A start for North-South carbon market cooperation, Pg6

Key Highlights:

• The EU and India announced a New Strategic EU-India Agenda on September 17, 2025, focusing on enhanced partnership across five pillars.
• A key component involves linking the Indian Carbon Market (ICM) with the EU's Carbon Border Adjustment Mechanism (CBAM), allowing carbon prices paid in India to be deducted from CBAM levies.
• Challenges include the ICM's underdeveloped architecture compared to the EU Emissions Trading System (ETS), with concerns over robust auction structure and independent verification.
• Discrepancies in carbon prices (€5-€10 in India vs. €60-€80 in the EU) and potential political tensions due to CBAM's controversial nature pose significant barriers.

Detailed Insights:

• The EU-India agreement aims to prevent double penalization of Indian exporters and reward early decarbonization efforts, fostering North-South carbon market cooperation.
• The ICM relies on intensity improvements and project-based offsets, while CBAM requires tonne-for-tonne accounting of embedded carbon, necessitating legally binding caps in India.
• A structural redesign of the ICM is needed to mirror the compliance-grade features of the EU's ETS, including independent regulators and emissions registries to guarantee market integrity.
• Resolving the carbon price gap requires either targeted sectoral carbon contracts or a negotiated floor price, both of which present political and economic challenges.
• CBAM is viewed by India and other developing countries as a unilateral and protectionist measure, creating a political contradiction in legitimizing a mechanism India has formally resisted.
• The success of the ICM-CBAM linkage depends on India maintaining a steady, transparent carbon market, as domestic political backtracking could expose exporters to full CBAM costs.

Key Concepts Involved:

• Carbon Border Adjustment Mechanism (CBAM): A carbon tariff on imports based on the carbon intensity of their production.
• Indian Carbon Market (ICM): India's domestic carbon trading scheme aimed at reducing emissions.
• EU Emissions Trading System (ETS): A cap-and-trade system used in the European Union to reduce greenhouse gas emissions.