Europe Flags Pollution In Indian Goods: What Is Carbon Tax And How Costly Is It?

Last Updated:January 27, 2026, 19:53 IST

India secures a major trade deal with the European Union, gaining access to 450 million consumers, but an EU carbon tax on exports like steel and cement dampens expected benefits

The carbon levy is expected to make products such as steel, aluminium and cement more expensive in the European market. (AI-Generated Image)

The much-hyped trade deal between India and the European Union has finally been sealed, marking one of India’s biggest trade breakthroughs in recent years. The agreement gives Indian exporters access to the combined market of 27 European nations, representing nearly 450 million consumers. While the deal is being projected as a major win for India, a key provision introduced by the European Union has tempered expectations.

As part of the agreement, the EU has decided to levy a carbon tax on select Indian products, arguing that their manufacturing processes generate higher carbon emissions. This move is seen as a significant dampener on the overall benefits of the deal for India, particularly for carbon-intensive sectors.

The carbon levy is expected to make products such as steel, aluminium and cement more expensive in the European market. As a result, export volumes from these sectors are likely to fall short of earlier projections, emerging as the biggest drawback for India under the landmark trade pact.

A carbon tax is a policy tool used by governments to curb greenhouse gas emissions and combat global warming. It places a price on carbon emissions generated during the production of goods, particularly those reliant on fossil fuels such as coal, oil and natural gas. The concept gained global traction after international climate agreements, including the Kyoto Protocol, which encouraged countries to adopt measures to penalise high emitters.

In practice, the tax is imposed based on the amount of carbon dioxide equivalent (CO2e) released. Governments typically charge a fixed amount per tonne of emissions, meaning factories with higher emissions face steeper taxes on their output. To avoid these levies, companies worldwide are increasingly shifting to renewable energy sources such as solar and wind power to cut emissions.

Globally, around 30-40 countries have already implemented some form of carbon tax. Sweden was the first to introduce it in 1991 and continues to charge among the highest rates. Several European nations, including Germany, France, Denmark, Norway and Finland, levy carbon taxes at varying levels. Outside Europe, countries such as Canada, the UK, Japan, South Korea, New Zealand and Singapore have also adopted similar regimes, while several nations in Latin America and Africa have followed suit.

Governments justify the carbon tax as a way to discourage pollution, mitigate climate change and address associated health and environmental risks. Revenues collected through the tax are often channelled into clean energy projects, climate mitigation efforts, subsidies and welfare schemes for vulnerable populations.

For India, the challenge now lies in balancing the gains of expanded access to Europe’s vast market with the added cost burden imposed by climate-linked trade measures.

News business Europe Flags Pollution In Indian Goods: What Is Carbon Tax And How Costly Is It?

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