The EU would need to be confident that an Indian carbon export levy would not be rebated back to industry but genuinely drive decarbonisation
We need to stop treating the carbon border tax as a zero-sum game and apply some creative thinking
Last month, the Financial Times reported that the EU was preparing to reject a demand from India to be exempted from its carbon border tax and suggested that the move would “complicate efforts to seal a trade deal between the two by the end of the year”.
Like many statements about the EU’s Carbon Border Adjustment Mechanism made by the media and politicians, this is an oversimplification that misses key points and makes the CBAM sound like a zero-sum issue. Instead of zero-sum approaches, applying a little creativity could enable a genuinely helpful compromise.
There is no simple exemption possible from the CBAM. But the Indian proposal is shrewder: to apply its own carbon export levy, moving the point of revenue collection for CBAM-liable exports to the Indian border. While this is not a total solution, it can serve as a basis for negotiation.
India is right to propose that the CBAM can be applied at home. The EU is equally correct to say that there are key criteria that it would need to fulfil in order to replace the European tariff.
At a minimum, to fulfil the CBAM criteria under the World Trade Organization’s equal treatment rules, the Indian export levy would need to be set at the same level that comparable goods pay at the EU border. This means that the calculation of embedded emissions in exported goods would need to be transparent to EU carbon accounting inventories. The price point would also need to match, and although this will be quite low when the CBAM comes into full operation in 2026, it will rise significantly towards 2030.
Crucially, for a compromise to work, it must first be acknowledged that India’s Carbon Credit Trading Scheme is not (yet) equivalent to the EU Emissions Trading System, which is the foundation for the CBAM. The ETS sets absolute carbon targets, and participants mostly purchase certificates at auction. The CCTS sets intensity targets, and the participants receive certificates through allocation.
The CBAM is a squaring-the-circle problem. It is the ‘right answer’ to the climate imperative, but doing the right thing is not sufficient to get a good result
This difference is why EU diplomats have responded that “there can be discussions around how any Indian effective carbon pricing could be deducted from CBAM” — but not gone any further. As New Delhi is well aware, the European Commission is preparing technical rules under Article 9 of the CBAM regulation on how to convert carbon prices paid on emissions in third countries into CBAM certification.
Candid friends of both jurisdictions recognise that additional, broader issues would also need to be addressed.
The EU would need to be confident that an Indian carbon export levy would not be rebated back to industry but genuinely drive decarbonisation.
India would need to see Europe acknowledge that the CBAM is a cost pass-through imposed on trading partners, and that both its ambition and its complexity are likely to implicitly disadvantage certain producers, particularly smaller actors in lower-income countries.
This candid factor may be where creative solutions lie. Could India commit to earmarking its domestically collected “CBAM” revenue into a low-carbon transition fund for its emissions-intensive industries? Could the EU offer to contribute a useful additional sum of climate finance to this fund?
Also, as a practical solution to enable transparency and reduce compliance burdens, could India assist the EU in building capacity for digital public infrastructure to verify and track emissions?
As a package, this approach might help address the current cost premium on green industry capital investments and operating costs, as well as wider issues of climate justice, interoperability between domestic policies in global markets, and co-governance. Operationalising this sort of “levy fund” would require goodwill on both sides. The fund could be initially established for a limited period until 2030 and then reviewed by both parties.
By responding to New Delhi’s proposal with a positive and constructive idea, Brussels would affirm the stated goal of the CBAM to “play a leading role in global climate action” and start to deliver on its “New Strategic EU-India Agenda” vision, adopted in September.
Let us remember that there is more at stake here than just the CBAM, which is only a subfield within the wider field of climate diplomacy and the scope of EU-India cooperative opportunities.
I do not believe the FT is correct to imply that the current free trade agreement could be derailed by such a relatively minor issue.
Instead, the EU and India could address solutions to the CBAM, for example, through a Memorandum of Understanding on a green economy partnership as part of the strategic agenda that will be discussed at next year’s EU-India leaders’ summit.
The CBAM is a squaring-the-circle problem. It is the “right answer” to the climate imperative, but doing the right thing is not sufficient to get a good result. There is an obvious “right-sizing” challenge when EU standards affect developing economies, where policies designed in Brussels encounter a world of diverse circumstances, resources and capabilities.
To get us past the frictions of the CBAM, a little more give-and-take will be needed on both sides.
This commentary originally appeared in Sustainable Views.
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Professor Jesse Scott is a Senior Fellow at the Observer Research Foundation, as well as adjunct faculty at the Hertie School in Berlin since 2019. ...
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