Bridging the carbon gap

This article is authored by Aparna Sharma and Gopal K Sarangi.

Starting with 2026, the European Union’s Carbon Border Adjustment Mechanism (CBAM), a mechanism reasoned to plug the carbon leakage from EU to other geographies, is now transiting to its definitive phase of operation. With this transition, CBAM turns into an inescapable pillar of the global trade order. For Indian industry; particularly sectors affected by CBAM mainly steel and aluminium, the focus must now move from resistance to strategic alignment. The core of the EU-India dialogue now rests on "recognition of carbon pricing." The pivotal question for India is whether it can leverage the Paris Agreement’s Article 6 to create a synergistic domestic compliance pathway that satisfies EU requirements while keeping decarbonisation capital within its own borders.

Carbon footprint (Getty Images/iStockphoto)

The EU recently signalled that carbon prices paid under "Article 6" could be considered part of the "effective price paid" for CBAM-affected goods, provided these credits are integrated into a country's mandated compliance system. If the argument on ‘effective carbon price paid’ for EU is based on price parity of credit within compliance mechanisms, then the case for including high-priced A6 credits would be strong. Currently, the EU ETS price fluctuates between $80–$100. If Indian firms are forced to pay the difference between a nascent domestic price and the EU price, it results into capital flowing out from the country to Brussels. However, if India integrates Article 6.4 credits into its Carbon Credit Trading Scheme (CCTS), it creates a "dual-purpose" mechanism: One, where for compliance, firms surrender high-quality Article 6 credits to meet domestic obligations. Second for capital retention where, instead of a "carbon levy" exiting the country, the funds remain in India to finance high-end mitigation and removal technologies.

Firstly, it inherently entails dilution risks of integrating offsets early in the design mechanism of domestic ETS. The CCTS is in its infancy, having about to finish its first compliance cycle. The framework is based on using intensity-based targets and a "carrot" approach to acclimatise industry. Introducing offsets (like Article 6.4 units) too early can dilute the stringency of the market. Historically, offsets are used as a "safety valve" only after a market matures and caps become tight.

Secondly, to address the price gap, for an offset to meaningfully reduce a CBAM levy, high value credits shall be considered. Traditional CDM-style credits (renewables/forestry) typically trade at $20–$30—far below the EU's $90 threshold. To bridge the gap, India would need to prioritise "high-hanging fruit" activities like Carbon Capture, Utilisation, and Storage (CCUS), Green Hydrogen, or offshore wind with storage, which can fetch upwards of $100. While the list of 13 activities as part of A6 for India is focussed on high end technologies which in turn can fetch high quality credit value, the technologies end deliver time for credit issuance are usually higher. Therefore, if the industry has to benefit from investing in A6.4 credits, new activities which can fetch high value as well as shorter issuance time, will have to be included in the A6 list. Methodologies on industrial biochar that are most relevant for India would be a sure win uptake.

Beyond market design, operational artifacts of the proposed mechanism entail three critical questions:

• Direct vs. CCTS route: Will these credits be surrendered directly against CCTS obligations, or through an India Carbon Market (ICM) offset registry? The EU’s current stance suggests that for a price to be "recognised," it must be part of a formal compliance mechanism.
• Corresponding adjustments (CAs): Using Article 6.4 credits for domestic compliance requires robust accounting to avoid double-counting. Managing CAs at scale is an institutional challenge that India’s registry and MRV (Monitoring, Reporting, and Verification) systems are still evolving to meet. Building necessary governance structure becomes the key.
• Boundary alignment: There is a technical mismatch between India’s "gate-to-gate" emission estimation and the EU’s "cradle-to-gate" requirements. For Article 6 credits to be valid for CBAM, the MRV systems must be harmonized to ensure the carbon "value" is equivalent in both jurisdictions.

The use of Article 6 credits should not be an ad-hoc reaction to CBAM, but a sequenced evolution of India’s climate policy and should be carefully integrated with the design of India’s domestic cap and trade market.

To turn this into a reality, the EU must support India in designing a "CBAM-aligned Tier" within the CCTS. This would allow sectors like steel and aluminium to surrender high-cost, high-integrity Article 6 credits as a recognised form of carbon payment. This supports domestic "revenue recycling"—allowing the government to redirect that the mobilised capital into a National Decarbonization Fund rather than losing it to cross-border levies.

Ultimately, the goal is clear: India must ensure that CBAM-driven pressures do not prematurely warp its market design but rather serve as a catalyst to fast-track a high-integrity Article 6 market that serves both domestic ambition and international trade.

(The views expressed are personal)

This article is authored by Aparna Sharma, programme lead, CEEW and Gopal K Sarangi, associate professor, Department of Policy and Management Studies (DoPMS), TERI School of Advanced Studies, New Delhi, India.