A Start for North-South Carbon Market Cooperation

Syllabus: GS3/Environment

Context

• Recently, India and the European Union (EU) announced a New Strategic EU-India Agenda, which includes a proposal to explore the integration of India’s Carbon Market with the EU’s Carbon Border Adjustment Mechanism (CBAM), marking a step toward aligning carbon market mechanisms between the Global North and South.

About India’s Carbon Market (ICM)

• It is designed to help India meet its climate commitments — particularly the goal of reducing the emissions intensity of GDP by 45% by 2030 (compared to 2005 levels).
  • It aims to create a national framework for carbon credit trading, where entities can buy and sell carbon credits based on their emissions performance.
  • Its working involves cap-and-trade systems, voluntary and compliance markets, and Carbon Credit Certificates.

EU’s Carbon Border Adjustment Mechanism (CBAM)

• It aims to prevent carbon leakage — where companies relocate production to countries with looser climate regulations.
• It ensures that imported goods face the same carbon costs as those produced within the EU, leveling the playing field and encouraging global decarbonization.
• Its working involves carbon pricing on imports, and sectoral coverage like cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.

Linking India’s ICM with EU’s CBAM: New Strategic EU-India Agenda

• It aims to align carbon pricing mechanisms across borders, ensuring that Indian exporters are not unfairly penalized under the EU’s climate regulations.
• It outlines five key pillars: prosperity and sustainability; technology and innovation; security and defence; connectivity and global issues; and enablers across pillars.
• What Is Being Proposed?
  • Recognition of India’s Carbon Credits: The EU may allow Indian exporters to offset their CBAM liabilities using carbon credits purchased under India’s domestic carbon market.
  • Avoiding Double Carbon Taxation: This would prevent Indian industries from paying both domestic carbon prices and CBAM levies on exports to the EU.
  • Mutual Trust in MRV Systems: For this linkage to work, both sides need to agree on Monitoring, Reporting, and Verification (MRV) standards to ensure transparency and credibility.

Key Challenges in Proposed Linking

• India’s Underdeveloped Carbon Market: India’s Carbon Credit Trading Scheme (CCTS), commonly called the ICM, is still in its infancy.
  • In contrast to the EU’s Emissions Trading System (ETS) mature market with clear caps, verification, and enforcement, India’s scheme relies on intensity-based improvements and project-level offsets, not absolute emission caps.
• Lack of Institutional Parity: The EU’s ETS operates under independent regulators and verified registries, ensuring integrity and transparency.
  • India currently lacks equivalent institutions, making EU authorities reluctant to recognize Indian credits as valid for CBAM deductions.
• Price Gap Problem: Carbon prices under the EU’s ETS hover between €60–€80 per tonne, while India’s range between €5–€10 per tonne.
  • Without comparable and enforceable carbon prices, the EU is unlikely to grant meaningful deductions, leaving Indian exporters exposed to both domestic compliance costs and CBAM levies.
  • It could provoke political backlash and industrial resistance within India, potentially weakening the integrity of its carbon scheme.
• Political and Legal Contradictions of CBAM: Beyond technicalities, CBAM’s unilateral nature makes it controversial.
  • India and several developing countries have criticized CBAM at the WTO as protectionist and discriminatory.
  • By linking ICM to CBAM, India risks legitimizing a system it has opposed in global forums.
• Sovereignty and Trust Issues: The EU’s ability to judge whether India’s carbon price is ‘sufficient’ raises sovereignty concerns.
  • If the EU refuses full deductions, India may face diplomatic disputes or legal challenges, straining bilateral relations.
  • Furthermore, any domestic rollback of carbon compliance due to political or industrial pressure could instantly expose exporters to higher CBAM costs — making the linkage fragile and dependent on mutual trust.

Pathways to a Real Partnership

• The proposed linkage offers an unprecedented opportunity for North-South cooperation in carbon markets, despite its risks. For the integration to succeed:
  • India needs to enhance its carbon market design with stronger caps, verifiable accounting, and regulatory independence.
  • The EU should provide technical and financial assistance to support India’s market maturation.
• Both sides should negotiate a realistic carbon price floor and create transparent verification mechanisms to build trust.

Conclusion: From Promise to Practice

• The ICM–CBAM linkage could redefine global carbon governance, aligning trade and climate goals between two major economies.
  • But, without credible reforms, price alignment, and sustained political commitment, the agreement risks remaining a paper breakthrough rather than a real-world success.
• Turning it into action requires a delicate balance of economics, diplomacy, and trust — the true test of the new EU-India strategic agenda.

Source: TH