India-EU FTA: Little clarity on carbon border measures raises concern

The India-UK free trade agreement (FTA), finalised on Tuesday after nearly two decades of negotiations, offers tariff concessions on both sides; however, it lacks clarity regarding carbon border measures. Industry cautions that, in the absence of a specific carve-out for the Carbon Border Adjustment Mechanism (CBAM), carbon-intensive exports from India, including steel, aluminium, and cement, could face carbon levies starting in 2027, undermining the tariff benefits of the agreement.

Under the FTA, the EU will broadly cut or scrap tariffs on 98% of Indian exports, delivering the biggest gains in labour-intensive sectors, such as garments, footwear, marine products, gems and jewellery, handicrafts, chemicals and machinery. India will liberalise around 97% of EU imports over 7-10 years, sharply reducing duties on wine, spirits, beer, and cars, moving many agri-food and consumer goods to zero tariffs, and phasing out duties on most processed foods, chemicals, machinery, electronics, and aircraft.

Bilateral merchandise trade between India and the EU has demonstrated sustained growth, valued nearly at $136.54 billion in 2024-25, with India exporting roughly $75.85 billion to the EU. India-EU trade in services reached $83.10 billion in 2024, as per the government data.


Beyond tariffs, India and the EU remain divided on government procurement, intellectual property, labour, environment, and sustainability, with the real impact clear only after the legal texts are released. Experts flag the EU’s CBAM as the biggest risk: since the mechanism sits outside the FTA, EU goods could enter India duty-free while Indian exports face carbon taxes in Europe. Though it currently covers six products, including steel and aluminium, CBAM is set to expand to all industrial goods, potentially eroding much of the FTA’s tariff gains.

The agreement barely addresses the imbalance, say experts, adding that the EU flexibility, such as recognising carbon prices or verifiers, offers no relief to exporters already paying CBAM. A proposed 2026 cooperation platform and possible €500 million in green funding are broad measures that fail to offset immediate, product-level costs, leaving CBAM unresolved, says GTRI, adding that India may consider equal-value retaliation.

“The India-EU FTA is a commercially significant deal that locks in deep tariff cuts and strengthens access to one of the world’s richest markets, especially for India’s labour-intensive exports such as garments and footwear, while opening India further to European wines, automobiles and industrial goods over time. Strategically, it anchors India-EU economic ties in a more predictable, rules-based framework at a moment of global trade fragmentation,” says Ajay Srivastava, founder, Global Trade Research Initiative (GTRI).

However, the unresolved issues in the agreement limit its impact, he says. “The EU’s CBAM remains outside the deal, creating a structural imbalance in which EU exports could enter India duty-free while Indian exporters continue to face carbon taxes in Europe—an asymmetry that could steadily erode tariff gains as CBAM expands beyond steel and aluminium.”

“Cooperation platforms and climate funding signal intent, but they do not solve exporters’ immediate cost pressures. As a result, the FTA is best seen as a strong tariff-cutting agreement whose ultimate value will depend on whether unresolved regulatory and climate issues are meaningfully addressed,” Srivastava adds.

Meanwhile, the Commerce Ministry says that beyond tariff liberalisation, the FTA addresses non-tariff barriers through stronger regulatory cooperation, greater transparency, streamlined customs, sanitary and phytosanitary (SPS) procedures, and technical barriers to trade disciplines. “Through CBAM provisions, commitments have been secured, including a forward-looking most-favoured nation assurance extending flexibilities if any are granted to third countries under the regulation, enhanced technical cooperation on recognition of carbon prices, recognition of verifiers, as well as financial assistance and targeted support to reduce greenhouse gas emissions and comply with emerging carbon requirements.”

Auszad Shaik, Vice President – Logistics & Supply Chain, Department of Industries, Commerce & Export Promotion, Government of Telangana, says that while the FTA offers tariff concessions, it does not provide any explicit exemption or carve-out for CBAM at this stage. Shaik notes that CBAM is a regulatory mechanism of the EU rather than a tariff measure, and therefore continues to apply independently of the trade agreement.

