How EU's CBAM Expansion Is Adding New Challenges for India Despite the FTA

When Prime Minister Narendra Modi and European Commission President Ursula von der Leyen posed for photographs on India's Republic Day in January, the optics felt historic. A long-pending free trade agreement (FTA) had finally landed, covering 99.5% of India's exports by trade value.

But the EU's Carbon Border Adjustment Mechanism—CBAM, the bloc's landmark carbon tariff—was left entirely untouched by the deal. At present, CBAM applies to imports of iron and steel, aluminium, cement, fertilisers, hydrogen, electricity, and selected steel/aluminium products.

"There is no commitment on the part of the EU to change our obligations with regard to CBAM, or grant India more favourable treatment," the European Commission's chief spokesperson confirmed flatly, just days after the FTA was announced.

For Indian exporters already absorbing the shock of CBAM's liability phase, which kicked in on January 1, this was a cold splash of water. And if they thought the pain was contained to blast-furnace steel and coal-fired aluminium, a draft report quietly published by the European Parliament's Environment Committee on April 10 has made the picture considerably more complicated.

It has proposed five major changes to the CBAM regime: extending CBAM to around 180 additional steel- and aluminium-based manufactured products from 1 January 2028; tightening carbon accounting rules for scrap-based production by including emissions from pre-consumer scrap; rejecting the use of international carbon credits for CBAM compliance; examining expansion of CBAM to indirect emissions from electricity use across more sectors; and introducing stricter anti-circumvention, reporting and verification requirements for suspected misuse.

“Together, these steps would turn CBAM from a tax mainly on steel and aluminium raw materials into a much wider carbon tax covering manufactured industrial goods,” Ajay Srivastava, founder at New Delhi based policy think tank Global Trade Research Initiative (GTRI), cautioned.

The Downstream Problem

The European Commission, in December 2025, proposed extending CBAM from January 2028 to cover roughly 180 downstream products—manufactured goods that incorporate steel and aluminium. These are about automobile parts, industrial robots, cooling towers, AC motors, washing machines, furniture fittings, gearboxes, and even certain cargo vehicles. These are not raw materials. They are the value-added engineering exports that India has spent two decades building into a competitive advantage.

“The European Parliament has also asked the European Commission to study future inclusion of organic chemicals, polymers, and selected scrap materials, indicating that CBAM may gradually expand across most industrial manufacturing sectors,” Srivastava highlighted.

The Parliamentary rapporteur Mohammed Chahim broadly endorses this expansion while pushing for tighter methodology and greater transparency. The scope, in his framing, should extend to the full value chain—and the Commission should continuously monitor newly split product codes to bring more goods under the net over time. This is not a narrow, technical adjustment. It is a structural shift in how the EU prices carbon across its import regime.

For India, the numbers are pointed. According to the Lexology analysis of the Commission's proposal, the downstream extension would bring at least $1.1bn in Indian exports within CBAM's scope from 2028. The automotive components sector alone ships roughly 27% of its total output to the EU. Add to this mechanical machinery, fabricated metal products, and industrial equipment, and the exposure runs deep into India's manufacturing heartland—Pune, Rajkot, Coimbatore, and Faridabad.

The FTA Is Not a Shield

The provisional FTA text released in February 2026 does contain one small concession on CBAM: India cannot be treated worse than any other third country if the EU grants flexibilities to someone else. But this is a defensive clause, not an exemption. India will get no special treatment, no carbon-pricing credit for its own emissions reduction efforts, and no phase-in grace period beyond what all other nations receive.

The CBAM compliance pressure, GTRI warned earlier, is already being embedded into commercial negotiations. EU buyers are pricing carbon intensity into supplier shortlists. Indian steel exporters—where blast furnace-basic oxygen furnace routes still dominate and emission intensity runs at 2.55 tonnes of CO₂ per tonne of crude steel against a global average of 1.9—are being asked to either cut prices by 15-22% or risk losing contracts altogether.

The downstream extension magnifies this problem considerably, because the embedded emissions logic travels with the product. A gearbox stamped in Pune from Indian blast-furnace steel does not escape CBAM simply because it is a finished component. Under the Commission's proposal, the carbon embedded in the steel input gets priced all the way through to the EU importer's CBAM certificate obligation.

GTRI also noted that under the FTA, EU products may gradually enter India at zero tariffs, while an increasing share of Indian industrial exports could face CBAM charges in Europe. India has limited ability to retaliate because of the limiting CBAM-related provisions in the FTA text.

Many of Indian agriculture exports will be affected under the EUs deforestation regulations.

What the Parliamentary Draft Signals

The Chahim report is notable not just for what it endorses, but for what it refuses. It proposes to delete entirely the Commission's Article 27a—a provision that would have allowed goods to be quietly removed from CBAM scope during "serious and unforeseen circumstances." The rapporteur said allowing such scope exclusions would make the regulation vulnerable to sector-specific lobbying, and undermine its credibility as an investment signal. For India, this means there is no back door. Once a product enters the CBAM net, it stays.

The report also pushes back firmly on the idea of counting international carbon credits—including Article 6 Paris Agreement credits—against CBAM obligations, calling such discussions "premature and counterproductive."

This means Indian exporters will not be able to use carbon credits bought in voluntary or international markets to reduce their CBAM liabilities. Instead, firms would have to physically reduce emissions at source or operate under a domestic carbon pricing system accepted by the EU.

Further, the EU is examining whether to extend CBAM to indirect emissions—that is, emissions generated from the electricity consumed during production rather than from on-site fuel combustion. This may be applicable from end-2027. “If adopted, this would significantly raise CBAM costs for Indian exporters because India’s industrial electricity grid remains relatively carbon-intensive due to continued dependence on coal-based generation,” GTRI cautioned.

The Clock and the Compliance Gap

The 2026 to 2027 window is critical. Downstream CBAM takes effect in January 2028, but the reporting and verification infrastructure needs to be in place well before that. Indian manufacturers in CBAM-exposed supply chains—including those who supply Tier 1 exporters rather than selling directly to Europe—will need installation-level emissions data, not just corporate sustainability reports. The methodology required is EU Implementing Regulation 2023/1773-compliant granular data. Most Indian SMEs in the engineering and auto-components belt are nowhere near ready.

The FTA's climate chapter does create a platform for technical dialogue and earmarks €500mn in EU support for India's decarbonisation efforts over two years. That is meaningful, but it is structured around long-term green transition cooperation—not near-term CBAM compliance handholding.