The India-EU FTA and CBAM – How the CBAM Annexure Is Protecting Indian Exporters in 2026
Introduction: The FTA-CBAM Connection
The India-European Union Free Trade Agreement (FTA) represents a landmark achievement in India's trade relations with one of its most important economic partners. But perhaps its most significant feature for Indian industry is the dedicated annexure on the Carbon Border Adjustment Mechanism (CBAM).
CBAM, which came into force on January 1, 2026, is the EU's carbon border tax mechanism aimed at levelling the playing field between European manufacturers and overseas exporters. It imposes a carbon price on imports of carbon-intensive goods such as steel, aluminium, cement, and fertilisers.
The India-EU FTA, which is expected to be signed later in 2026 with implementation likely in 2027, includes a comprehensive work plan to help India navigate the EU's carbon tax regime. The annexure is built around multiple pillars aimed at reducing compliance burdens for Indian exporters, particularly small and medium enterprises (SMEs).
As Darpan Jain, Additional Secretary in the Department of Commerce and India's chief negotiator for the FTA, stated: "CBAM compliances are a concern among SMEs in terms of verification, determining the value of embedded carbon and ensuring that verifiers are recognised by EU authorities. There are separate provisions under the agreement to address these issues".
This guide provides a comprehensive analysis of the India-EU FTA's CBAM annexure, what it means for Indian exporters, how it can protect your business from carbon border taxes, and what you must do to leverage its provisions.
What Is the India-EU Free Trade Agreement?
The Agreement
The India-European Union Free Trade Agreement is a comprehensive trade deal that has been under negotiation for several years. It was concluded in late January 2026, with CBAM being the last issue to be resolved during negotiations.
Key Features
| Feature | Description |
|---|---|
| Scope | Comprehensive trade agreement covering goods, services, and investment |
| Legal Scrubbing | Completed as of July 2026 |
| Signing | Expected later in 2026 |
| Implementation | Likely in 2027 |
| CBAM Annexure | Dedicated framework to address carbon border tax concerns |
The CBAM Challenge
CBAM was a major sticking point during negotiations. India sought to secure concessions for its exporters, particularly small and medium enterprises (SMEs), which face disproportionate compliance burdens. "CBAM took a lot of negotiating capital," Jain said.
The Outcome
The FTA includes a dedicated annexure on CBAM with comprehensive provisions to address exporters' concerns and support SMEs. Both sides have prepared a comprehensive framework to help Indian industry comply with the EU's carbon-related import rules while safeguarding commercial interests.
What Is CBAM and Why Does It Matter?
What Is CBAM?
The Carbon Border Adjustment Mechanism is the EU's carbon border tax mechanism aimed at levelling the playing field between European manufacturers and overseas exporters. It imposes a carbon price on imports of carbon-intensive goods such as steel, aluminium, cement, and fertilisers.
Why CBAM Exists
The new measures aim to close loopholes and ensure that the EU's climate goals are not undermined by "carbon leakage" — when carbon-intensive production moves to countries with less strict climate policy.
How It Works
| Step | Description |
|---|---|
| 1. Declaration | Importers must declare the embedded emissions of their imports |
| 2. Certificate Purchase | Importers purchase CBAM certificates to cover these emissions |
| 3. Deduction | If a carbon price has already been paid in the country of origin, it can be deducted |
| 4. Compliance | Importers must submit annual reports and compliance declarations |
The CBAM Transition
| Phase | Period | Requirement |
|---|---|---|
| Transitional | October 2023 – December 2025 | Reporting only, no payment |
| Definitive | January 1, 2026 | Payment phase begins |
Sectors Covered
CBAM currently covers six sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity. The tax is currently levied on steel and aluminium products.
Why the CBAM Annexure Matters
The CBAM annexure in the India-EU FTA is designed to reduce compliance burdens for Indian exporters, particularly SMEs, by providing flexibility, SME compliance support, verification recognition, and carbon price offset mechanisms.
