Carbon Pricing as Competitive Necessity: India and Turkey Adjust to a New Trade Reality

Carbon pricing entered policy discourse as a domestic environmental instrument. Its logic was internally coherent: by placing a price on emissions, governments could internalise the external cost of carbon into the production decisions of firms, shifting incentives toward cleaner technologies without mandating specific technological choices. For the better part of three decades, the argument for carbon pricing was made primarily to domestic audiences, contested primarily by domestic industry, and evaluated primarily against domestic emissions trajectories. That framing is now obsolete. On 1 January 2026, the European Union’s Carbon Border Adjustment Mechanism converted carbon pricing from a domestic policy choice into a condition of EU market access. A country that does not price carbon does not avoid the cost of its emissions. It pays that cost to the EU.

The structural shift is most clearly visible in the fiscal arithmetic. India exports between $8.4 billion and $9.2 billion in CBAM-covered goods to the EU annually across steel, aluminium, cement and fertilisers, according to the Global Trade Research Initiative and Ministry of Commerce data for 2025. The European Union, through CBAM, is now entitled to charge carbon certificates on the embedded emissions in those goods at the weekly average ETS price, currently €84.50 per tonne, minus any carbon cost already paid in India. If India’s Carbon Credit Trading Scheme carbon price is ₹1,200 per tonne and the EU price is €84.50, the deduction India can claim is approximately 17 per cent of the EU cost. The remaining 83 per cent constitutes revenue that flows to Brussels rather than New Delhi. The policy choice between building a credible domestic carbon price and paying CBAM certificates is, in these terms, precisely a choice between domestic revenue sovereignty and external fiscal transfer.

The analytical tendency to frame India’s CBAM exposure as a steel problem understates the full liability. Steel is the dominant component: 3.2 million tonnes exported to the EU in FY2024-25, valued at $4.8 billion, with an emissions intensity of 2.5 tonnes of CO2 per tonne of crude steel against an EU benchmark of 1.4 tonnes, according to World Steel Association and Indian Steel Association data. But aluminium and fertilisers compound the aggregate exposure significantly. India exported 224,500 tonnes of aluminium to the EU in FY2024-25, valued at $684 million. It exported 112,000 tonnes of fertilisers, primarily urea and ammonia derivatives, valued at $142 million. Together with steel, the aggregate CBAM-exposed export value runs between $8.4 billion and $9.2 billion, representing 16.4 per cent of India’s total merchandise exports to the EU according to Ministry of Commerce and DGFT data.

The sectoral variation in India’s exposure is analytically important because the decarbonisation pathways differ substantially across sectors. Steel has a structural advantage that the previous articles in this series have noted: India’s production is already 54 per cent electric arc furnace and induction furnace based, primarily using direct reduction iron, according to Indian Steel Association and World Steel Association 2024 data. This gives India a faster route to green hydrogen DRI than China, which is more heavily committed to blast furnace assets. Aluminium presents a starker challenge: approximately 85 per cent of India’s aluminium smelting is powered by coal-fired captive power plants according to NALCO and International Aluminium Institute data, with renewable energy accounting for only 15 per cent through round-the-clock renewable tender arrangements. Fertiliser decarbonisation requires either green hydrogen feedstock for urea production or carbon capture on conventional ammonia plants. Each pathway has a different timeline, a different capital requirement and a different interaction with India’s energy structure.

The Carbon Credit Trading Scheme, notified on 28 June 2023 and covering 11 industrial sectors including steel, cement and fertilisers, entered its compliance phase and commenced trading in November 2025. The Bureau of Energy Efficiency and MoEFCC data for early 2026 confirms that the CCTS is operational rather than merely legislated, with early market trades establishing an indicative carbon credit price of ₹1,200 to ₹1,500 per tonne of CO2 equivalent. This is a significant institutional development. It means India has moved from a purely efficiency-based carbon reduction framework under the Perform Achieve and Trade scheme to a market-based pricing mechanism that generates a tradeable carbon credit with a price signal attached.

The PAT scheme deserves recognition as the institutional foundation that makes the CCTS credible. Across six completed cycles, PAT has achieved 25.75 million tonnes of oil equivalent in cumulative energy savings from 1,333 designated consumers, generating ₹55,600 crore, approximately $6.7 billion, in cost savings according to BEE Annual Report 2024-25. These are not trivial numbers. They demonstrate that Indian industrial facilities are capable of monitoring, reporting and verifying energy performance data at the level of precision required for carbon trading, and that the institutional infrastructure for a compliance-based energy and carbon scheme has been functioning for over a decade. The CCTS builds on this foundation rather than starting from scratch, which is why its November 2025 launch was credible rather than aspirational.

