Indian exporters from double taxation.
• It could also incentivise early decarbonisation by rewarding cleaner production.
• However, significant challenges still hamper implementation.
• Unless these barriers are resolved, the integration may stall before yielding tangible benefits.

Challenges in Aligning India’s Carbon Credit Trading Scheme (CCTS/ICM) with the EU’s CBAM

Structural and Institutional Gaps

• India’s Carbon Credit Trading Scheme (CCTS/ICM) is still an evolving framework, unlike the EU Emissions Trading System (ETS), which has over two decades of tested mechanisms.
• The EU ETS features a robust auction system, cap-setting processes, and independent verification — all missing or weak in the Indian setup.
• Indian credits currently stem from intensity-based improvements or project offsets, not absolute emission caps, which CBAM mandates for tonne-for-tonne accounting.
• Without legally binding caps and strict penalties, EU regulators are likely to treat Indian credits as inferior.
• India lacks institutional equivalents to the EU’s regulators or emission registries, which ensure market transparency and environmental integrity.
• Therefore, the EU cannot deduct Indian carbon prices unless the ICM demonstrates credible verification and compliance mechanisms.
• Bridging this gap is not just technical — it demands a complete structural redesign of the ICM to match EU compliance standards, which remains a bureaucratic challenge in India.

Carbon Price Disparity and Political Risks

Domestic and Policy Implications

• Without comparable carbon prices, the EU may refuse full deductions, leading to dual costs for Indian exporters.
• This could create domestic political backlash, as industries may resist “double burden” compliance.
• Firms could lobby to dilute India’s ICM rules, weakening its environmental credibility.
• Bridging the price and structural gap will need:
  • Sector-specific carbon contracts, or
  • A negotiated floor price aligned with CBAM expectations — both politically difficult to implement in the near term.

Political and Strategic Contradictions in Linking CBAM with India’s Carbon Market

1. WTO and Political Tensions

• Even if technical and pricing issues are addressed, CBAM remains politically contentious.
• India and other developing countries have opposed CBAM at the WTO and global forums, branding it a unilateral and protectionist measure.
• Hence, agreeing to link the Indian Carbon Market (ICM) with CBAM creates a political contradiction — India would be endorsing a mechanism it has formally opposed.

2. Future Disputes and Sovereignty Risks

• Disputes may arise if the EU deems India’s carbon price “insufficient” and refuses full deductions.
• Such a scenario would prompt exporters’ protests and force New Delhi to escalate the issue politically or legally.
• This raises a sovereignty concern, as carbon pricing is a domestic policy tool, yet CBAM effectively gives Brussels a say in India’s climate measures.
• For a country that fiercely protects policy autonomy, this could become a red line in future negotiations.

3. Strategic and Domestic Vulnerabilities

4. Broader Implication

• The ICM–CBAM linkage is not merely a technical alignment but a test of political trust and strategic coherence.
• It is hostage to WTO legalities, domestic political economy, and the fragile balance of EU-India climate diplomacy.

Looking at optimistic resolutions

• The linkage between India’s Carbon Market (ICM) and the EU’s Carbon Border Adjustment Mechanism (CBAM) is among the most significant outcomes of their new strategic agenda.
• If implemented successfully, it can protect Indian exporters from double taxation, accelerate industrial decarbonisation, and set a precedent for North–South carbon market cooperation.
• However, weak institutional structures, mismatched carbon prices, and political contradictions threaten to undermine its success.
• A stronger collaborative framework is needed — India must strengthen market design and enforcement, while the EU should offer technical clarity and transitional support.
• Without such alignment, this “breakthrough” will remain symbolic, and Indian exporters will continue to bear CBAM costs at the border.

Conclusion

The proposed ICM–CBAM linkage represents a bold step toward North–South climate cooperation, offering a path to fairer trade and faster decarbonisation. Yet, its success hinges on institutional reform, price parity, and political trust. Only through mutual transparency, policy alignment, and sustained dialogue can this partnership move beyond symbolism and deliver real climate and trade benefits for both sides.