The CBAM Annexure: A Dedicated Framework for Indian Exporters
What Is the CBAM Annexure?
The CBAM annexure is a dedicated section of the India-EU FTA that addresses CBAM-related concerns. It includes a comprehensive work plan to help India navigate the EU's carbon tax regime.
Key Provisions
| Provision | Description |
|---|---|
| Dedicated work plan | Comprehensive framework to help India navigate the EU's carbon tax regime |
| SME support | Provisions to ease compliance for small and medium enterprises |
| Carbon price recognition | Framework for recognising carbon prices paid domestically |
| Verification support | Help with measuring embedded carbon and getting it verified |
The Government's Perspective
Speaking at the Indo-German Chamber of Commerce (IGCC) Industry Dialogue 2026, Darpan Jain said the proposed trade pact contains a separate annexure dealing exclusively with CBAM-related issues.
"CBAM compliances are a concern among SMEs in terms of verification, determining the value of embedded carbon and ensuring that verifiers are recognised by EU authorities. There are separate provisions under the agreement to address these issues. We also have a provision to engage with EU authorities on taking into account the carbon price paid in India," Jain said.
The Four Pillars of the CBAM Annexure
Additional Secretary Darpan Jain outlined the key pillars of the CBAM annexure:
Pillar 1: Flexibility
| Aspect | Description |
|---|---|
| What It Means | In case of flexibility in future, that will be available to India |
| Why It Matters | Ensures India is not locked into rigid compliance requirements |
Pillar 2: SME Compliance
| Aspect | Description |
|---|---|
| What It Means | Help Indian SMEs meet compliance requirements |
| Why It Matters | SMEs face disproportionate compliance burdens |
Pillar 3: Verification
| Aspect | Description |
|---|---|
| What It Means | Provisions for verification and recognition of verifiers |
| Why It Matters | Currently, EU authorities may not recognise Indian verifiers |
Pillar 4: Carbon Price Offset
| Aspect | Description |
|---|---|
| What It Means | Engage with EU authorities on taking into account the carbon price paid in India |
| Why It Matters | Carbon prices paid in India could be offset against CBAM liabilities |
The annexure includes provisions covering verification processes, calculation of embedded carbon emissions and engagement with EU authorities to ease compliance for smaller exporters.
SME Support: A Critical Focus
Why SMEs Need Special Support
Unlike large corporations with dedicated sustainability teams and robust data systems, MSMEs often lack the technical expertise, systems, and financial resources to measure, verify, and report embedded emissions.
The Compliance Cost Burden
Meeting the requirement under the carbon tax alone could cost an MSME unit between ₹15 lakh and ₹20 lakh. These are largely fixed compliance costs, which do not reduce in proportion to the size of the business.
SME Support Provisions
| Provision | Description |
|---|---|
| Compliance support | Help Indian SMEs meet compliance requirements |
| Flexibility | Provisions to ease compliance for smaller exporters |
| Verification recognition | Recognition of Indian verifiers for SMEs |
| Government outreach | Extensive outreach programme to help businesses understand and benefit from the FTA |
What This Means for SMEs
The CBAM annexure provides a framework for:
- Reduced compliance burdens
- Recognition of Indian verifiers
- Support for carbon data collection and verification
- Access to government compliance support
The Official's Assurance
"I am very hopeful that SMEs will not face any problems," Darpan Jain said.
The CBAM Work Plan: What It Covers
What Is the Work Plan?
The CBAM annexure includes a comprehensive work plan to help India navigate the EU's carbon tax regime. Both sides have prepared a comprehensive framework to help Indian industry comply with the EU's carbon-related import rules while safeguarding commercial interests.
