Carbon Pricing in India

India’s current approach to the European Union’s Carbon Border Adjustment Mechanism (CBAM) is largely centred on seeking exemptions. However, this approach needs to evolve into a proactive domestic carbon pricing strategy to ensure long-term trade competitiveness, fiscal stability, and global climate leadership.

What is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM) is a climate-linked trade policy introduced by the European Union. It is a part of the EU’s “Fit for 55 by 2030” package, which aims to reduce greenhouse gas emissions by at least 55 percent by 2030 compared to 1990 levels, in accordance with the European Climate Law. CBAM is designed to ensure that imported goods bear the same carbon cost as goods produced within the European Union.

Implementation of CBAM

The CBAM will be implemented by requiring EU importers to declare the quantity of goods imported and report the embedded greenhouse gas emissions associated with those goods on an annual basis. To offset these emissions, importers will be required to surrender CBAM certificates. The price of these certificates will be linked to the weekly average auction price of allowances under the EU Emissions Trading System (ETS), expressed in euros per tonne of carbon dioxide emitted.

Objectives of CBAM

The primary objective of CBAM is to ensure that the European Union’s climate goals are not undermined by carbon-intensive imports. It also seeks to prevent carbon leakage, where industries relocate production to countries with weaker environmental regulations. Additionally, CBAM aims to encourage cleaner and low-carbon production practices globally.

Significance of CBAM

CBAM has the potential to encourage non-EU countries to adopt stricter environmental standards, thereby contributing to a reduction in global carbon emissions. It helps prevent carbon leakage by discouraging companies from relocating to jurisdictions with lax climate regulations. Furthermore, the revenue generated from CBAM will be used to finance EU climate policies, particularly in the areas of renewable energy and green transition, offering important lessons for other countries.

Impact of the EU Carbon Border Adjustment Mechanism (CBAM) on India

The implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM) is expected to have significant economic and trade implications for India, particularly in terms of exports, industrial competitiveness, and energy transition.

Impact on India’s Exports

CBAM is likely to have an adverse impact on India’s exports of carbon-intensive products, especially iron, steel, and aluminium, which are major export items to the European Union. These products will be subjected to stringent carbon scrutiny under the mechanism.

India’s key exports to the EU, such as iron ore and steel, face a substantial threat due to carbon levies ranging between 19.8 percent and 52.7 percent. From 1 January 2026, the EU will begin collecting carbon taxes on each consignment of steel, aluminium, cement, fertilisers, hydrogen, and electricity, increasing compliance costs for Indian exporters.

Carbon Intensity and Higher Tariffs

The carbon intensity of Indian products is considerably higher than that of the EU and several other countries, primarily due to India’s heavy reliance on coal for energy production. Coal accounts for nearly 75 percent of India’s power generation, compared to about 15 percent in the EU and a global average of 36 percent.

As a result, both direct and indirect emissions from sectors such as iron, steel, and aluminium are significantly higher. Under CBAM, higher emissions will translate into higher carbon tariffs, making Indian products more expensive in the EU market.

Risk to Export Competitiveness

While CBAM initially targets a limited number of sectors, it may be expanded to additional sectors in the future, including refined petroleum products, organic chemicals, pharmaceutical products, and textiles, which are among the top imports from India to the EU.

The absence of a domestic carbon pricing mechanism in India further aggravates the problem. Countries with established carbon pricing systems may be able to offset or reduce CBAM liabilities, whereas Indian exporters may face the full burden of carbon taxation, thereby eroding their export competitiveness.

Measures India Can Take to Mitigate the Impact of CBAM

The European Union’s Carbon Border Adjustment Mechanism (CBAM) poses significant challenges for India’s export competitiveness and industrial growth. To mitigate its impact, India needs a multi-pronged strategy combining domestic reforms, international negotiations, and long-term climate planning.

Integrating the Decarbonisation Principle into Domestic Policies

On the domestic front, the government has introduced schemes such as the National Steel Policy and the Production Linked Incentive (PLI) scheme to enhance manufacturing capacity. However, carbon efficiency has not been a central objective of these initiatives.

