A Start for North-South Carbon Market Cooperation
Why in the News?
The New Strategic EU-India Agenda has been announced which is a critical move to link the Indian Carbon Market (ICM) with the EU’s Carbon Border Adjustment Mechanism (CBAM).
UPSC Relevance
GS3, Conservation, Environmental Pollution and Degradation, Environmental Impact Assessment, Important Climate Change initiatives are asked in Prelims.
PYQ
2021
Describe the major outcomes of the 26th session of the Conference of Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). What are the commitments made by India in this conference? (15 M)
Latest Developments
The New Strategic EU-India Agenda has been announced which is a critical move to link the Indian Carbon Market (ICM) with the EU’s Carbon Border Adjustment Mechanism (CBAM).
- New Strategic EU-India Agenda (September 17, 2025):
- The joint communication sets out a new comprehensive strategic agenda with five pillars, including prosperity and sustainability, technology, security, connectivity, and global issues.
- A key component in the section on clean transition is the commitment for the EU to link the Indian Carbon Market (ICM) with CBAM.
- Significance of the Linkage:
- In plain terms, carbon prices paid in India will be deducted from CBAM levies at the EU border.
- This is a breakthrough that could prevent Indian exporters from being penalized twice and reward early decarbonization.
Major Barriers to Operationalization
Underdeveloped Indian Carbon Market (ICM)
- Evolving Architecture: India’s Carbon Credit Trading Scheme (CCTS), or ICM, is still an evolving architecture with fragmented foundations, unlike the two-decade-old, robust EU Emissions Trading System (ETS).
- Lack of Absolute Caps: Current Indian credits are often based on intensity improvements or project-based offsets, not absolute caps on emissions, which is what the CBAM requires for tonne-for-tonne accounting of embedded carbon.
- Result: Without legally binding caps, EU regulators may treat Indian credits as “second class.”
- Institutional Gap: India currently lacks an institutional equivalent to the EU’s independent regulators and emissions registries that guarantee market integrity.
- Challenge: Bridging this requires a structural redesign of the ICM to mirror the compliance-grade features of the EU’s ETS, a difficult pivot for India’s bureaucracy in the near term.
Misaligned Carbon Prices
- Price Disparity: CBAM relies on a stringent carbon price (EU ETS floats around €60 to €80 per tonne), while initial Indian carbon credit prices hover in the range of €5 and €10.
- Consequence: European regulators will not deduct much unless the price is comparable and enforced across sectors.
- Political Risk: Exporters may face both the Indian compliance cost and the EU’s full CBAM levy, creating a “double burden”.
- This could lead to domestic political resistance from industries, potentially lobbying to water down India’s scheme.
- Bridging the Price Gap: Requires politically difficult options like targeted sectoral carbon contracts or a negotiated floor price.
CBAM : Criticisms and Contradictions
- Controversial Mechanism: India and other developing countries have consistently opposed CBAM at international forums as a unilateral and protectionist measure.
- Political Contradiction: Agreeing to a linkage is a political contradiction, as it implies legitimizing a mechanism India has formally resisted.
- Risk of Disputes: Tensions could resurface if the EU deems India’s carbon price “insufficient,” forcing New Delhi to escalate the issue politically or legally.
- Sovereignty Issue: CBAM effectively gives the EU a say in whether India’s domestic carbon pricing measures are “good enough,” which could be a “red line” for a country guarding its policy space.
- Strategic Risk: The linkage is hostage to domestic political economy and EU-India trust; any domestic political backtracking (e.g., rolling back compliance) would immediately expose exporters to full CBAM costs, destabilizing trade flows.
- Historical Responsibility Not Accounted For: The mechanism is criticized for not considering the historical contributions of developed countries, including the EU, to the stock of greenhouse gas emissions. Developing nations argue that the EU should bear a proportionally greater burden for emission reduction and climate financing, in line with the principle of Common but Differentiated Responsibilities (CBDR).
- Green Investment Re-Routing: Critics argue that the revenue generated from CBAM duties should be re-routed back to the source countries (exporting developing nations). This revenue could then be used for green investments and industrial decarbonization in those countries, supporting their transition rather than simply taxing them at the border.
- Disproportionate Duties vs. Tariffs ( inconsistent with WTO principles): The projected 20-35% CBAM duties on carbon-intensive imports are significantly greater than the average tariffs currently levied by the EU (for instance, the average EU Most-Favored-Nation (MFN) tariff is around 2.2%). This disparity is seen by some as an unjustifiable or disguised restriction on international trade, making it prone to challenge under WTO rules (specifically the principles of Most-Favored-Nation and National Treatment).
- Neglect of Other Industrial Factors: Developing countries contend that their lower production costs and, consequently, their higher attractiveness as an industrial location are not solely due to “relaxed environmental norms” or a lack of carbon pricing. Other legitimate industrial location factors (e.g., cheaper labour, capital, or domestic resource availability) are also responsible, and CBAM unfairly penalizes these factors under the guise of an environmental measure.
- Conflict with Free Trade Agreements (FTAs): CBAM creates a significant challenge for countries that have or are negotiating Free Trade Agreements (FTAs) with the EU for zero or preferential duties. The imposition of a carbon levy, which can be substantial (20-35%), effectively negates the benefit of zero duties promised under an FTA, as a new, higher barrier is introduced under an environmental label.
Optimistic Resolutions and Next Steps
- High Stakes: The linkage is one of the most significant agreements under the strategy agenda; if successful, it accelerates industrial decarbonization and creates a model for North-South cooperation.
- Call for Collaboration: To prevent the breakthrough from remaining “on paper,” there is a case for more comprehensive collaboration where:
- India strengthens its market design.
- The EU offers clarity and technical support for a smooth transition.