Key Elements
| Element | Description |
|---|---|
| Verification processes | Support for exporters in meeting EU verification requirements |
| Embedded carbon calculation | Guidance on accurate emissions calculation |
| Engagement with EU authorities | Ease compliance for smaller exporters |
| SME support | Special provisions to protect small and medium enterprises |
The Work Plan Pillars
According to Darpan Jain, the work plan includes:
- Flexibility provisions: Future flexibility available to India
- Compliance support: Help with verification and embedded carbon calculation
- Verifier recognition: Recognition of Indian verifiers by EU authorities
- Carbon price offset: Engagement on carbon prices paid in India
Why the Work Plan Matters
The work plan provides:
- A clear roadmap for addressing CBAM concerns
- Technical support for Indian exporters
- A framework for ongoing cooperation
- Recognition of Indian verifiers
The Commerce Ministry's Outreach
The commerce ministry is also preparing an extensive outreach programme to help businesses understand and benefit from the trade agreement once it comes into force. "We want to go to all the districts and conduct outreach programmes there and tell industry about what is there in the FTA, how they can use it, explore opportunities under that," Jain said.
Carbon Price Recognition: The Key to CBAM Relief
The Mechanism
CBAM allows for the deduction of a carbon price already paid in the country of origin. CCTS compliance certificates can serve as evidence of this carbon price.
India's Carbon Pricing Mechanism
"As you know, India is also developing its own carbon pricing mechanism. So, how to offset what is paid in India from what is paid in Europe is also part of the discussions," Jain said.
What This Means
| Aspect | Implication |
|---|---|
| CCTS recognition | EU may recognise carbon prices paid through India's CCTS |
| CBAM deduction | CCTS compliance could reduce CBAM liability |
| Export competitiveness | Indian exporters could remain competitive in EU markets |
| Value retention | Carbon value stays within India |
The Negotiating Position
The FTA provides a framework for India to engage with the EU on recognising carbon prices paid domestically once India's own carbon pricing mechanism is operational. Discussions are underway on India's emerging carbon pricing framework to ensure that domestic carbon costs can potentially be offset against CBAM liabilities in Europe.
Verification and Recognition of Verifiers
The Verification Challenge
Currently, EU authorities may not recognise Indian verifiers for CBAM purposes. This forces Indian exporters to hire expensive EU auditors, adding to compliance costs.
The FTA Provision
The CBAM annexure includes provisions for verification and recognition of verifiers, aimed at:
- Recognising Indian verification agencies
- Reducing compliance costs for Indian exporters
- Building Indian capacity for carbon verification
What This Means for Exporters
| Aspect | Current Situation | With FTA |
|---|---|---|
| Verifiers | Must hire EU-recognised auditors | Indian verifiers may be recognised |
| Cost | High | Lower |
| Capacity | Limited Indian capacity | Indian capacity built over time |
The Mutual Recognition Goal
The goal is a mutual recognition regime between European verification agencies and Indian verification bodies to prevent expensive foreign auditing costs.
What This Means for SMEs
SMEs, which are the most vulnerable to verification costs, stand to benefit significantly from recognition of Indian verifiers.
India's Carbon Pricing Mechanism: The CCTS Connection
The CCTS Framework
India's Carbon Credit Trading Scheme (CCTS) is the country's domestic carbon market. It covers approximately 490 obligated entities across seven energy-intensive sectors, with emissions coverage of approximately 477 million tCO₂e.
The CCTS-CBAM Connection
| Aspect | Connection |
|---|---|
| Carbon price | CCTS creates a domestic carbon price |
| CBAM deduction | Carbon prices paid through CCTS could be deducted from CBAM liabilities |
| Export competitiveness | CCTS compliance could reduce CBAM costs for exporters |
What Exporters Must Do
| Action | Why It Matters |
|---|---|
| Participate in CCTS | Demonstrate carbon compliance to EU buyers |
| Document compliance | Maintain records for CBAM declarations |
| Procure credits | Buy CCCs to demonstrate carbon reduction |
| Engage with FTA provisions | Leverage the CBAM annexure |
The EU Recognition Question
Discussions are underway on India's emerging carbon pricing framework to ensure that domestic carbon costs can potentially be offset against CBAM liabilities in Europe.
