The recently concluded Free Trade Agreement (FTA) between India and the European Union (EU) is facing scrutiny, with the Indian National Congress raising concerns about the government's failure to secure exemptions from the EU's Carbon Border Adjustment Mechanism (CBAM) for Indian aluminum and steel producers. The opposition party argues that this omission weakens the FTA and could negatively impact India's trade balance and domestic industry.

The EU's CBAM, which came into effect on January 1, 2026, imposes a carbon charge on emissions embedded in specific imported goods. This mechanism is designed to prevent "carbon leakage" by aligning import costs with EU carbon prices. Congress General Secretary Jairam Ramesh stated that the CBAM could increase costs for Indian steel and aluminum exporters, potentially forcing them to reduce prices by 15-22% for EU importers to offset the carbon tax. He also noted that the documentation requirements for carbon emissions accounting would add further costs.

The EU Commission confirmed that the FTA does not include any CBAM exemptions for India, with chief spokesperson Paula Pinho stating that India's treatment under CBAM will be no more favorable than other states. A senior EU official acknowledged that CBAM was a contentious issue during negotiations, along with steel and cars. While India initially took a "very radical" stance on the EU's carbon border, the FTA now opens the possibility for "technical dialogue" on CBAM.

According to estimates, the CBAM could act as an additional tax of up to 25% on affected Indian goods, significantly reducing their price competitiveness. For the Indian steel industry, which relies on the EU as a major market, this could result in a 25-30% decline in profitability for companies exporting to the bloc once CBAM is fully implemented. Data indicates that Indian aluminum and steel exports to the EU have already fallen from $7 billion to $5.8 billion, a trend expected to worsen under the carbon tax regime.

Despite the CBAM concerns, the EU and India have committed to launching a platform on climate action in the first half of 2026, with €500 million in EU support planned over the next two years to aid India's greenhouse gas mitigation efforts. The FTA itself includes a chapter on climate change and decarbonization, indicating a commitment to cooperation in this area.

The India-EU FTA, after nearly two decades of negotiations, aims to create a free trade zone of two billion people, encompassing 25% of global GDP and one-third of global trade. The EU has agreed to eliminate tariffs on 99.5% of Indian exports, with most duties falling to zero immediately upon the agreement's implementation. India, in turn, has offered tariff concessions on 97.5% of EU exports, with phased reductions for sensitive sectors. President Droupadi Murmu stated that the FTA would boost manufacturing and service sectors in India and create new employment opportunities.

However, the failure to secure CBAM exemptions raises concerns about the FTA's overall effectiveness. While the agreement aims to level the playing field for Indian exporters, the EU's complex regulatory framework, including CBAM and stringent health and safety standards, could pose compliance challenges, particularly for small and medium-sized enterprises.

The Congress party has urged that the India-EU FTA address the carbon tax as a non-tariff barrier. As the FTA moves forward, the impact of CBAM on Indian industries will be closely monitored, and further discussions between India and the EU may be necessary to mitigate potential negative consequences.