The EU-India FTA: A stepping stone for sustainable industrial transformation?

On 27 January 2026, after nearly two decades of negotiations, India and the European Union (EU) finally concluded a free trade agreement (FTA). It comes amid a rapidly shifting geopolitical landscape, in which both sides seek to diversify market access and de-risk their supply chains. Beyond the FTA, the two blocs signed a Joint India-European Comprehensive Strategic Agenda setting out a broad framework for cooperation, including in areas such as sustainability, innovation, and defence.

The EU’s Carbon Border Adjustment Mechanism (CBAM), a carbon levy that took effect on 1 January 2026, was a key sticking point during the negotiations. While the brokered outcome reflects compromises from both sides, it does not include CBAM exemptions or flexibilities for Indian firms. However, the parties have agreed to cooperate on CBAM implementation and, beyond CBAM, have identified win-win opportunities to strengthen clean value chain integration. The approach adopted in the deal could serve as a stepping stone toward stronger integration of clean value chains and accelerated sustainable industrial transformation. 

No CBAM exemption

Indian negotiators expressed concern that CBAM, which taxes embedded carbon emissions in hard-to-abate industries, could erode the benefits of tariff liberalization, particularly for India’s iron and steel, aluminum, and cement sectors. Already in FY25, before CBAM payments were collected, India’s steel and aluminium exports to the EU fell by 24.4%, to $5.8 billion. The Commission’s recently proposed scope expansion to an additional 180 steel- and aluminium-intensive downstream products, such as washing machines and automotive parts, risks placing additional pressure on exporters, especially micro, small, and medium-sized enterprises (MSMEs), which play an essential role in exporting downstream steel products to the EU.

Despite their insistence, Indian negotiators did not secure any flexibilities or exemptions under CBAM. While the text of the EU-India FTA is not yet publicly available,  according to the Indian government’s press release, the country has secured a “forward-looking most-favored-nation assurance” under which any CBAM flexibilities extended to third countries would also apply to India. 

This would appease India’s concern that the EU might offer CBAM exemptions to the United States as part of a deal with Washington. However, this apparent concession by the EU is of limited practical value, given that country-specific exemptions were never on the table in the first place and would not be consistent with the EU’s WTO commitments. 

Additional cooperation around CBAM implementation is a mixed bag 

Beyond this outcome, the Indian government noted in a press release that India and the EU agreed to hold talks on several technical aspects of CBAM implementation, as well as financial and technical assistance. In early February, India’s Minister of State for Commerce and Industry, in response to a parliamentary question, provided more detail on the CBAM agreement. 

The EU-India FTA will include an Annex on CBAM, which aims to “strengthen cooperation and support between India and the EU to enhance efforts to reduce greenhouse gas emissions.” Specifically, India and the EU agreed to cooperate on the recognition of India’s carbon pricing regime, the exchange of information to facilitate the establishment of default values, and the exploration of mutual recognition of accreditation bodies for emissions verifiers. 

These emerging details about agreed additional areas of CBAM cooperation are promising steps in the right direction. However, they remain signals of intent, but their real value will depend on whether they translate into concrete, enforceable commitments rather than aspirational language.  Even where cooperation materializes, the CBAM relief they will provide to Indian exporters will likely remain limited. 
Mutual recognition of accreditation bodies, for example, could lower verification costs and reduce delays, but only if India can quickly develop a sufficiently large pool of verifiers that meet stringent foreign verification criteria.  

Similarly, cooperation on the recognition of carbon prices paid in India under the Carbon Credit Trading Scheme (CCTS) will be important, especially ahead of the EU’s forthcoming methodology for deducting third-country carbon costs. Yet any resulting deductions are expected to be modest at best, reflecting the wide gap between European and expected Indian carbon prices, and more fundamental differences in system design, scope, and ambition between the EU ETS/CBAM and the Indian CCTS.

Financial support provisions also risk falling short. The pledged €500 million funding package is neither CBAM-specific nor proportionate to the scale of the compliance challenge. 

Where technical support can really make a difference is in monitoring, reporting, and verification (MRV). Increasing support for CBAM-related compliance is long overdue and critical to reducing CBAM costs for Indian firms, especially MSMEs. 

As TULIP Consulting’s ongoing research in this space shows, without access to robust MRV support, many MSME exporters will remain unable to use actual emissions data and will be forced to rely on punitive default values, with a 10% markup (2026) rising to 30% (2028). This compresses margins and threatens to push Indian MSME exporters out of the European market altogether. While the parties have agreed to cooperate on data sharing to establish default values, this alone will not be sufficient to address the MSME challenge. 

Added complexity: EU steel measures beyond CBAM

For Indian steel exports, CBAM is no longer the only challenge. From mid-2026, the EU’s new steel safeguards will halve existing duty-free quotas and impose a 50% tariff on volumes exceeding those quotas. While a major win for India in the FTA negotiations has been securing a larger quota, this will still cover only about half of its current steel exports to the EU. A punitive 50% tariff risks not only further undermining tariff concessions on steel but may also disincentivise firms to invest in decarbonisation processes and technologies.

Parallelly, Indian steel producers will also face additional compliance obligations due existing and forthcoming “spaghetti bowl” of green regulations, as discussed in TULIP Consulting’s policy paper. This includes the Eco-design for Sustainable Products Regulation and associated steel-specific eco-design and performance requirements, as well as the voluntary low-carbon steel standard, which is currently being developed under the Industrial Accelerator Act. 

