A carbon credit refers to the certificate that represents a tonne of greenhouse gases that has been successfully reduced, avoided, or offset. A company earns credits by cutting emissions below a defined target, and can trade or surrender them depending on the scheme's design. On the other hand, the concept of a “carbon price” is about putting a cost directly on carbon emissions in the form of tax, charge, or cap-and-trade system that makes companies pay per each tonne of carbon emitted. The EU's Carbon Border Adjustment Mechanism (CBAM), which charges carbon embodied in certain products imported into the EU, except those coming from countries with similar carbon pricing schemes under Article 9, which allow the deduction of the carbon price. This is different from India's Carbon Credit Trading Scheme (CCTS), which issues carbon credits but not carbon price.

That distinction sets up three separate questions. First, whether compliance with CCTS constitutes a “carbon price” under the Article 9, when a firm complying with its obligations pays nothing for doing so. Second, whether the India-EU FTA's carbon-cooperation annex changes this calculus, and it does not go as far as outright recognition of CCTS, only a promise of non-discriminatory treatment. Third, whether CCTS' own dispute resolution framework makes the inquiry irrelevant even if a recognition issue would be resolved to the advantage of India, as there is a specific mechanism for addressing shortfall orders and trading conduct cases, while the dispute concerning either an entity's emissions intensity target or the results of verification procedure, these three gaps are why a carbon market at home may not, by itself, translate into a discount at the EU border.

The EU's Carbon Border Adjustment Mechanism entered its definitive phase on 1 January 2026 turning a two-year reporting exercise into a real charge on Indian exports of steel, aluminum, cement, fertilizers, hydrogen and electricity. Just weeks after that, on 27 January 2026, the Free Trade Agreement between (FTA) India and the EU was finalized with a separate annex on carbon border cooperation. By mid-2026 India's own Carbon Credit Trading Scheme (CCTS) is due to see its first compliance-market trades. This sequence of events creates a convenient story about how India developed a carbon market and now Indian exporters can benefit from it in the EU. But there is another issue that is left out of this story namely whether CCTS would qualify as a “carbon price” according to the Carbon Border Adjustment Mechanism (CBAM) provision relevant for India. And the recent draft of the European Commission says that the answer is no.

The Statutory Base, Briefly

CCTS is based on Section 14(w) of the Energy Conservation Act, 2001, introduced by the 2022 amendment, which gives the Central Government powers to define such a trading system in consultations with the Bureau of Energy Efficiency. The power to issue carbon credits certificates belongs to Section 14AA this provision is enabling while the details have been laid down in the Carbon Credit Trading Scheme 2023, published on 28 June 2023 and subsequently amended on 19 December 2023, to introduce voluntary offsetting mechanism. The scheme comprises two mechanisms a compliance mechanism and an offset mechanism. Under the compliance mechanism obligated entities are required to meet prescribed greenhouse-gas emission intensity targets and may earn Carbon Credit Certificates (CCC) upon compliance, whereas non-compliance may necessitate the purchase of additional certificates and attract environmental compensation in accordance with the scheme. The offset mechanism enables non-obligated entities to voluntarily undertake eligible activities and earn Carbon Credit Certificates for verified emission reductions.

What is important for CBAM is its structural nature CCTS does not impose a carbon price on every tonne of greenhouse gas emissions. Instead compliance obligations arise only where an entity fails to meet prescribed emissions-intensity targets. The idea reflects an understanding which is made central in the carbon accounting literature¹ a carbon footprint measure functions as a price only once a mandatory charge attaches to a defined quantity of emissions. An entity that meets its prescribed target is not required to purchase additional Carbon Credit Certificates. The EU's own Emissions Trading System by contrast is an absolute economy-wide cap moving toward full auctioning of covered tonnes. That design difference is the crux of what follows.

Article 9: A Deduction, Not a Presumption

Article 9 of the CBAM Regulation lets an EU importer deduct, from certificates it must surrender, a sum corresponding to a carbon price already effectively paid in the country of production.² This is the provision Indian industry is counting on. The Regulation defines a “carbon price” as the monetary amount paid in the third country under a carbon emissions reduction scheme whether as a tax, levy or fee, or as emission allowances under an emissions trading system. A cap-and-trade allowance or carbon tax fits without difficulty. Whether compliance under the CCTS constitutes a carbon price effectively paid within the meaning of Article 9 remains uncertain, particularly where a compliant entity incurs no direct payment obligation.

