CBAM and India: Green Regulation as Export Advantage

The Lift Line

“A durable path for India is to lower the carbon content of our production, capture the overseas markets that regulation creates and use it to build the industries the domestic economy will eventually need.” (Rajat Gupta, The Indian Express)

Why This Editorial Matters for Your Exam

This column in The Indian Express, published on 15 October 2026, is by Rajat Gupta, a senior partner at McKinsey & Company, writing in a personal capacity. It asks India to change the question it puts to the EU’s Carbon Border Adjustment Mechanism (CBAM) and other climate-linked trade rules. Not only “how do we resist them?”, but, in his words, “Can the demand and price signals created by these rules finance the early years of its own green industrialisation?”

The topic is examinable from three sides: the EU rules themselves (CBAM, ReFuelEU Aviation, the Deforestation Regulation), India’s own carbon market under the Carbon Credit Trading Scheme, and the trade diplomacy of the India-EU Free Trade Agreement. For background, see our reports on the WTO panel on Russia’s complaint against CBAM and on revised emission intensity targets under the Carbon Credit Trading Scheme.

GS Paper 3: Indian economy and issues relating to growth, development and employment; changes in industrial policy and their effects on industrial growth; conservation, environmental pollution and degradation. GS Paper 2: Bilateral, regional and global groupings and agreements involving and affecting India’s interests; effect of policies and politics of developed countries on India’s interests.

In the news: CBAM has applied in its definitive regime since 1 January 2026. The author argues that India should turn such rules into an export advantage rather than treat them only as barriers.

Background and Context

CBAM in brief

The Carbon Border Adjustment Mechanism puts a carbon price on selected imports into the EU. The importer pays for the carbon embedded in the goods, at a price linked to the EU Emissions Trading System (EU ETS). The legal duty falls on the EU importer, not on the Indian exporter; the exporter’s stake lies in the emissions data it must supply and in the carbon cost its buyer has to bear.

What is law, and what is only proposed

• Proposed, not law: in December 2025 the European Commission proposed extending CBAM to 180 steel and aluminium-intensive downstream products, “like machinery and appliances”, from 1 January 2028. The Council agreed its position on 12 June 2026. The European Parliament adopted its negotiating position in plenary on 15 September 2026; the two institutions now negotiate the final text in trilogues, so this remains a proposal, not law.
• Direct emissions only, for now: under the Regulation as adopted in 2023, only direct emissions count for iron and steel and for aluminium (Annex II). The author expects India’s aluminium exposure to grow once indirect emissions from electricity are counted.

The other EU green rules the column names

The column also mentions digital product passports and sustainability clauses in trade agreements, without details.

India’s own carbon market

• The Carbon Credit Trading Scheme (CCTS), notified in 2023, is the framework for the Indian Carbon Market (ICM). It works through two mechanisms: a Compliance Mechanism and an Offset Mechanism.
• Under the Compliance Mechanism, emission-intensive industries designated as Obligated Entities must meet Greenhouse Gas Emission Intensity (GEI) targets. Those that outperform their targets can earn Carbon Credit Certificates and trade them with entities that fall short.
• GEI targets were first notified in October 2025 for aluminium, cement, chlor-alkali and pulp and paper (282 entities), then on 13 January 2026 for petroleum refineries, petrochemicals, textiles and secondary aluminium (208 more), taking the total to 490 obligated entities (PIB, 22 January 2026).
• The Bureau of Energy Efficiency (BEE) is the Administrator and Grid India the Registry, under a National Steering Committee co-chaired by the Secretaries of the Ministry of Power and the Ministry of Environment, Forest and Climate Change.
• The compliance sectors moved over from the older Perform, Achieve and Trade (PAT) scheme. Thermal power plants have not been moved to the CCTS Compliance Mechanism.
• The Indian Carbon Market Portal was launched on 21 March 2026; nine methodologies had been notified by then.

India’s climate commitments

For context, on 25 March 2026 the Union Cabinet approved India’s Nationally Determined Contribution (NDC) for 2031 to 2035:

The author’s “India of 2070” refers to this net-zero target.