The gap between the CCTS and CBAM equivalence remains substantial, however. The European Commission has acknowledged India’s CCTS through the India-EU Trade and Technology Council but has not granted formal equivalence for carbon price deduction under CBAM. Technical dialogues on monitoring, reporting and verification standards are ongoing according to EC DG TAXUD and TTC sources for 2025. The core obstacle is the price gap: the EC’s CBAM equivalence framework requires not just the existence of a domestic carbon price but a price level and coverage comparable to the EU ETS. At ₹1,200 against €84.50, India’s current CCTS price is approximately 17 cents on the euro. Formal equivalence, if achievable, would require either a substantial increase in the CCTS price, a broader definition of equivalence that incorporates intensity-based reductions rather than absolute price parity, or a combination of both. The India-EU dialogue appears to be exploring the second route. Its outcome will determine whether billions in annual CBAM certificates remain payable or become deductible.

The single most important structural constraint on India’s carbon pricing ambition is its electricity generation mix. Coal accounts for 71.4 per cent of total units generated in India according to the Central Electricity Authority Monthly Generation Report for December 2025. India’s total installed power capacity stands at 520.5 gigawatts as of January 2026, with coal at 227.8 gigawatts, renewables at 201.2 gigawatts, hydro at 51.2 gigawatts, nuclear at 8.8 gigawatts and gas at 20.7 gigawatts. The non-fossil total of 271.9 gigawatts represents 54.4 per cent of India’s 500 gigawatt non-fossil capacity target, meaning roughly half the target has been achieved.

The distinction between installed capacity and actual generation is critical to understanding this data. India added a record 22.4 gigawatts of renewable capacity in FY2024-25 according to MNRE, yet coal still accounts for 71.4 per cent of generation. This apparent contradiction reflects the capacity factor differential between coal plants and intermittent renewables: a coal plant running at 65 per cent capacity factor generates substantially more electricity per gigawatt of installed capacity than a solar plant running at 18 to 22 per cent. The transition from installed capacity to generation dominance requires not only more renewable capacity but more storage, grid reinforcement, and demand flexibility. The energy architecture article earlier in the India 2.0 series documented this infrastructure gap in detail. For CBAM purposes, what matters is that a steel plant or aluminium smelter drawing from India’s grid is drawing on a grid that is 71.4 per cent coal-powered, and that the carbon content of that grid electricity is embedded in the CBAM calculation for electricity-intensive products.

Turkey’s CBAM exposure and its institutional response differ from India’s in both character and pace. Turkey exported 4.1 million tonnes of steel to the EU in 2024, valued at €3.8 billion, against a total two-way EU goods trade of €212 billion according to Eurostat and the Turkish Steel Producers Association. The EU is not a significant export destination for Turkey: it is the central one. The customs union relationship that has governed Turkey-EU goods trade since 1996 means that Turkey’s industrial exporters are structurally integrated into European supply chains in a way that most other CBAM-affected economies are not. When the EU imposes a carbon border mechanism, Turkey does not face a trade policy problem. It faces a supply chain continuity problem.

Turkey’s emissions intensity for steel is 1.6 tonnes of CO2 per tonne of crude steel according to World Steel Association 2024 data, below India’s 2.5 tonnes and closer to the EU benchmark of 1.4 tonnes. This advantage reflects Turkey’s higher reliance on electric arc furnace production, driven partly by Turkey’s significant scrap metal availability and its historically lower electricity prices when hydroelectric capacity runs near full. Turkey’s electricity generation mix is comparatively less coal-dependent than India’s: renewables account for 42 per cent of generation, coal for 34 per cent and gas for 21 per cent according to TEIAS and IEA Turkey Review data for 2024. This structural position means Turkey’s CBAM liability, while substantial at €1.2 billion annually according to UNCTAD and the Turkish Exporters Assembly, is more manageable per unit of exported product than India’s, and the pathway to closing the EU carbon price gap is correspondingly shorter.

The institutional response has been rapid. Turkey passed its Climate Law in May 2025. A pilot Emissions Trading System launched in October 2025, covering high-emitter sectors aligned with CBAM requirements. Full ETS operation is scheduled for January 2027, according to the Ministry of Environment, Urbanisation and Climate Change. If the Turkey ETS is accepted as CBAM-equivalent, Turkish exporters would be able to deduct their domestic carbon cost from CBAM certificate obligations. The January 2027 full operation date gives Turkey approximately three years before the CBAM free allowance phaseout compresses to 51.5 per cent in 2030, creating a meaningful window to establish equivalence before the financial cost becomes fully acute.