India can complement these schemes by incorporating a Decarbonisation Principle, which focuses on reducing or eliminating greenhouse gas emissions, particularly carbon dioxide, from key sectors such as power generation, manufacturing, transportation, and agriculture. Embedding decarbonisation targets within industrial policies would align economic growth with climate action.

Negotiating with the EU for Tax Recognition and Reduction

India should engage in negotiations with the European Union to seek recognition of its domestic energy taxes as equivalent to a carbon price. If accepted, this could reduce the CBAM burden on Indian exports.

For instance, India can argue that its coal cess serves the purpose of internalising the cost of carbon emissions, making it comparable to a carbon tax. Such recognition would make Indian exports less vulnerable to CBAM-related levies.

Facilitating Transfer of Clean Technologies and Climate Finance

India should actively negotiate with the EU for the transfer of clean technologies and access to climate financing mechanisms to improve the carbon efficiency of its industrial sector.

One possible approach is to propose that the EU allocate a portion of CBAM revenues to support climate mitigation projects in developing countries, including India. This would align CBAM with the principle of common but differentiated responsibilities.

At the same time, India should accelerate preparations for a domestic carbon trading system, similar to efforts underway in countries like China and Russia, to improve readiness for carbon-linked trade regimes.

Incentivising Greener and Sustainable Production

India should view CBAM not only as a challenge but also as an opportunity to transform its production systems. By incentivising cleaner and more sustainable manufacturing practices, India can enhance long-term competitiveness in a carbon-conscious global economy.

Such a transition would help India integrate into the future international economic system while simultaneously progressing towards its Net Zero target by 2070, without compromising developmental priorities.

Engaging with the EU’s Carbon Tax Framework at the Global Level

As a key global player and former G20 President, India should use its diplomatic influence to raise concerns about the EU’s carbon tax framework. India can advocate on behalf of other developing and resource-dependent countries that may be disproportionately affected by CBAM.

By highlighting the adverse impact on poorer nations that rely heavily on mineral and carbon-intensive exports, India can push for a more inclusive and equitable global climate policy framework.

What is Carbon Pricing?

Carbon pricing is an economic policy instrument that assigns a monetary value to carbon emissions by capturing their external costs, such as damage to crops, increased healthcare expenditure, and property losses caused by extreme weather events. By linking these costs directly to the sources of emissions, carbon pricing ensures that the polluters bear the financial responsibility for environmental harm.

This mechanism incentivises emitters to either reduce their emissions, continue polluting while paying for it, or invest in cleaner and low-carbon technologies.

Global Status of Carbon Pricing

At present, carbon pricing mechanisms cover approximately 12.8 gigatonnes of CO?, accounting for nearly 25 percent of global greenhouse gas emissions, and are implemented across 89 countries. This indicates the growing acceptance of carbon pricing as a key climate policy tool.

Carbon Pricing Mechanisms

Governments generally adopt three major approaches to carbon pricing, aiming to achieve emission reductions at the lowest possible cost to society.

Emissions Trading System (ETS)

An Emissions Trading System (ETS) allows industries to trade emission allowances within a regulated framework. It operates through two main models.

In the Cap-and-Trade system, a maximum cap is set on total emissions. Companies that emit less than their allotted limit can sell surplus allowances, while those exceeding the cap must purchase additional allowances.

In the Baseline-and-Credit system, industries are assigned a baseline level of emissions. Companies that reduce emissions below this baseline are rewarded with credits, which they can sell to other entities.

Carbon Tax

A Carbon Tax directly imposes a fixed tax per tonne of carbon dioxide emitted. Unlike ETS, it provides price certainty but does not guarantee a specific level of emission reduction. Industries independently decide whether to cut emissions or pay the tax, depending on their cost structures.

Crediting Mechanism

A Crediting Mechanism allows emission reductions achieved through specific projects to generate carbon credits. These credits can be traded domestically or internationally and used for compliance obligations or voluntary mitigation efforts.