The India-EU FTA and CBAM

• Negotiations for the India-EU Free Trade Agreement concluded on 27 January 2026 at the 16th India-EU Summit.
• The EU is India’s largest trading partner: €120 billion of trade in goods in 2024, or 11.5 per cent of India’s total trade, according to the European Commission.
• On CBAM, the Government of India listed “a forward-looking most-favoured nation assurance extending flexibilities if any granted to third countries under the regulation, enhanced technical cooperation on recognition of carbon prices, recognition of verifiers, as well as financial assistance”. That is an assurance and support, not an exemption from CBAM.
• On 11 September 2026 the European Commission sent its proposals for the agreement’s signature and conclusion to the Council. It has to be signed and concluded before it can take effect.

The WTO angle

Article XX of the GATT (General Exceptions) allows measures “necessary to protect human, animal or plant life or health” (clause b) and measures “relating to the conservation of exhaustible natural resources” (clause g), subject to its conditions. The European Commission says “CBAM is designed to be compatible with WTO rules”. No WTO ruling has yet tested that claim; for the dispute now before a WTO panel, see our report on that panel.

The Analysis

1. Not a passing irritant. The author grants that India’s objections have some force: CBAM is described as protectionist, deforestation and product-traceability rules as intrusive, and sustainability clauses as an attempt to impose rich-country standards. “Some of this criticism is justified.” But green trade regulation, he argues, “is no longer a temporary irritant that can be negotiated away”. EU allowances for domestic producers are being withdrawn on a fixed schedule, carbon border adjustment is set to widen, and other economies with domestic carbon prices will face the same pressure to protect their producers. The EU record supports the direction: the CBAM bill is tied to the free allowances EU producers receive (Article 31), and an extension to downstream goods is moving through EU law-making, though it is still a proposal.

2. Build it green the first time. “Most of the India of 2070 (the targeted net-zero timeline) is yet to be built,” the author writes. India can set up power, steel, aluminium, chemical and transport systems around fossil fuels and pay to replace them later, or build lower-carbon industries from the outset. Cleaner technologies are more capital-intensive and cost more at first. The opportunity, in his words, “is to make regulated foreign markets pay part of that early cost while India builds scale and capability at home.”

3. Four sector bets. The author’s examples, set beside the rules that create the demand:

4. Electrical equipment: import bill or export engine. The world’s electrification will need far more transformers, cables, switchgear, batteries and solar equipment. The author puts the largest traded categories at “a market of roughly $500 billion”, with China holding about 30 per cent of exports and India less than 2 per cent. He adds that India supplies nearly 20 per cent of the UK’s non-European transformer imports but has a negligible share in Europe. These figures are his. Without an industrial response, he warns, electrical equipment could become one of India’s largest import bills as domestic demand surges; with one, it can become a major export engine.

5. Compliance as an industry. Carbon borders, deforestation rules and digital product passports all depend on trusted data. India built digital public infrastructure (DPI) for low-cost payments and communications; the author says it should now build “low-cost, interoperable systems for product-level carbon accounting, traceability and third-party verification.” Tracking and verifying carbon at the world’s lowest cost would cut compliance costs and make Indian green products more competitive. The India-EU FTA’s CBAM text already speaks of “recognition of verifiers”.

6. Fix the home carbon market. The author wants external pressure used to redesign India’s “recently established carbon market”. A carbon price, he says, “needs to be $30-50 a tonne to change investment decisions in steel, hydrogen or fertiliser”, and “At these levels, India also retains more of the carbon revenues under the CBAM regulations.” The mechanism is CBAM’s deduction rule: an importer who proves a carbon price was paid where the goods were made can deduct it. Whether, and how far, a price under India’s intensity-based CCTS would count is a question for negotiation, which is why the FTA’s promise of cooperation on “recognition of carbon prices” matters. The author also prefers sector-level targets, as in Europe, to the current plant-specific targets, which he says “perversely reward high emitters and penalise efficient plants”. The CCTS does set GEI targets entity by entity; the judgement on their effect is his.

7. Negotiate, but aim for advantage. India should contest protectionism, seek transition periods and demand that rich countries share technology and finance. “But the primary aim should shift to enabling Indian firms to turn overseas green regulation into export advantage.” His example: use bilateral trade and green-partnership agreements to secure mutual recognition of carbon accounting, testing and certification. The India-EU FTA moves part of the way, with an MFN assurance on CBAM flexibilities and cooperation on carbon prices and verifiers, but no exemption.