The revenue dimension of carbon pricing is often treated as secondary to the environmental objective. For governments managing constrained fiscal positions in a period of high debt service costs and development spending pressure, it is not secondary at all. India’s coal cess, currently set at ₹400 per tonne under the Finance Act 2025, generates revenue that was originally directed toward the National Clean Energy Fund for climate investment. That fund is now dormant: its functions have been absorbed into general budgetary allocations according to Ministry of Finance data. The revenue from the cess continues to flow, but into GST compensation mechanisms rather than dedicated energy transition investment. India is already taxing carbon-intensive fuels and not ring-fencing the revenue for climate purposes, which represents a policy inconsistency that the CCTS architecture could resolve if the carbon credit price escalates and the revenue recycling mechanism is redesigned.

The fiscal sovereignty argument for domestic carbon pricing is most visible when stated in comparative terms. India’s CBAM liability is estimated at $1.1 billion to $1.6 billion annually by 2030. That is money leaving India. A CCTS price at CBAM-equivalent levels, covering the same sectors and emissions volumes, would generate the same revenue domestically, available for industrial transition subsidies, household energy cost compensation, renewable energy investment or fiscal consolidation. The choice is not between paying carbon costs and not paying them. It is between paying them to Brussels and retaining them in New Delhi. India issued ₹20,000 crore, approximately $2.4 billion, in sovereign green bonds in FY2024-25 at a coupon 5 to 10 basis points below the standard government securities curve, demonstrating that investor demand for climate-labelled Indian sovereign paper exists at below-market rates. A properly structured carbon revenue recycling framework could amplify that signal further.

Carbon pricing changes incentives. It does not provide capital. The distinction matters enormously for the sectoral decarbonisation that CBAM ultimately requires. India’s aluminium sector, with 85 per cent of smelting powered by coal-fired captive plants, cannot decarbonise through price signals alone. It requires capital investment in renewable power, grid connectivity, storage and potentially new smelter designs compatible with variable renewable supply. India’s green bond market stands at $32.5 billion in total outstanding issuance across all issuers according to SEBI and Climate Bonds Initiative data for 2025. The Asian Development Bank provided $3.1 billion in climate finance to India in 2024 according to its Annual Report. India’s total FDI inflow in FY2024-25 was $74.2 billion according to DPIIT, of which $2.8 billion, approximately 3.8 per cent, was directed to renewable energy according to DPIIT and RBI data.

These are not negligible figures, and the trend direction is positive. But the scale of required transition investment dwarfs the current climate finance flows. The IEA estimates $4.4 trillion in steel sector investment alone to 2050, with approximately 60 per cent of new capacity investment needing to occur in emerging economies. Against that backdrop, $3.1 billion in ADB climate finance to India and $2.8 billion in renewable energy FDI represent meaningful but insufficient starting points. The global ESG assets under management estimate of $44 trillion from the Global Sustainable Investment Alliance and BloombergNEF indicates that the capital exists in aggregate. The question is the mobilisation mechanism: what combination of carbon price signals, concessional finance, de-risking instruments and regulatory clarity will direct a meaningful fraction of that $44 trillion toward the industrial decarbonisation of India and Turkey specifically. That question is not answered by CBAM alone. It requires the financial architecture that CBAM revenue, if redistributed, could begin to fund.

The political economy of carbon pricing in India is inseparable from the employment reality of coal. India’s coal sector supports approximately 3.2 million workers in direct and indirect employment, with Coal India Limited alone employing 234,000 people according to Ministry of Coal and CIL Annual Report 2023-24 data. The steel sector supports approximately 2.5 million workers directly and indirectly according to the Ministry of Steel. These are not abstract numbers. They represent concentrated employment in specific geographic regions, primarily Jharkhand, Chhattisgarh, Odisha and West Bengal, where the political economy of carbon policy is experienced not as a climate finance calculation but as a question of household income and regional economic survival.

Niti Aayog launched a just transition framework for eight pilot districts, primarily in Jharkhand and Chhattisgarh, in August 2025 as a formal acknowledgement that the coal transition carries a social obligation that the industrial policy framework alone cannot discharge. This is institutionally significant. It indicates that the Indian government has moved from a position of resisting the coal transition narrative to actively designing the social infrastructure around it. The pilot districts approach is modest in scope relative to the scale of coal dependency, but it represents a policy architecture that can be expanded as fiscal space and political conditions evolve. Carbon revenue that is retained domestically through a credible CCTS, rather than transferred to Brussels through CBAM certificates, is a natural funding source for precisely this kind of transition support. The revenue sovereignty and the just transition arguments are not separate policy cases. They are the same fiscal argument stated from different perspectives.

