Levelling the Field or Shifting Balance? India, WTO Law, and the Complexities of the EU Carbon Border Adjustment Mechanism

Authored by: Sarthak Goyal, 2nd Year (LLB), Jindal Global Law School, Sonepat

Introduction

Amidst the mounting burdens of global climate commitments and the intensifying scrutiny of carbon footprint, the European Union’s Carbon Border Adjustment Mechanism (“CBAM”) arises as one of the most ambitious regulatory interventions on the global trade stage.  Considered by many as the vital missing link in climate policy, CBAM attempts to align environmental ambition with economic pragmatism, safeguarding that the carbon price borne by EU industries is not eroded by cheaper, high-emission imports.

However, for major developing economies like India, CBAM serves as an urgent wake-up call. According to empirical analyses, material expenses of the mechanism can result in heavy burdens on Indian industry, consequently undermining competitiveness and increasing inequality. In juridical terms, this evolution raises a number of penetrating questions in WTO jurisprudence such as the implications of the most-favored-nation (MFN) provisions, national treatment provisions and the imposition of border-adjusted preferences. This evolving legal landscape necessitates that India crafts a nuanced response, harmonising robust compliance and strategic advocacy to safeguard its growth while shaping the future of equitable climate–trade governance.

Equity Implications for Developing Economies

The implementation of CBAM in January 2026, after a two-year transition period of reporting and data gathering, is positioned to restructure the rules of international trade for carbon-intensive sector. The policy has triggered stark criticism from Indian officials, who criticise it as a masked form of protectionism, contrary to the principle of ‘common but differentiated responsibilities’ enshrined in International Climate Law. The proposal to introduce the Carbon Border Adjustment Mechanism (CBAM), at least in principle, is formidable. Decarbonising the global economy necessitates that such action is not compromised by ‘carbon leakage,’ where firms reposition production to jurisdictions with weaker environmental standards, undermining the efficacy of rigorous domestic carbon-pricing regimes. The EU Emissions Trading System (ETS) has been criticised for applying a disproportionate burden on European producers, levying a substantial carbon cost on energy-intensive industries while importers from external jurisdictions stay unaffected. CBAM is framed as a corrective mechanism, intending to ‘level the playing field’ by subjecting selected imports to a carbon price attuned to mirror the liability incurred under the EU ETS. The regulatory structure of CBAM, following the Omnibus I reforms, signifies a deliberate modification to lessen transitional effects and tackle concerns for administrative workability. The regime also credits carbon prices already paid in the country of export, provided that EU recognises the country of origin’s carbon-pricing mechanism as sufficiently rigorous.

Nonetheless, for India and other developing economies, CBAM’s emergence is much more than a technical matter; it signifies a disruptive force with substantive implications. Albeit India remains a signatory to Paris Agreement and has accelerated its adoption of renewable energy and energy-efficiency measures, its development trail remains different from that of the EU. India’s per capita emissions are a fraction of those in Europe, and its economy is still undergoing industrialization, focused on millions-strong efforts to lift people from poverty, and infrastructure expansion essential for sustainable growth extensive. Enforcing a uniform carbon price on exports to EU, and disregarding divergent national contexts and historical emissions, sits uneasy with the established principles of climate equity.

Indian policymakers have been quick to highlight these asymmetries. The doctrine of ‘common but differentiated responsibilities and respective capabilities,’ enshrined in the United Nations Framework Convention on Climate Change (UNFCCC), and reaffirmed by the Paris Agreement, enables developing countries to flexible climate goals, acknowledging their distinct starting points. CBAM, by its very design, risks evading this foundational tenet, placing costs on Indian industries without due regard for India’s domestic policy space or fiscal space.  For many Indian producers, the cost of CBAM compliance, through sophisticated emission measurement systems, and investments in cleaner technologies, might erode already-thin profit margins, undermine competitiveness, and reduce jobs. Even smaller exporters below the threshold remain vulnerable to regulatory flux and might be drawn into the CBAM’s expanding ambit if thresholds are amended or EU buyers consolidate their supply chains. India has refrained from initiating a formal World Trade Organization (WTO) dispute, instead opting to address the issue within ongoing trade negotiations, like the India–EU Free Trade Agreement (FTA).