Data and Institutions Vault

Prelims-grade facts:

The EU rules:

• CBAM: Regulation (EU) 2023/956 of 10 May 2023; sectors: cement, iron and steel, aluminium, fertilisers, electricity, hydrogen.
• CBAM phases: transitional (reporting only) 1 October 2023 to 31 December 2025; definitive regime from 1 January 2026.
• Who complies: EU importers above 50 tonnes of CBAM goods, as authorised declarants; price linked to EU ETS auction prices.
• CBAM price, Q3 2026: €82.32 per tonne of CO2 (published 5 October 2026); a carbon price paid in production can be deducted.
• ReFuelEU Aviation: Regulation (EU) 2023/2405; SAF share at EU airports 2% from 2025, 70% from 2050.
• EUDR: Regulation (EU) 2023/1115; applies from 30 December 2026 (large, medium) and 30 June 2027 (micro, small).

India:

• CCTS (notified 2023): Compliance and Offset mechanisms; BEE is the Administrator, Grid India the Registry.
• Obligated entities: 490 with GEI targets: 282 notified in October 2025, 208 on 13 January 2026.
• NDC 2031-35 (Cabinet, 25 March 2026): emissions intensity of GDP down 47% by 2035 from 2005; 60% non-fossil capacity by 2035.
• India-EU FTA: concluded 27 January 2026 at the 16th India-EU Summit; sent to the EU Council for signature on 11 September 2026.
• GATT Article XX: clause (b) protects human, animal or plant life or health; clause (g) covers conservation of exhaustible natural resources.

⚠️ Watch the trap: CBAM certificates are bought by the EU importer; it is not a tax India levies or collects. The extension to machinery and appliances is a proposal (from 1 January 2028 if adopted), not law. The India-EU FTA gives an MFN assurance and cooperation on CBAM, not an exemption. The EUDR does not yet apply: it starts on 30 December 2026. Thermal power plants are not in the CCTS Compliance Mechanism.

The Debate

How to Think About This

Break any answer on green trade rules into three parts: the rule (what CBAM requires, from whom, and from when), the cost (who bears it, and how a carbon price paid at home changes it), and the response (contest, comply, or compete). The author’s point is that India’s response need not stop at “contest”. Keep the tenses straight: CBAM’s definitive regime is in force, the downstream extension is proposed, the EUDR is scheduled, and the India-EU FTA is concluded but not yet signed and concluded on the EU side.

For GS2, this is a clean example of how the policies of developed countries affect India’s interests, and of how a trade agreement can soften, but not remove, a unilateral measure. For GS3, link it to industrial policy: the same rule that raises a cost can create a market.

Diagram-in-Words

Takeaway Box

• The argument: green trade rules are here to stay; India should make regulated foreign markets pay part of the early cost of its low-carbon industries.
• The rule: CBAM’s definitive regime since 1 January 2026; six sectors; EU importers buy certificates priced off the EU ETS.
• The bets: green ammonia, sustainable aviation fuel, cleaner steel, clean-power aluminium, electrical equipment and carbon-data services.
• At home: a stronger carbon price under the CCTS, which CBAM’s deduction rule can reward, and sector-level targets (per the author).
• Abroad: mutual recognition of carbon accounting and verifiers; the India-EU FTA’s CBAM terms are an assurance, not an exemption.

Revision Flowchart

Sources: The Indian Express, Rajat Gupta, “How to turn overseas green regulation into export advantage”; Regulation (EU) 2023/956 (CBAM), EUR-Lex; European Commission, CBAM, definitive regime and certificate prices; European Commission press release IP/25/3088 (December 2025); European Commission, Council agreement on CBAM; EPRS briefing (September 2026); European Commission, ReFuelEU Aviation; European Commission, EU Deforestation Regulation; PIB, GEI targets for 208 more entities; PIB, CCTS framework; PIB, Indian Carbon Market Portal; PIB, India-EU FTA concluded; European Commission, EU-India agreements; PIB, Cabinet approves India’s NDC 2031-2035; WTO, GATT 1947 Article XX

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