Has Carbon Pricing Served Its Purpose?

Carbon pricing is widely regarded as an effective economic instrument to limit greenhouse gas (GHG) emissions. It has helped in the internalisation of environmental externalities, thereby ensuring that polluters take responsibility for the social and environmental costs of their actions across multiple sectors.

However, despite the adoption of carbon pricing mechanisms, extreme weather events continue to intensify, and global temperatures are still rising, raising questions about whether carbon pricing has fully achieved its intended objectives.

Achievements of Carbon Pricing

Carbon pricing has contributed to making emissions economically visible, forcing industries to account for the cost of pollution. It has encouraged efficiency improvements, fuel switching, and investment in cleaner technologies in several countries. In this sense, carbon pricing has served its purpose to a limited extent, particularly in jurisdictions with strong institutional frameworks.

Why Carbon Pricing Has Not Realised Its Full Potential

One major reason is the lack of full compliance with commitments under the Paris Agreement. Many countries have prioritised short-term development needs over long-term sustainability goals, thereby weakening the effectiveness of carbon pricing.

Another significant challenge is the financial constraint faced by developing countries. These countries often lack adequate resources to upgrade technologies and transition towards low-carbon development pathways.

The political economy of climate action, especially in the developing world, has further slowed progress. Political pressures related to employment, food security, and economic growth have compelled governments to adopt a gradual approach to sustainability, resulting in slow technological change in sectors such as agriculture and manufacturing.

In addition, developed countries have failed to fulfil their climate finance commitments, particularly the pledge made under the COP16 Accord to mobilise USD 100 billion annually for climate action in developing countries. This has undermined global trust and constrained climate mitigation efforts.

Most importantly, climate change is a multidimensional problem that requires structural transformations in energy systems, consumption patterns, and governance. Carbon pricing alone cannot reverse climate change, but can only act as one supporting policy tool.

Why India Needs to Adopt a Robust Carbon Pricing Strategy

India’s growing integration with global markets and its climate commitments make the adoption of a robust carbon pricing strategy both an economic and environmental necessity. Such a framework can help India address trade risks, strengthen fiscal capacity, enhance industrial competitiveness, and improve its global negotiating position.

Structural Vulnerability to CBAM

India’s exports, particularly steel, aluminium, and cement, are among the most carbon-intensive globally. This makes Indian exporters highly vulnerable to future carbon tariffs under mechanisms such as the EU’s Carbon Border Adjustment Mechanism (CBAM).

Although temporary CBAM exemptions may defer compliance costs, they do not eliminate long-term exposure. In the absence of a domestic carbon pricing mechanism, Indian firms risk double taxation, where they incur costs both through foreign carbon tariffs and domestic mitigation measures without any compensatory adjustment.

Supporting the Indian Economy and Public Finances

Currently, only about 23 percent of India’s steel exports qualify for CBAM exemptions. A domestic carbon pricing system would allow Indian exporters to claim equivalent carbon cost adjustments, thereby reducing CBAM liabilities in the EU market.

A transparent carbon pricing framework would also ensure that compliance costs are retained as domestic revenue instead of being transferred to foreign jurisdictions through carbon taxes. According to the OECD Green Fiscal Reform Report (2024), India could generate up to 1.5 percent of GDP annually through carbon taxes or emissions trading. These resources could be channelled towards green infrastructure, renewable energy expansion, and energy transition programmes.

Enhancing Industrial Competitiveness and Low-Carbon Innovation

Evidence from the IEA India Energy Outlook 2024 and the TERI Policy Paper on Carbon Pricing (2024) suggests that carbon pricing incentivises energy-intensive industries to invest in low-emission technologies, leading to improved productivity and efficiency.

Experiences from South Korea and China show that well-designed carbon markets can reduce emission intensity by 10–15 percent within five years. By internalising the cost of carbon, India can future-proof its industries against border taxes while simultaneously promoting innovation in renewable energy, green hydrogen, and clean manufacturing.

