Why India’s CCUS Push Is About Energy Security, Growth & Trade

When India and the European Union (EU) signed their long-awaited Free Trade Agreement (FTA) in January 2026, much of the public discourse focused on tariff reductions, export quotas, and improved market access. Yet, beneath these headlines lies a more consequential shift in the political economy of trade. India did not get any exemption for the Carbon Border Adjustment Mechanism (CBAM), exposing some of its exports to additional compliance and carbon costs. While tariffs are coming down, carbon intensity has emerged as the gatekeeper of market access.

CBAM, which places a ‘carbon price’ on manufacturing of emissions-intensive goods such as steel, cement, aluminium and fertilisers, is framed as a tool to prevent carbon leakage. It operates as a non-tariff trade barrier but disproportionately affects developing economies whose industries remain coal-reliant and capital-constrained. While the EU’s position during negotiations was unequivocal, with no country-specific exemptions, or preferential treatment for strategic partners, FTA does note that if preferential treatment is granted to any third country India would also be eligible. Furthermore, while India’s Carbon Credit Trading Scheme is not immediately recognised, a framework for alignment with EU’s Emissions Trading Scheme and recognition has been established. 

The rigidity matters because the sectors exposed to CBAM: steel, cement, refineries and chemicals, are the backbone of India’s manufacturing exports to Europe, accounting for ~$7.4bn in exports to the EU. India’s steel shipments to EU ranging between 2-4mn tonnes annually, specifically illustrate the scale of risk due to CBAM.

It is against this backdrop that the Union Budget 2026 announcement on Carbon Capture, Utilisation and Storage (CCUS) must be understood. The proposed ₹20,000 crore outlay over five years, targeted precisely at CBAM-covered sectors, is not merely a climate policy signal. It is a strategic response shaped by trade exposure, energy security imperatives and the realities of India’s growth trajectory.

India’s CCUS push rests on a hard and often unspoken premise that decarbonisation cannot happen at the cost of India’s economic growth or energy security. Coal, which underpins over 70% of India’s electricity generation and feeds critical industrial processes, is not disappearing in the foreseeable future. Nor should it. For an economy adding manufacturing capacity towards achieving aatmanirbharata, infrastructure and jobs, rapid dismantling of coal-based systems would impose unacceptable economic and social costs.

CCUS therefore is a time-buying instrument. Deep decarbonisation pathways such as green hydrogen and full renewable energy-based electrification remain essential but face constraints of high cost, infrastructure readiness and scale. While they would define India’s long-term transition, CCUS provides a transitional compliance mechanism.

However, CCUS alone will not guarantee CBAM relief. While the FTA’s climate cooperation chapter includes the EU’s €500mn in concessional mitigation finance, the asymmetry is clear. CBAM standards, methodologies and verification remain EU-defined. India must therefore ensure EU-acceptable measurement, reporting and verification and lifecycle emissions accounting that withstands regulatory scrutiny, while using the proposed joint technical working group to shape rules that align with India’s economic and industrial interests.

Therefore, it must be ensured that investments are made for capacity building and setting-up of CBAM advisory services in India, which would significantly lower compliance costs for exporters preventing overpayment under CBAM due to poorly contextualised emissions assumptions. Without this, India might risk subsidising CCUS projects that fail to deliver CBAM-recognised emissions reductions, bearing fiscal costs without securing trade benefits.

Another challenge is that firms with limited EU exposure may rationally avoid costly decarbonisation or CCUS retrofits, choosing to exit EU markets instead. This raises the question of broad participation beyond export-heavy firms. Moral suasion is insufficient. Scaling CCUS requires tangible incentives such as preferential finance, public procurement advantages, faster clearances, and integration into green value chains, so compliance is seen as profitable, not merely obligatory.

But India’s predicament reveals a fault line in global climate governance. Though framed as environmental, CBAM shifts adjustment costs onto exporters with minimal historical responsibility. Developing economies face a constrained choice: absorb carbon costs or deploy expensive end-of-pipe solutions to preserve market access, paths that neither address climate inequity nor support social development, structural transformation or competitiveness in non-EU markets.

In this light, an under-examined question is what happens to the revenues collected through CBAM. If these funds simply accrue to EU treasuries, CBAM becomes a one-way fiscal transfer. If, however, they are recycled as concessional finance to support rapid decarbonisation, particularly for mid-sized firms in exporting countries, they could function as a genuine transition nudge rather than a punitive trade instrument. This is one of the arrangements that India should negotiate for under the ‘living dialogue’ status of the FTA.

The India-EU FTA makes climate and trade inseparable. CBAM has pushed India to internalise carbon into fiscal and industrial strategy. India’s CCUS push is about safeguarding growth, securing energy sovereignty, preserving export competitiveness and negotiating space in a carbon-constrained global economy.

(Akanksha Jain is a Research consultant and Debajit Palit is the Centre Head at Centre for Climate Change and Energy Transitions at the Chintan Research Foundation. The views expressed are personal.)