The CBAM Certificate Price and Tax Burden
The First Price
The first quarterly price for CBAM certificates was set at EUR 75.36 per tonne of CO₂ equivalent for Q1 2026. The second quarter price was set at €75.28 per tonne for Q2 2026.
The CBAM Tax Burden
Under the EU's Carbon Border Adjustment Mechanism, Indian exports of steel, aluminium, and cement to the EU could face tariffs of 20-35 per cent.
The Cost Impact
| Sector | Tax Burden |
|---|---|
| Steel | 20-35% |
| Aluminium | 20-35% |
| Cement | 20-35% |
What This Means
This is no longer a compliance exercise on paper. For any exporter of iron, steel, aluminium, cement, fertilisers, hydrogen, or electricity into the EU, carbon cost is now a line item in the cost of goods sold, not a future risk.
The MSME Data Gap: A Critical Vulnerability
The Problem
A key problem is that large producers often do not share plant-level emissions data with MSMEs that source steel or aluminium from them, leaving smaller firms without the verified carbon information required under CBAM.
The Default Values Risk
In the absence of such data, EU authorities may apply default emission values, usually set at the highest benchmarks, which can sharply inflate carbon costs even when actual emissions are lower.
The Impact on MSMEs
Industry representatives warn that the compliance burden could fall unevenly across the supply chain, with smaller exporters facing the greatest risk. The CBAM annexure addresses these concerns by providing provisions for verification and SME support.
What MSMEs Must Do
- Request verified emissions data from large producers
- Conduct independent verification using accredited agencies
- Prepare standardised CBAM data packs
- Engage with the India-EU FTA CBAM annexure provisions
The CBAM Expansion: 180 Additional Products by 2028
The Council's Decision
The EU has announced plans to expand CBAM coverage to additional products.
Key Changes
| Change | Impact |
|---|---|
| Expansion to additional products | More Indian exports affected |
| Timeline | 2028 onwards |
What This Means for Exporters
- CBAM coverage will expand significantly
- More Indian products will face carbon border taxes
- Preparation is essential
Implementation Timeline: When Will It Take Effect?
The FTA Timeline
| Milestone | Timeline |
|---|---|
| FTA Conclusion | January 2026 (negotiations completed) |
| Legal Scrubbing | Completed July 2026 |
| FTA Signing | Expected later in 2026 |
| FTA Implementation | Likely in 2027 |
| CBAM Annexure Implementation | Likely 2027 onwards |
The CBAM Timeline
| Phase | Period | Requirement |
|---|---|---|
| Transitional | October 2023 – December 2025 | Reporting only, no payment |
| Definitive | January 1, 2026 | Payment phase begins |
| Certificate Surrender | February 2027 | First CBAM certificates must be surrendered for 2026 imports |
What This Means for Exporters
- 2026: CBAM payment phase begins; exporters must adapt
- 2027: FTA implementation begins; CBAM annexure provisions take effect
- 2028: CBAM expands to additional products
The FTA Does Not Change CBAM: What Exporters Must Understand
The FTA's Limitations
The FTA does not change the CBAM financial obligation. It provides a framework for managing it, but the carbon border tax remains in full effect.
Carbon Costs Are Quietly Eroding Tariff Gains
Carbon costs are quietly eroding the tariff gains from the India-EU Free Trade Agreement. Exporters must understand that CBAM applies full financial liability from January 2026.
What Exporters Must Do
Despite the FTA, exporters must:
- Participate in CCTS to demonstrate carbon compliance
- Reduce emissions to lower carbon intensity
- Document compliance for CBAM declarations
- Prepare CBAM data packs for each manufacturing facility
The Strategic Imperative
The FTA provides a framework for addressing CBAM concerns, but it does not eliminate the need for exporters to take concrete action to reduce their carbon footprint and demonstrate compliance.
How Carboned.in Can Help
At Carboned.in, we help Indian exporters navigate the India-EU FTA and CBAM with clarity and confidence.
