The climate impact of FTAs is becoming a defining issue for India’s trade negotiations, as carbon-linked rules like the EU’s CBAM increasingly shape market access and industrial competitiveness.
As India accelerates negotiations on free trade agreements (FTAs) with the European Union, United Kingdom, EFTA countries and the United States, a parallel transformation is unfolding — one where trade policy is increasingly shaped by climate-linked conditions.
A recent policy discussion summarised in India’s FTAs: Trade, Climate and Strategic Choices, organised by Climate Trends, argues that the EU’s Carbon Border Adjustment Mechanism (CBAM) represents not a marginal environmental tool, but a structural shift in global trade governance. The deeper question is whether India’s trade engagements are effectively becoming instruments of climate policy — and if so, under whose terms.
CBAM: From Environmental Tool to Structural Trade Instrument
Ajay Srivastava, Founder and CEO of GTRI, cautioned against viewing CBAM as a narrow carbon levy limited to a handful of sectors. While the current scope covers steel, aluminium, cement, fertilisers, hydrogen and electricity, the EU has stated its intention to expand the mechanism to all industrial products by 2033.
“What most people ignore about CBAM is that it will not only hurt six products,” Srivastava said. “After a few years when CBAM is in full form, then the normal CBAM liability on exports will range anywhere between 20% to 35%, and even 50% or more for products like aluminium.”
India’s average applied tariffs into the EU are currently around 3–3.5%. CBAM, by contrast, could impose carbon-linked charges many times higher. “Instead of 3% custom duties… exporters may pay 20%-40% under CBAM. And in return, all EU goods will be entering India at zero tariffs. Such a deal appears asymmetric,” he added.
From this perspective, CBAM is less a climate safeguard and more a structural replacement of tariffs with carbon-linked entry costs — one that sits outside the formal FTA framework while reshaping its economic value.
Climate Compliance as Market Entry Condition
The broader concern is cumulative compliance. CBAM does not operate in isolation. The EU Deforestation Regulation, supply-chain traceability rules, and ESG-linked disclosure expectations together create what analysts describe as an embedded climate cost for market access.
Colette van der Ven, Founder and Director of Tulip Consulting, noted that CBAM was a key sticking point in EU–India negotiations. “Even if the Indian government’s press statements suggest that there are provisions around MFN treatment, that may, in practice, not have very much value… giving country-specific flexibilities was already off the cards for the EU.”
In effect, climate-linked measures are emerging as non-negotiable features of trade architecture.
Divergent Impact: Large Firms vs MSMEs
The climate-trade shift is not uniform in its impact.
Large integrated producers such as Tata Steel and JSW, according to van der Ven, are relatively insulated. Many operate European subsidiaries, have internal monitoring, reporting and verification (MRV) systems, and possess capital for cleaner technologies. For them, CBAM is a manageable compliance cost.
However, the situation is starkly different for MSMEs.
Ajay Srivastava pointed to early evidence from CBAM’s reporting phase, which began in October 2023. “In FY25, our exports of steel and aluminium to the EU were down by 24%. Why? Because MSMEs could not supply data, and EU-based importers stopped placing orders from them. So, MSMEs will be the hardest hit. It will soon be a game only for large players.”
Van der Ven added that default carbon values under CBAM are punitive. “Even if you have relatively clean production, but you cannot measure it, you are still going to be getting a default value that is a lot higher than the actual carbon emissions… That means that your competitiveness level goes down.”
The key barrier is not necessarily emissions intensity, but data asymmetry and compliance infrastructure.
Trade Policy as Domestic Climate Policy
Suranjali Tandon, Associate Professor at NIPFP, framed the issue more fundamentally: “All matters of trade policy are also matters of domestic economic policy.”
She argued that Indian firms will require domestic carbon pricing, measurement systems, and industrial support mechanisms to respond effectively. “Indian companies need to have their own carbon pricing to be able to respond to such measures… The best thing that can be done is to have measurement systems in place while ensuring that there are domestic policies that support increasing production capacity.”
Without robust domestic support — incentives, certification regimes, transitional demand buffers — exporters may struggle to absorb external carbon costs.
Fragmented Global Carbon Regimes
A central tension lies in fragmentation. EU-bound exports account for roughly 20% of India’s trade. The remaining 80% flows to markets without CBAM-style requirements.
Srivastava highlighted the dilemma: Indian firms may need separate production processes for EU markets, raising costs across their operations. Producing “green” goods for a minority of export destinations could erode competitiveness elsewhere.
This fragmentation complicates investment decisions. Without globally harmonised carbon pricing, unilateral measures risk distorting trade patterns rather than aligning them.
Strategic Choices Ahead
The discussion suggests that FTAs are no longer purely about tariffs and quotas. They increasingly interact with carbon pricing systems, sustainability standards, and domestic regulatory reforms.
Recommendations emerging from the dialogue include:
>> Prioritising measurement and MRV infrastructure, especially for MSMEs
>> Designing selective emissions trading systems, beginning with large emitters
>> Aligning industrial, trade, and climate policies domestically
>> Viewing FTAs as platforms for cooperation, rather than solutions in themselves
Archana Chaudhary of Climate Trends summarised the broader shift: “Trade seems to be forcing domestic climate action and capital is being steered in that direction. These new trade deals and the carbon-linked rules are going to be shaping up India’s real economy.”
Climate Alignment or Competitiveness Risk?
The deeper climate perspective is complex. On one hand, CBAM aligns with long-term decarbonisation goals. On the other, its current design places disproportionate adjustment burdens on developing economies and smaller firms.
Van der Ven suggested that alignment exists beneath the friction. “Beyond the differences, there is alignment between the EU and India in wanting to decarbonize. We must think towards these win-win opportunities along the supply chain.”
The outcome, however, will depend less on individual FTAs and more on whether India can integrate trade, industrial, and climate strategies coherently at home.
As climate-linked trade measures proliferate, India’s FTAs may increasingly serve not just as economic agreements — but as de facto climate policy instruments reshaping the country’s industrial future.