Strengthening Geopolitical Leverage in Climate Negotiations

A domestic carbon pricing framework would signal India’s serious commitment to global net-zero goals. This would enhance India’s credibility and bargaining power in G20, WTO, and CBAM-related negotiations, allowing it to shape global climate-trade rules more effectively.

Such a move would also strengthen India’s position in advocating for equity and fairness in international climate regimes.

Institutional Readiness in India

India already possesses important building blocks for a national carbon market. Mechanisms such as the Perform, Achieve, and Trade (PAT) scheme and Renewable Energy Certificates (RECs) serve as precursors to carbon pricing.

With the enactment of the Energy Conservation (Amendment) Act, 2022, India has the institutional framework required to integrate these mechanisms into a unified carbon pricing system. This would enable India to potentially link with global carbon markets by 2030.

Different Types of Carbon Pricing Mechanisms

Emissions Trading System (ETS)

Under an Emissions Trading System, emitters can trade emission units to meet regulatory targets. Entities can either reduce emissions internally or purchase emission units from the carbon market.

ETS operates mainly through cap-and-trade and baseline-and-credit systems. In cap-and-trade, an overall emissions cap is fixed and allowances are auctioned or allocated accordingly. In baseline-and-credit systems, credits are issued to entities that reduce emissions below a predetermined baseline, and these credits can be sold to entities exceeding their limits.

Carbon Tax

A carbon tax involves setting an explicit tax rate on GHG emissions. It provides price certainty but does not guarantee a specific emissions outcome, as emitters may choose to pay the tax instead of reducing emissions.

Offset Mechanism

Under offset mechanisms, predefined emission reductions achieved through specific projects generate emission reduction certificates. These certificates can be sold to emitters who are unable to meet emission norms.

Results-Based Climate Finance (RBCF)

Results-Based Climate Finance is an instrument under which payments are made only after predefined climate outcomes are achieved, such as emission reductions or improved climate resilience.

Internal Carbon Pricing

Internal carbon pricing is a tool used by organisations to assign a notional price to carbon emissions for internal decision-making. It helps assess climate risks, guide investments, and align business strategies with climate goals.

Different Countries, Different Carbon Pricing Approaches

Countries adopt different carbon pricing instruments based on their national circumstances, economic structures, and political realities. Under mandatory carbon pricing regimes, Emissions Trading Systems and carbon taxes are the most commonly used instruments.

The choice of carbon pricing mechanism is usually aligned with broader economic priorities, administrative capacity, and development objectives.

Carbon Pricing in India

India does not have a specific carbon tax. However, it employs several alternative mechanisms to address climate change, including the Perform, Achieve and Trade (PAT) Scheme, Coal Cess, Renewable Purchase Obligations (RPOs), Renewable Energy Certificates (RECs), and the adoption of Internal Carbon Pricing (ICP) by some firms.

Carbon Credit Trading Scheme (CCTS), 2023

The Carbon Credit Trading Scheme (CCTS), 2023, introduced under the Energy Conservation (Amendment) Act, 2022, replaces the Perform, Achieve, and Trade (PAT) scheme. It establishes the Indian Carbon Market (ICM) and aligns India’s domestic climate action with its commitments under the Paris Agreement.

What is the Carbon Credit Trading Scheme?

The Carbon Credit Trading Scheme (CCTS) is a market-based mechanism designed to regulate and trade carbon credits under the Indian Carbon Market. Its primary objective is to decarbonise the Indian economy by assigning an economic value to greenhouse gas (GHG) emissions and enabling carbon trading among regulated and voluntary participants.

Transition from PAT to CCTS

The earlier PAT scheme focused on improving energy efficiency in energy-intensive industries by issuing Energy Saving Certificates (ESCerts). However, it measured only energy intensity, not actual emissions.

The CCTS replaces PAT and shifts the focus to reducing GHG emission intensity. Under the new system, emissions are monitored in terms of tonnes of greenhouse gas equivalent (tCO?e). The scheme issues Carbon Credit Certificates (CCC), where each certificate represents a reduction of one tonne of CO? equivalent.