‘Broader risk is structural’
A section of experts says that the EU’s CBAM is proceeding independently of tariff negotiations, including any trade deal concessions. CBAM will move from its current reporting phase to full financial implementation from January 2026, with analysts estimating that carbon levies on covered products like steel and aluminium could range between €60-90 per tonne of CO₂, in line with EU Emissions Trading System (EU ETS) prices.

Deepak Garg, Director, Avax Apparels and Ornaments, says the near-term impact on sectors like apparel and ornamental jewellery is limited, as CBAM currently covers only six carbon-intensive sectors and excludes textiles, garments and jewellery. However, there is no explicit carve-out for India, and EU policymakers maintain CBAM is a climate measure, not a trade tool, leaving little room for country-specific exemptions, Garg notes.

“The broader risk, however, is structural. The apparel value chain is energy-intensive upstream, covering yarn, fabric processing, dyeing, and finishing, where emissions can account for 30-40% of a garment’s total carbon footprint. If CBAM expands in later phases to include processed goods or embedded emissions, exporters operating without a domestic carbon pricing or robust emissions-tracking framework could face a cost disadvantage of 5-10% compared to EU producers or suppliers from countries with established carbon accounting systems. This makes long-term preparedness essential, even for sectors currently outside CBAM’s scope,” adds Garg.

‘Indirect cost pass-through is also a concern’
At present, CBAM does not cover electric vehicles (EVs) or their components, as its scope is limited to six carbon-intensive sectors. The concern is future expansion, as EV manufacturing relies heavily on aluminium and steel, which together can account for 30-40% of a vehicle’s embedded emissions, say stakeholders.

“If CBAM is extended to downstream or processed goods, exporters could face indirect carbon costs unless clear exclusions or transition safeguards are negotiated. While finished EVs are currently outside CBAM’s scope, key inputs such as aluminium structures, steel chassis, and battery-related materials are already covered, making EV supply chains vulnerable to indirect cost pass-through,” says Yetender Sharma, Managing Director, Supertech EV.

“Studies estimate that CBAM-linked costs could raise the price of carbon-intensive inputs by 8-15%, depending on emissions intensity and EU carbon prices. With EU ETS prices remaining structurally elevated, EU importers are likely to push for price renegotiations or demand verified low-carbon sourcing to protect margins. From our perspective, the biggest risk isn’t immediate taxation but gradual erosion of tariff gains from the FTA. Proactively measuring emissions, improving energy efficiency, and securing low-carbon inputs will be critical to ensuring that EV exports remain competitive in the EU market over the medium term,” adds Sharma.

More discussions expected
Meanwhile, Shashi Mathews, Partner at CMS INDUSLAW, says India has been pressing the EU for flexibility in the implementation of CBAM through the FTA. However, given the way the mechanism is structured and its broader, economy-wide implications, the EU has kept it outside the scope of the trade agreement, he adds.

“This means that CBAM will continue to be applicable. However, considering that India has negotiated the forward-looking MFN assurance, it means that any flexibility or concession given to third-party countries will also be extended to India. Further, both countries have agreed to ramp up support by way of financial assistance and technical cooperation. Further technical discussions are expected to happen on this front. One of the key factors is allowing Indian agencies to assess carbon footprint, which will at least lower the cost from an Indian perspective,” says Mathews.

Meanwhile, Shaik believes that this phase should be viewed as a transition window. "It gives Indian exporters, and logistics ecosystems like Telangana’s, time to build emissions visibility, reporting capability, and greener supply chains, which will be critical for sustaining exports to carbon-regulated markets such as the EU,” adds Shaik.

Shaik acknowledges that the concern is valid since without a carve-out, carbon levies could partially offset tariff gains for steel, aluminium, cement and similar sectors from 2027. However, he says that this also creates a strategic opportunity. "CBAM should not be seen only as a trade barrier — for Telangana, it is a signal to future-proof logistics and supply chains, ensuring long-term relevance in sustainability-driven global trade,” says Shaik.