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Informist, Thursday, Jan. 1, 2026

 

By Krity Ambey

 

NEW DELHI – As the European Union's Carbon Border Adjustment Mechanism comes into full effect on Thursday, nearly 8% of India's exports to the bloc face a fresh risk. A potentially larger challenge, however, looms over the ongoing free trade agreement negotiations between New Delhi and Brussels, with the carbon tax threatening to undermine the progress made over the past two years.

 

From Thursday, EU importers, who since Oct 2023 have been required only to submit quarterly reports on greenhouse gas emissions embedded in their imports, will be required to pay a levy based on the carbon content of their shipments. The carbon tax currently applies to iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity entering the EU.

 

If India and the EU conclude the FTA under these conditions, the deal would be lopsided, former commerce ministry official and founder of the Global Trade Research Initiative Ajay Srivastava said. While European goods would enter India duty-free, Indian exports from carbon-intensive sectors would still face the EU's carbon levy. Srivastava added that the carbon adjustment mechanism list, which currently covers only a handful of sectors, is set to expand to most products by 2034.

 

Srivastava said the EU has granted certain flexibilities to the US, including allowing carbon prices paid in the country of origin to avoid double taxation and providing long reporting periods. India, he said, may seek to negotiate similar concessions. However, European goods entering the US continue to face an additional 15% tariff under the agreement, while New Delhi is negotiating a free-trade agreement with the EU.

 

One way to manage the situation could be for India to impose a domestic levy so that no further charge is imposed at the EU border, Federation of Indian Export Organisations Director General Ajay Sahai said. Such a mechanism could help the government build a corpus to support green initiatives in India, he added.

 

Although New Delhi and Brussels have made significant progress in trade talks, the EU's Carbon Border Adjustment Mechanism proposal remains a key sticking point. Greater clarity on the direction of negotiation may emerge after Commerce Minister Piyush Goyal visits Brussels next week.

 

Over the past two years, Goyal has repeatedly and publicly criticised the EU's climate regulations, describing them as trade barriers. Just a few months ago, he said the bloc would need to reconsider its insistence on including non-trade issues such as climate regulations if it wanted to conclude the FTA with India "amicably". "Any self-respecting decent country cannot sign up to commitments that are irrational and beyond the realm of trade," Goyal had said.

 

 

India and the EU have already missed the target of concluding the trade deal by the end of 2025. However, there is some hope that an announcement on the conclusion of the FTA could come during European Commission President Ursula von der Leyen's visit to New Delhi in January. She has been invited as the chief guest for the Republic Day celebrations on Jan. 26.

 

India's iron and steel and aluminium exports to the EU have already been hit since Brussels mandated greenhouse gas emissions reporting in 2023–24 (Apr–Mar). Complex data and verification requirements raised compliance costs, forcing smaller exporters out of the EU market. Shipment of iron and steel to the bloc fell 35%, while aluminium exports declined 10% in FY25. Overall, India exported goods worth $75.85 billion to the EU in FY25, including $6.2 billion from the carbon tax-covered sectors.

 

According to the Global Trade Research Initiative, Indian exporters may need to cut prices by 15–22% to absorb the carbon costs passed on by EU importers. Smaller exporters that rely on high-emission production methods, such as blast furnaces, are likely to suffer the sharpest loss of competitiveness. "Larger players like Tata and Jindal, which have manufacturing plants in the EU, may already be compliant and therefore insulated from the additional levy," Sahai said.  End

 

US$1 = INR 89.96

 

Edited by Akul Nishant Akhoury

 

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