CBAM is not the only carbon border mechanism under development. The United Kingdom is advancing its own carbon border adjustment mechanism covering analogous sectors, with an implementation timeline under active development by HM Treasury and HMRC. The United States has the PROVE IT Act and the Clean Competition Act in Congressional review according to the Congressional Research Service for 2025, both of which mirror the CBAM logic for domestic industry protection purposes. If each jurisdiction implements carbon border measures using divergent sector coverage, different benchmark emissions methodologies and different certificate pricing mechanisms, the compliance burden on major exporters multiplies rather than harmonises.

For India and Turkey, the practical implication of regulatory fragmentation is that building CBAM compliance infrastructure for the EU does not automatically build equivalent infrastructure for the US, UK or any other jurisdiction that implements comparable measures. The monitoring, reporting and verification systems, the audit trails, the sector-specific embedded emissions accounting and the administrative resources required for each regime must be configured to that regime’s methodology. Large integrated steel groups with dedicated compliance teams and sophisticated enterprise resource planning systems can adapt. Smaller Indian steel mills and Turkish cement producers, for whom the fixed compliance cost represents a larger share of operating expenses, face a more significant burden. Regulatory fragmentation benefits scale. It systematically disadvantages the smaller and less institutionally sophisticated producers who are disproportionately represented in developing economy export sectors.

Carbon pricing operates as an investor signal independently of its direct emissions effect. A government that establishes a credible, escalating carbon price is communicating regulatory predictability, transition commitment and a willingness to impose costs on domestic industry in the service of a long-term structural objective. These are signals that institutional investors managing portfolios against global ESG benchmarks use to assess country-level policy risk. Global ESG assets under management are estimated at $44 trillion according to the Global Sustainable Investment Alliance and BloombergNEF. Even a marginal reallocation of those assets toward economies with credible carbon pricing frameworks represents a significant capital flow.

India’s sovereign green bonds, issued at a coupon 5 to 10 basis points below the standard government securities curve in FY2024-25, demonstrate that the investor appetite for climate-labelled Indian sovereign paper is real and price-competitive. The $32.5 billion green bond market across all Indian issuers confirms that corporate and financial institution green issuance has also established a functioning market. The CCTS, if it escalates toward CBAM-equivalent levels and if the MRV framework achieves international credibility, would strengthen these investor signals further: it would signal that India’s carbon reduction commitments are backed by a functioning price mechanism rather than solely by regulatory mandates and efficiency targets.

India and Turkey face the same fundamental strategic choice that the previous article in this series identified as the determinant of CBAM’s global climate outcome: whether to respond to carbon border costs by decarbonising production or by redirecting exports toward markets without carbon pricing. The diversion data from India, which increased steel exports to MENA and Southeast Asia by 14 per cent since mid-2023, shows that both strategies are occurring simultaneously. The CCTS and Turkey’s ETS development indicate that decarbonisation investment and institutional carbon market building are proceeding alongside the commercial trade reorientation. These are not mutually exclusive responses. They are parallel adaptations to the same incentive structure, and the relative weight of each will be determined by the pace of carbon price escalation, the availability of transition capital and the institutional speed at which CBAM equivalence can be achieved.

Turkey’s position is more strategically coherent than India’s because its EU dependency makes managed diversion a less viable long-run option. With €212 billion in total EU goods trade and a customs union that has defined Turkish industrial strategy for three decades, Turkey cannot substantially redirect its export base away from Europe without restructuring its entire industrial geography. The CBAM alignment strategy is, in Turkey’s case, the only commercially rational response. India’s position is more complex because its export markets are more geographically diversified: the EU represents 16.4 per cent of merchandise exports, significant but not determinative. India has more room to divert, which is both an economic hedge and a structural disincentive for the rapid carbon price escalation that CBAM equivalence requires. The strategic question for Indian industrial policy is whether the revenue sovereignty argument, the investor signalling benefit and the long-run EU market preservation case collectively outweigh the short-run competitive cost of a higher domestic carbon price. The CCTS launch and the PAT scheme’s institutional foundation suggest the direction of travel is toward internalisation. The pace remains the open question.

India’s 54 per cent EAF and DRI production route is a structural asset that the BF-BOF dominated economies do not have. It makes green hydrogen integration faster and cheaper because DRI plants can be retrofitted for hydrogen feedstock more readily than blast furnaces can be decommissioned and replaced. The NDC commitment to 45 per cent GDP emissions intensity reduction by 2030 and 500 gigawatts of non-fossil capacity, with 271.9 gigawatts already achieved, provides the macro framework within which the CCTS and CBAM response sit. The institutional capacity demonstrated by the PAT scheme across 1,333 designated consumers and 25.75 MTOE of cumulative energy savings confirms that the carbon reduction infrastructure is real rather than aspirational. What remains to be built is the price escalation pathway, the CBAM equivalence framework and the capital mobilisation architecture that converts institutional capacity into the full industrial transition that both India’s domestic ambitions and Europe’s trade architecture now require.