Our Services
| Service | What We Do |
|---|---|
| FTA-CBAM Assessment | Understand how the FTA and CBAM annexure apply to your business |
| CCTS Compliance | Help you meet domestic compliance obligations |
| Credit Procurement | Buy CCCs to demonstrate carbon compliance |
| Verification Support | Connect you with accredited verifiers |
| CBAM Data Pack Preparation | Help you prepare standardised data packs |
| Legal Documentation | Draft contracts and compliance documents |
| Regulatory Advisory | Stay informed about FTA and CBAM developments |
Why Choose Carboned.in?
| Reason | Why It Matters |
|---|---|
| Legal Expertise | Led by Siddharth Gupta, Advocate, Calcutta High Court |
| Regulatory Knowledge | Deep understanding of CCTS, CBAM, and trade policy |
| FTA Experience | Knowledge of India-EU FTA provisions |
| End-to-End Support | From assessment to compliance |
Your first consultation is completely free. No obligation. Just honest advice.
Conclusion
The India-EU FTA's CBAM annexure represents a significant opportunity for Indian exporters to navigate the EU's carbon border tax regime. With provisions for flexibility, SME support, verification recognition, and carbon price offset, the annexure provides a framework for protecting Indian export competitiveness.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| FTA Signing | Expected 2026 |
| FTA Implementation | Likely 2027 |
| CBAM Annexure | Dedicated framework for CBAM concerns |
| Four Pillars | Flexibility, SME support, verification, carbon price offset |
| CBAM Tax Burden | 20-35% on steel exports |
| CBAM Expansion | Additional products from 2028 |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Act now | Understand FTA provisions, participate in CCTS, protect export competitiveness |
| Wait and see | Face higher costs, lose market share, suffer reputational damage |
How Carboned.in Can Help
At Carboned.in, we help Indian exporters navigate the India-EU FTA and CBAM with clarity and confidence.
- FTA-CBAM Assessment: Understand how the FTA applies to your business
- CCTS Compliance: Meet domestic obligations
- Credit Procurement: Demonstrate carbon compliance
- Verification Support: Connect with accredited verifiers
- CBAM Data Packs: Prepare for EU requirements
Your first consultation is completely free. No obligation. Just honest advice.
How Carboned.in can help
Our team covers every dimension of India's carbon market — pick the service that matches where you are.
Frequently Asked Questions
What is the India-EU FTA?+
A comprehensive free trade agreement between India and the European Union, expected to be signed in 2026 and implemented in 2027.
What is the CBAM annexure?+
A dedicated section of the FTA that addresses CBAM-related concerns, providing essential support for Indian exporters, particularly SMEs.
What is CBAM?+
The EU's Carbon Border Adjustment Mechanism — a carbon tariff on imports effective from January 1, 2026.
What sectors are covered by CBAM?+
Steel, aluminium, cement, fertilisers, hydrogen, and electricity. The tax is currently levied on steel and aluminium products.
What are the four pillars of the CBAM annexure?+
Flexibility, SME compliance, verification, and carbon price offset.
How does the FTA help SMEs?+
The FTA includes provisions to ease compliance for SMEs, including verification support and carbon price recognition.
What is carbon price recognition?+
The EU will take into account India's carbon trading system when implemented, allowing carbon prices paid in India to be offset against CBAM liabilities.
What is the CBAM tax burden?+
Under CBAM, Indian exports of steel, aluminium, and cement to the EU could face tariffs of 20-35 per cent.
When will the FTA take effect?+
Implementation is likely in 2027.
When will CBAM expand?+
The EU has announced plans to expand CBAM coverage to additional products by 2028.
Does the FTA change CBAM?+
No. The FTA provides a framework for managing CBAM, but the carbon border tax remains in full effect.
How can Carboned.in help?+
We provide FTA-CBAM assessment, CCTS compliance, credit procurement, verification support, and CBAM data pack preparation.
Siddharth Gupta is the founder of Carboned.in and specialist counsel for India's carbon compliance framework — advising obligated entities, project developers, and buyers on CCTS, CR-I registration, and credit transactions.
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