While the Strategic Agenda highlights cooperation “on low carbon materials definitions such as steel and cement, while ensuring a level playing field”, it does not include concrete commitments to align the parties’ vastly different approaches to this. Doing so will be incredibly complex. 

For instance, while India’s Green Steel Taxonomy considers steel to be green if it has less than 2.2 tonnes of CO2 per tonne of finished steel, the EU’s low-carbon steel standard will almost certainly establish a much lower threshold, reflecting vastly different levels of average emissions intensity - 2.54 tonnes of CO₂ per tonne of crude steel in India compared with 1.06 tonnes in Europe.

Leveraging the deal to facilitate sustainable industrial decarbonization  

Strengthened EU-India bilateral cooperation should go beyond compliance with CBAM and other EU regulations and serve as a platform to address supply-side obstacles to decarbonising India’s rapidly growing, coal-dependent, heavy industries. 

Based on 2022 trade data, the World Bank estimates that India exported 7% of its total steel production to the EU, 4% of its aluminium, and 0.12% of its cement. Therefore, from a climate lens, the bigger challenge is establishing enabling conditions to decarbonise India's hard-to-abate industries beyond the export component.

To this end, the Strategic Agenda emphasises commitments to enhancing collaboration on industrial decarbonisation, particularly in hard-to-abate energy-intensive industries, and cooperation on clean supply chains such as solar, wind, and hydrogen. This reflects an understanding that a key gain in the context of trade and climate is to integrate clean supply chains, playing to each party’s strengths and aligning with industrial policy objectives. 

For instance, India has a structural cost advantage over the EU in producing large-scale, low-cost green hydrogen and hydrogen-based derivatives, driven by low renewable power costs and high solar irradiance. However, India faces capital constraints and financing gaps. 

Increased EU investment in Indian green hydrogen production, including in electrolyser manufacturing, project development, and infrastructure support, could accelerate the uptake of a green hydrogen ecosystem in India. At the same time, it would support the EU’s decarbonisation objectives, strengthen supply chain diversification, and enhance long-term energy security. 

In addition, the European Commission has announced plans to conclude a Memorandum of Understanding to establish a dedicated EU-India platform for cooperation and support on climate action, alongside a €500 million commitment to support India’s emission-reduction objectives and sustainable industrial transformation. While politically meaningful, this sum is marginal compared with the roughly $467 billion estimated to be required to decarbonise India’s heavy industry between 2022 and 2030. 

More broadly, whether cooperation on clean supply chains and industrial transformation yields concrete outcomes will depend on the parties’ political commitment, willingness to compromise, and sufficient resource allocation. 

Furthermore, the multitude of platforms and initiatives listed in the Strategic Agenda, in addition to the existing EU-India Trade and Technology Council (TTC), risks diluting efforts across platforms and leading to misalignment. This calls for the designation of a main platform to discuss industrial transformation issues – including, where warranted, by specific sectors – thereby streamlining different efforts linking trade, climate, and industrial policy. This could be done through existing committees under the FTA, the TTC, or modelled on the Commission’s new Clean Trade and Investment Partnerships.

Missing pieces for sustainable industrial transformation 

Several critical provisions are missing from the EU-India deal that could facilitate decarbonization in hard-to-abate industries such as steel. Notably, the FTA and the Stratgic Agenda fall short in their commitments to technology transfer and co-development in the context of industry transformation, despite the EU’s leadership in low-carbon innovation. 

This gap is significant as India seeks to enhance utilisation of low-carbon technologies, including through the recent allocation of ₹20,000 crore for carbon capture, utilisation, and storage in the 2026–27 Union Budget. Given India’s constrained public resources for research and development, deeper cooperation in these areas will be essential.

Similarly, cooperation on access to scrap, a low-cost pathway to emissions reduction in steel and aluminium, is absent. This omission is particularly striking given the EU’s restrictions on scrap exports to non-OECD countries under the Revised EU Waste Shipment Regulation. Indeed, it is currently unclear whether India will be able to continue importing scrap from the EU after 2027, as this will depend on the EU’s assessment of the environmental implications of India’s scrap management. Given India’s reliance on imported scrap to decarbonise its steel industry, it would be important for the parties to use the EU-India FTA platform to collaborate on scrap exports, ensuring that restrictions are kept to a minimum. 

Another missing piece is an EU-India Investment Protection Agreement, whose negotiations are still ongoing. Concluding this agreement should be a priority to enhance investor confidence and facilitate investment in energy-intensive industries and clean energy, such as green hydrogen and wind, which are particularly promising areas for European investors in India. 

The recently concluded EU-Ecuador Sustainable Investment Facilitation Agreement, which includes a first-of-its-kind Annex outlining specific provisions for investment in sustainable energy and raw materials, could serve as a model. Enhancing investment flows should go hand in hand with derisking approaches, including by scaling up Team Europe Global Gateway Investment through the European Investment Bank.

While India-EU cooperation on trade and climate still has a long way to go, the EU-India trade deal presents an important – yet incomplete – framework to sustain and deepen clean supply chain integration and the broader industrial transformation agenda. It is now up to the parties to leverage the momentum and translate intent to cooperate into binding commitments and time-bound action.

Collete van der Ven is the Founder and Director at the Geneva-based Tulip Consulting. Sanvid Tuljapurkar is the Lead, Sustainable Law at Tulip Consulting