 

Mechanisms under the CCTS

The CCTS introduces carbon pricing through two key mechanisms to ensure comprehensive emission reduction.

Compliance Mechanism

Under the compliance mechanism, energy-intensive industries such as aluminium, cement, fertilisers, and iron and steel are mandated to meet sector-specific GHG emission reduction targets. Entities that exceed their targets earn Carbon Credit Certificates, while those that fail to meet the targets must purchase credits from the market.

Offset Mechanism

The offset mechanism allows voluntary participation by entities outside the mandatory compliance framework. These entities can earn carbon credits by undertaking projects that lead to verified emission reductions.

Sectors Covered under CCTS

Initially, the CCTS covers energy-intensive sectors including iron and steel, aluminium, cement, fertilisers, petroleum refineries, pulp and paper, and textiles. Together, these sectors account for approximately 16 percent of India’s total greenhouse gas emissions.

The power sector, which contributes nearly 40 percent of India’s GHG emissions, may be brought under the scheme at a later stage.

Regulatory Oversight

The CCTS is managed by multiple government institutions. Key oversight bodies include the Bureau of Energy Efficiency (BEE) and the National Steering Committee for the Indian Carbon Market (NSCICM), which are responsible for governance, target setting, and market regulation.

Importance of CCTS in India’s Climate Goals

India has committed to reducing its emission intensity by 45 percent by 2030. The CCTS plays a crucial role in achieving this target by mobilising private sector participation, promoting clean technologies, expanding the use of renewable energy, and encouraging carbon capture and mitigation solutions.

 

 

 

Way Forward

To effectively address the challenges posed by the EU’s Carbon Border Adjustment Mechanism (CBAM) and align with India’s long-term climate commitments, a phased and strategic approach to carbon pricing is essential. This roadmap allows India to balance economic growth, trade competitiveness, and environmental responsibility.

Phase I: Foundation Building (2025–2027)

The first phase should focus on establishing a strong legal and institutional framework for carbon pricing in India. This includes setting up a central Carbon Market Authority responsible for the design, implementation, regulation, and compliance of the national carbon market.

During this phase, India must also develop robust Monitoring, Reporting, and Verification (MRV) infrastructure. Emissions reporting should be made mandatory for large industrial emitters across major sectors such as power, steel, cement, and oil and gas. Reliable emissions data will form the backbone of any effective carbon pricing mechanism.

Phase II: Transition to a Compliance Market (2027–2030)

In the second phase, India should launch a National Emissions Trading System (ETS) based on a cap-and-trade model. This system should initially cover large emitters in key sectors, including power generation, steel, and cement.

At the same time, a carbon tax can be introduced for non-covered sectors, such as transport and residential energy use, ensuring economy-wide carbon pricing without overburdening any single sector.

India should also explore linkages with international carbon markets, particularly the EU Emissions Trading System (EU ETS). Such linkages would enable cross-border credit trading, reduce CBAM-related trade exposure, and improve cost efficiency for Indian firms.

Phase III: Expansion and Deepening (2030–2035)

The final phase should focus on expanding sectoral coverage to include agriculture, aviation, and shipping, which are significant sources of emissions but currently underregulated.

Carbon prices should be progressively increased to reflect the true social cost of carbon, while providing adequate transition support to vulnerable sectors. This phase should also prioritise strengthening international cooperation, enabling India to integrate more deeply into global carbon markets and climate governance frameworks.

Conclusion

The Carbon Border Adjustment Mechanism represents a fundamental regime change in the global economic and trade order. For India, long-term success depends on a strategic shift in perspective.

India must accept CBAM as an emerging global norm rather than an external imposition. Implementing a domestic carbon pricing system, including a carbon tax, will allow India to retain revenues domestically, protect exporters, and finance its green transition. Deeper economic and regulatory integration with the EU can further support sustainable and resilient trade relations.

Viewed correctly, CBAM is not a threat but an opportunity for India to align fiscal policy, trade strategy, and environmental responsibility. This marks the true beginning of India’s green economic transformation, grounded in competitiveness, sustainability, and global leadership.