A start for North-South carbon market cooperation

Source: The post “A start for North-South carbon market cooperation” has been created, based on “A start for North-South carbon market cooperation” published in “The Hindu” on 28 October 2025. A start for North-South carbon market cooperation.

UPSC Syllabus: GS Paper -2-Effect of Policies and Politics of Developed and Developing Countries on India’s interests

Context: The EU and India have agreed to link India’s Carbon Market (ICM) with the EU’s Carbon Border Adjustment Mechanism (CBAM), allowing carbon prices paid in India to be deducted from CBAM levies at the EU border. This collaboration represents a significant shift in global climate governance by establishing a model for North–South carbon market cooperation.

Significance of Linking ICM with CBAM

1. This linkage prevents Indian exporters from bearing both domestic carbon compliance costs and CBAM charges simultaneously.
2. It encourages Indian industries to adopt early decarbonisation measures through credible carbon pricing.
3. It enhances the legitimacy and global acceptance of India’s evolving carbon market architecture.
4. It strengthens India–EU economic cooperation while aligning climate transition pathways between developed and developing economies.
5. It provides a long-term incentive for market-based climate action in India rather than reliance on regulatory mandates alone.

Key Challenges in Operationalisation

1. Underdeveloped Domestic Carbon Market
   1. India’s ICM is still evolving because it relies on emission-intensity-based credits rather than absolute emission caps that are required under EU standards.
   2. Current compliance, monitoring, and verification systems in India lack the institutional robustness seen in the EU-ETS.
   3. The absence of legally binding penalties and strong enforcement mechanisms limits environmental integrity.
2. Price Gap and Cost Burden
   1. The carbon price in the EU is significantly higher than in India, which may result in EU authorities rejecting Indian credits as insufficient.
   2. Indian exporters may experience a double financial burden until price convergence and sector coverage alignment take place.
3. Institutional and Regulatory Barriers
   1. The EU demands transparent and independent regulatory oversight, which requires a structural redesign of India’s compliance systems.
   2. Alignment on sectoral carbon contracts and negotiated price floors would be politically difficult to agree upon.
4. Sovereignty and Trade Concern
   1. India has historically opposed CBAM at the WTO, viewing it as a unilateral and protectionist measure, which creates a political contradiction in formally linking with it.
   2. The EU’s authority to judge the adequacy of India’s climate action raises sensitivities about policy sovereignty.

Legal and Political Risks

1. Disputes may arise if the EU rejects India’s carbon pricing as inadequate, pushing the issue into legal or political escalation.
2. Any weakening of domestic compliance under internal industrial pressure could restore CBAM levies fully, destabilising export flows.
3. Misalignment in market design and political resistance on both sides could jeopardise the continuity of cooperation.

Way Forward and Opportunities

1. India must strengthen cap-setting, monitoring, verification, and enforcement mechanisms to meet global carbon market expectations.
2. A negotiated carbon price floor and expanded sectoral coverage would ensure smoother CBAM deduction for Indian exporters.
3. India and the EU can expand technical cooperation to ensure a predictable, credible, and transparent transition.
4. Successful implementation will accelerate industrial decarbonisation and promote low-carbon value chains across borders.

Conclusion: The EU-India carbon market linkage is one of the most important climate and trade arrangements between major global economies because it protects exporters while advancing environmental goals. Its success will depend on strong political commitment, credible market governance, and equitable treatment under CBAM. This cooperation has the potential to establish a global template for North–South collaboration on carbon markets, provided India strengthens its institutional foundations and compliance confidence.

Question: Discuss the significance and challenges of linking India’s carbon market with the European Union’s Carbon Border Adjustment Mechanism (CBAM).