This is no longer hypothetical on 13 May 2026, the European Commission published a draft implementing regulation on exactly how Article 9 deductions will be calculated and evidenced, with consultation closing 10 June 2026. The draft names the United Kingdom, China and California among recognized jurisdictions it does not name India. It also confirms that a domestic compliance carbon-pricing system a binding tax, levy, fee or emissions trading system is the threshold condition for any deduction, precisely the category CCTS's intensity-based, credit-and-shortfall design sits outside of. This forecloses nothing permanently the rules remain open to revision, and default prices for more countries are contemplated from 2027 but the Commission's own working draft currently treats CCTS as unrecognized, not merely under review.

For a mid-sized steel exporter, the practical effect is stark. Beating the CCTS target means paying nothing domestically leaving no monetary amount for the EU importer to point to. Failing to do so will mean buying CCCs for the difference only and not the entire amount of embedded carbon for the entity in question whereas CBAM liability is calculated on the embedded emissions associated with the imported CBAM-covered goods. At best the impact of Article 9 will be minimal in relation to CBAM tax liability after the Indian exporters convince the Commission to recognize the purchase price as carbon price.

What the FTA Annex Actually Gives India

The FTA's carbon-cooperation annex guarantees a forward-looking Most-Favoured-Nation (MFN) undertaking that any CBAM flexibility the EU offers to another nation applies to India and commits both parties to technical cooperation in regards to recognizing carbon-pricing systems and verification bodies. This is indeed a positive move since for the first time it includes an actual commitment from India in the form of a treaty rather than protesting in the WTO. Read the final text and speak about a document that fails to include provisions for the automatic recognition of any future Indian system, or even the formulation of the transition flexibility, or any side-by-side mutual recognition obligation which is based on dialogue text rather. This gives India protection from discrimination rather than recognition and 13 May 2026 draft is the best example of the way the discretion will be trimmed. While Article 9 might be a doorway that CCTS has not walked through yet it becomes more of one when equivalence is determined.

The wider fairness argument belongs here too, though it should not be overstated as law. India has repeatedly argued at the WTO's Committee on Trade and Environment that CBAM applies formally equal treatment to producers facing structurally unequal decarburization capacity Common but Differentiated Responsibilities pulling one way, trade non-discrimination the other. That tension may shape the Commission's eventual discretion, but does not change what Article 9 currently requires India to demonstrate.

The Domestic Gap Feeding the External One

The uncertainty is compounded by real fragmentation in CCTS's own dispute architecture though not quite the simple appellate vacuum sometimes described. The shortfall charge is formally an “environmental compensation” order by the CPCB, not a market purchase requirement, and CPCB compensation orders are ordinarily contested before the National Green Tribunal rather than any CCTS-specific tribunal. A CCTS shortfall order would likely raise the same threshold question. Separately CERC's regulation of CCC exchange trading derives from the Electricity Act, 2003, bringing the Appellate Tribunal for Electricity into play for trading-conduct disputes. What lacks any assigned forum is the layer in between a dispute over an entity's emission-intensity target an Accredited Carbon Verification Agency (ACVA) verification finding, or the shortfall computation itself leaving only writ jurisdiction under Article 226 a mechanism not ideally suited to highly technical measurement disputes.

A regime that relies for its penalty system on a disputed interpretation of its own authorising legislation with no designated forum for sorting out its technical disputes is ill equipped to argue the details of its numbers in front of an EU equivalency analysis designed precisely to analyse such details. This does not solve the problem in either direction a CCC price might still, theoretically qualify as a carbon price, irrespective of the enforcement of the penalty system, but it provides a second, entirely independent basis for failing the recognition test.

The CCTS itself is only two years old but is far more advanced compared to many of its counterparts in the Global South. However, the prospect of protecting exporters from the CBAM has been claimed more frequently than confirmed legally. The very definition of carbon price under Article 9 relies on a monetary component that none of the most complying CCTS companies actually pays the first draft of the Commission has thus far acknowledged the systems in other jurisdictions but not those in India and the disputing structure of CCTS itself undermines the technical argument. CCTS has not failed but treating CBAM recognition as its foregone consequence is premature, and exporters currently budgeting for a discount they may not receive should plan accordingly.

References

1. T. Wiedmann and J. Minx, “A Definition of Carbon Footprint,” in C.C. Pertsova (ed.), Ecological Economics Research Trends, Ch. 1, pp. 1–11 (Nova Science Publishers, 2008).

2. Regulation (EU) 2023/956 establishing a Carbon Border Adjustment Mechanism, as amended by Regulation (EU) 2025/2083, Art. 9 and definitional provisions on “carbon price.”

Author Parul Shukla is an Assistant Professor of Law at Marwadi University, Rajkot, Gujarat & Bijendra Shandilya is a Final-year Law student at Integrated Programme in Law, Indian Institute Of Management, Rohtak. Views are personal.