Like the Indian Minister of Commerce and Industry, Piyush Goyal goes to Brussels On January 8-9, to achieve the conclusion of the long-awaited India-EU Free Trade Agreement (FTA), the negotiations entered their most decisive and difficult phase. Both sides are now focusing on resolving the most controversial issues, especially European Union Carbon Border Adjustment Mechanism (CBAM) under which exports of certain industrial products to the EU will be subject to a carbon price. The visit is expected to provide a much-needed boost to the conclusion of FTA negotiations, as India prepares to welcome Ursula von der Leyen and António Costa. main guests for Republic Day on January 26, 2026.
India-EU FTA Talks: The Story So Far
Negotiations were officially launched in 2007, but stalled in 2013. They were ambitious. RELAUNCH in June 2022 after a hiatus of more than nine years. Since then, both parties have held 14 rounds of intense negotiations and several high-level ministerial dialogues, with the last interaction taking place in December 2025, against a backdrop of global supply chain disruptions caused by increased geopolitical volatility.
Despite high expectations and sustained high-level political commitment, both sides failed to conclude negotiations by the end of 2025, as talks broke down on the key issue of climate-related trade measures. In the center of The deadlock is the EU’s CBAM regimewhich emerged as the most contentious issue, overshadowing the tariff reductions and market access gains that were initially expected to anchor a final deal.
What is the Carbon Border Adjustment Mechanism (CBAM)?
The European Union Carbon border adjustment mechanism (CBAM) is a new policy instrument that imposes a carbon tax on imports into the EU from six carbon-intensive industrial sectors: cement, iron and steel, aluminum, fertilizers, electricity and hydrogen. Put simplyit is “a fee or customs duty levied on imported goods based on the greenhouse gases emitted during their production”.
By imposing the CBAM as a regulatory instrument, the EU seeks to address the risk of “carbon leakage”, which is referred such as “shifting the production of goods to third countries where the carbon cost associated with their production is low, or even non-existent”.
CBAM was legally created under Regulation (EU) 2023/956 of May 10, 2023. It applies to persons designated CBAM products imported into the EU from third countries and are part of the broader “Suitable for 55“climate package. Its main objective is to ensure that the prices of certain imported goods be more precise reflect their carbon content, while simultaneously seeking to encourage foreign producers and trading partners to reduce emissions.
For regulatory purposes, “imports” refers to all goods entering the EU from third countries. The scope of application of the CBAM is defined in Annex I of the Regulation using the “Combined nomenclature” (CN), the standardized classification system for goods in international trade. Sectors covered currently include iron and steel, fertilizers, aluminum, cement, hydrogen and electricity.
CBAM between climate ambition and development needs
For India, the CBAM is widely seen as a non-tariff barrier that risks eroding export competitiveness in carbon-intensive sectors such as steel, aluminum and cement, while limiting industrial growth at a stage when large parts of the economy remain dependent on coal. Indian exporters face higher compliance costs, pricing pressures from EU buyers and the prospect of eroding margins even before formal carbon payments begin.
For Indian exporters, CBAM represents a serious challengeand the implications could be significant. For example, much of India’s heavy industry remains dependent on coal, with it accounting for almost 46% of total energy consumption. According to to an analysis According to the Center for Science and Environment (CSE), “CBAM could impose substantial cost pressures on steel and aluminum exports to the EU (and affected) exports could face a price burden of around 25 percent – a shock that exporters are likely to absorb by squeezing prices in order to remain competitive.” »
Once the CBAM mechanism is fully implemented, carbon costs will be taken into account upfront in trade negotiations with EU buyers, increasing operating and compliance costs for Indian companies. Indian officials have criticized the mechanism as a “arbitrary trade barrier” disguised as climate action, arguing that it imposes additional costs on producers in developing countries.
In February 2025, during the second meeting of the India-EU Business and Technology Council, the EU recognized India’s concerns regarding the implementation of the CBAM. The joint statement noted that “(the two sides held in-depth discussions on trade and decarbonization through several bilateral channels and jointly engaged with stakeholders, in particular on the implementation of the EU Border Carbon Mechanism (CBAM). Both sides discussed the challenges arising from the implementation of the CBAM, in particular for small and medium-sized enterprises, and agreed to continue to address them.”
Beyond the bilateral framework, EU climate-related trade measures have been criticized by emerging and developing economies at UN climate forumswhere concerns persist that such carbon trade-related measures pose a risk to economic growth in countries with limited capacity to absorb these compliance costs for their exports to the EU.
Why the EU is unlikely to back down
From the EU perspective, CBAM is explicitly linked At EU Emissions Trading System (EU ETS) both in its objective and in its pricing. The CBAM aims to equalize carbon costs between EU imports and domestic production under the ETS so that foreign producers do not gain a competitive advantage through weaker climate policies. Importers of covered products must report their integrated emissions and, from 2026, waive CBAM certificates their price reflects the carbon cost that EU producers face under the ETS. In other words, the price of CBAM certificates reflects the price of EU ETS allowances, thus creating a comparable carbon cost on imported goods.
Now, the EU’s official position emphasizes that the CBAM is designed to ensure that all goods imported into its market bear the same carbon cost as goods produced within the EU, in line with the EU ETS, helping to preserve the EU’s industrial competitiveness. Furthermore, supported by a strong national political consensus and anchored in the European Green Dealthe mechanism leaves little room for Brussels to dilute or suspend it within the framework of an FTA, even though India argues that its unilateral application goes against development and climate equity considerations.
Consequently, the FTA has evolved into a climate equity debate, focusing on whether the financial cost of greening supply chains should fall on Indian producers or be shared by the EU in recognition of its own historic emissions.
What a deal will likely look like
A global settlement remains unlikely in the short term. What seems more plausible is a gradual arrangement rather than a single, blanket agreement. Tariff reductions in less controversial sectors will likely be implemented first, while difficult political and technical issues such as carbon accounting, sustainability standards and labor mobility will be placed in transition agreements or dealt with through parallel mechanisms.
The Center for Science and Environment (CSE) has suggested that “developed countries like India should levy a carbon tax nationally at the point of export, so that funds can be directed towards decarbonizing domestic industry, while also meeting the CBAM carbon pricing criteria.” » In addition, several analysts have also noted that “the India-EU FTA is not just an economic agreement: it is a strategic instrument for shaping the future of globalization”.
Above all, CBAM will be operational whether or not the EU-India FTA is concluded. This sequence reflects an effort to manage adjustment costs and regulatory capacity, rather than an absence of political will on both sides.
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