GATT Compatibility: MFN, National Treatment and Tariff Bindings

The MFN obligation under Article I GATT mandates that WTO members accord no less favourable treatment to like products originating in any other member state. CBAM, which applies to all covered goods irrespective of origin, suggesting operation on a formally neutral footing. However, if the EU credits carbon pricing mechanisms from some jurisdictions while potentially excluding India or other developing economies, the result may be indirect discriminatory results for like products. WTO jurisprudence has consistently privileged the effect of a measure over its formal structure, reaffirming that the practical operation, not the regulatory form, is determinative for the purpose of Article I. Differentiation based on the nature of a country’s climate policy, albeit seemingly objective, risks violating the Article I:1 by causing de facto discrimination.

Article III:4 of the GATT requires countries to make sure that imported goods are not treated less favourably than similar domestic goods when it comes to internal taxes and rules. The EU contends that both systems impose equivalent carbon costs, yet EU producers continue to benefit from ‘free allowances’, a transitional measure designed to moderate the impact of carbon pricing. In contrast, Indian exporters would bear the full cost of CBAM from the outset, deprived of any comparable mitigation. This asymmetry could be characterized as a violation of the national treatment obligation, especially if cumulative effect disadvantages foreign imports in relation to domestic production. Under, Article II GAT, members are bound to respect maximum tariff rates as scheduled. For many countries affected by CBAM, agreed tariff rates with the EU are very low, often less than 5%. CBAM could increase costs by an amount similar to a 20–35% import duty, raising the question whether CBAM violates WTO rules by acting as an extra customs duty under Article II, or if it is as an internal tax under Article III. The EU asserts CBAM is an internal measure designed to match the ETS. However, its operational reality, being levied at the border, enforced by customs authorities, and absent from EU tariff schedules, suggests a divergence from Article II:1. India thus possesses a substantial ground to argue that CBAM would be impossible to comply with the WTO tariff requirements of the EU unless clearly coordinated with the EU internal charges.

It is inevitable that the EU will invoke the general exceptions contained in Article XX GATT to justify CBAM as a measure to safeguard health and conserve exhaustible natural resources. WTO, has upheld climate change mitigation as a legitimate policy ground under Article XX. Nevertheless, Article XX enforces strict discipline, the measure must not constitute arbitrary or unjustifiable discrimination, nor a disguised restriction on international trade. The design of CBAM, the criteria for recognising foreign carbon pricing schemes, the treatment of free allowances, and the application of the de minimis threshold, will be examined for consistency and fairness. If CBAM’s implementation privileges certain countries or if procedural barriers reduce it inaccessible to developing-country exporters, India will have solid grounds to argue that CBAM is not an environmental measure but veiled form of protectionism.

Prospective Compliance with Reservation: India’s Future Negotiation and Dispute-Settlement Framework

It would be reductive to portray the Carbon Border Adjustment Mechanism (CBAM) solely as a tool of economic self-interest on the part of the European Union. Instead, it symbolizes CBAM as a recognition that international trade cannot remain oblivious to climate risk, and all economies have a shared obligation to internalise the environmental costs. Crucially, EU’s recognition of the responsibilities extends to the development of CBAM in ways that adjust the mechanism’s compliance burden for small importers, the recognition of foreign carbon pricing scheme, guarantee credit for legitimate foreign carbon pricing, and incorporate robust data-driven verification procedure.

However, the real-life implications, specifically to the developing states, are controversial. India faces a two-fold challenge: intensifying efforts to strengthen its technical and institutional capacity for accurate emissions measurement and reporting, and safeguarding negotiations measures at the bilateral and multilateral levels. While full-scale compliance may over time incentivise investment in cleaner technologies and more effective production processes. Nonetheless, the related transitional costs for vulnerable sectors and populations be challenging.  India’s strategic response should therefore eschew a dichotomy between compliance or outright confrontation. A pragmatic ‘compliance with reservation,’ position makes sense, including active engagement with EU authorities to secure acknowledgement of Indian mitigation efforts, while preserving the option of WTO litigation should the regime’s application turn arbitrary or discriminatory. The EU’s own vulnerability to protectionist accusations, heightened by the current geopolitical milieu, increases the negotiating leverage.

Thus, EU’s CBAM ushers in a paradigm shift in the intersection of trade and climate governance. For India, where CBAM represents both a test and an incentive, fortifying domestic measurement capacity, advocating for recognition of existing mitigation efforts, and remaining vigilant against arbitrary application. The CBAM’s legitimacy will be judged not by its stated ambition, but by the integrity and fairness of its application. Whether CBAM is viewed as an exemplary precedent or a cautionary tale will rest upon the collective readiness of the EU, India, and other trading partners to engage in constructive dialogue, and to comprehend the realities of development.