A start for North-South carbon market cooperation

On September 17, 2025, the European Union (EU) and India set out a new comprehensive strategic agenda in their joint communication. Called the New Strategic EU-India Agenda, it primarily addresses five pillars on which their partnership will be enhanced: prosperity and sustainability; technology and innovation; security and defence; connectivity and global issues, and enablers across pillars. Buried in the section on clean transition is a critical line that the EU will link the Indian Carbon Market (ICM) with the Carbon Border Adjustment Mechanism (CBAM).

In plain terms, carbon prices paid in India will be deducted from CBAM levies at the EU border. This is a breakthrough. It could prevent Indian exporters from being penalised twice and reward early decarbonisation. However, major barriers still plague its operationalisation. Unless addressed, they will stall this integration before it delivers real gains.

Underdeveloped Indian carbon market

India’s Carbon Credit Trading Scheme (CCTS), commonly referred to as ICM, is still an evolving architecture. Unlike the EU Emissions Trading System (ETS), which has a two decade record of robust auction structure, cap-setting processes, and independent verification, India’s scheme is built on fragmented foundations. Current credits are often based on intensity improvements or project-based offsets, not absolute caps on emissions, wherein the ICM is moving. The CBAM, however, requires a tonne-for-tonne accounting of embedded carbon in goods. Without legally binding caps and strong penalties for non-compliance, EU regulators will treat Indian credits as second class.

There is also no current institutional equivalent in India to the EU’s independent regulators or emissions registries that guarantee market integrity. In effect, the EU cannot “deduct” Indian carbon prices unless it is confident that the underlying system delivers environmental integrity. Bridging this institutional gap is not a technical fix. It requires a structural redesign of the ICM to mirror the compliance-grade features of the EU’s ETS. Imagining this substantive pivot within the Indian our bureaucratic understanding and operation anytime soon is challenging.

CBAM also relies on a clear and stringent carbon price. In the EU’s ETS, the price floats around €60 to €80 a tonne. In India, initial carbon credit prices hover in the range of €5 and €10. Unless the carbon price is comparable and enforced across covered sectors, European regulators will not deduct much, if anything, at the border.

Worse, exporters may end up facing both the Indian compliance cost and the EU’s full CBAM levy. This creates political risk inside India, where industries may resist a “double burden” and they could lobby to water down India’s scheme, i.e., compliance parameters under ICM. Bridging the price gap requires either targeted sectoral carbon contracts or a negotiated floor price that aligns with CBAM expectations. Both are politically difficult options to negotiate.

Fundamental nature of CBAM

Even if technical and price issues are solved, CBAM remains controversial. India and other developing countries have consistently opposed it at the WTO and international dialogues as being a unilateral and protectionist measure. Agreeing to a linkage between India’s carbon market and CBAM, therefore, creates a political contradiction that India would be legitimising a mechanism it has formally resisted.

This tension will resurface in disputes. For instance, if the EU deems India’s carbon price to be “insufficient” and refuses full deductions, exporters will cry foul, and New Delhi will be forced to escalate the issue politically or legally. There is also a sovereignty issue because carbon pricing is a domestic policy tool, but CBAM effectively gives Brussels a say in whether India’s measures are “good enough”. For a country that guards its policy space, this could become a red line. Beyond trade law, there is a strategic risk wherein CBAM deductions will work only if India maintains a steady, transparent carbon market. Any domestic political backtracking, for example, rolling back compliance under industry pressure, would immediately expose exporters to full CBAM costs, destabilising trade flows. In short, the linkage is hostage not only to WTO legalities but also to domestic political economy and EU-India trust.

Looking at optimistic resolutions

The Indian carbon market and CBAM linkage is one of the most significant agreements under the strategy agenda by the two big global economies. If it works, it shields Indian exporters, accelerates industrial decarbonisation, and creates a model for North-South carbon market cooperation. But weak domestic architecture, misaligned carbon prices, and political contradictions may sink it. There is an underlying case to be made for more comprehensive collaboration. India can strengthen its market design, and the EU can offer clarity and technical support for a smooth transition. Otherwise, this “breakthrough” will remain on paper, while Indian exporters continue to pay at the border.

Shashank Pandey is a lawyer and researcher working on environmental law and climate finance