CBAM Can Erode Benefits of FTA Tariff Elimination
As CBAM is not addressed in the FTA, EU goods could enter India duty-free while Indian exports continue to face carbon taxes in Europe
Chennai: Despite the announcement of the trade deal with the European Union, 2026 will remain a tough year for Indian exporters as the deal has kept the environmental regulation, CBAM for iron, aluminium, steel and cement exporters out of its purview. When the EU expands CBAM to other carbon-intensive sectors, Indian exports will lose their advantage.
From January 1, tariff reductions under Generalized System of Preferences (GSP) have been suspended for 87 per cent of Indian exports to the EU. Indian goods will remain less competitive till the trade deal comes into force, which will take around one year.
The texts of the deal will go through legal revision and translation into all official EU languages. The European Commission will then put forward its proposal to the European Council. Once adopted by the Council, the EU and India can sign the agreements. After this, the agreement requires the European Parliament's consent, and the Council's decision on conclusion for it to enter into force. Indian Parliament too will have to ratify the agreement, for it to enter into force.
From January 1, Carbon Border Adjust Mechanism tariffs also have come into force on imports of aluminium, steel, cement, hydrogen, electricity, and fertiliser. While European goods, including iron and steel, will enter duty free under the FTA, the CBAM will levy carbon charges on Indian exports.
Many Indian exporters of steel will have to cut prices by 15–22 per cent to remain competitive, allowing EU buyers to absorb the carbon cost through margins. ICRA estimates that CBAM could negatively affect 15–40 per cent of the steel India exports to the EU between 2026 and 2034 if carbon intensity isn’t reduced.
For primary aluminium players, CBAM taxes are likely to be $ 50-140/MT between 2026 to 2034, which would be 2-6 per cent of the current aluminium prices. However, if indirect emissions are included in the future, the impact would be 27-30 per cent of the current aluminium prices.
Further, there is a possibility of CBAM being extended to other carbon-emitting sectors in the future.
“As CBAM is not addressed in the FTA, EU goods could enter India duty-free while Indian exports continue to face carbon taxes in Europe. Although CBAM currently applies to only six products, including steel and aluminium, it is designed to expand to all industrial goods, potentially eroding much of the FTA’s tariff benefits,” said GTRI.
As per the press statement, India has secured a commitment from EU on extending flexibilities, if any, granted to third countries under the CBAM 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.