Need for a Global Carbon Market Mechanism
Explore why a global carbon market mechanism is vital for fair climate action, trade equity, and decarbonisation. Learn how EU–India collaboration can shape transparent and sustainable carbon pricing systems.
Global Carbon Market Mechanism
In September 2025, India and the European Union unveiled the New Strategic EU–India Agenda, focusing on five major pillars—prosperity and sustainability, technology and innovation, security and defence, connectivity, and global issues. A central aspect of this partnership is developing a Global Carbon Market Mechanism, crucial for achieving equitable and coordinated climate action.
Why is there a need for a global carbon market mechanism?
1. Preventing Fragmentation of Climate Action:
The current global landscape of carbon pricing is fragmented. Some nations implement strict carbon taxes or cap-and-trade systems, while others have none. This uneven distribution encourages “carbon leakage”, where industries shift operations to regions with weaker climate rules. A unified global carbon market mechanism ensures consistent carbon costs across borders, creating a level playing field and stronger, coordinated climate outcomes.
2. Supporting Trade Equity and Decarbonisation:
The European Union’s Carbon Border Adjustment Mechanism (CBAM) aims to prevent carbon leakage but may unintentionally penalize exporters from developing economies. A shared market framework can enable mutual recognition of carbon pricing, ensuring exporters are not taxed twice and that global trade aligns with decarbonisation goals. This fosters fair trade and promotes the global transition to green energy.
3. Mobilising Climate Finance:
Developing countries need substantial financial resources for clean energy transitions. A credible international carbon market can attract climate finance, channeling funds into low-carbon technologies, green infrastructure, and verified offset projects. This aligns with Article 6 of the Paris Agreement, which promotes cooperative approaches and carbon trading for sustainable development.
4. Enhancing Transparency and Accountability:
Uniform global rules for Measurement, Reporting, and Verification (MRV) of emissions are vital for ensuring trust and comparability. Such transparency enables cross-border market linkages and helps investors assess the integrity of carbon credits and national targets.
How can the EU and India help in building such architectures?
1. Institutional Linkage of ETS and ICM:
The EU’s Emissions Trading System (ETS), operational since 2005, provides a mature model for market-based emissions control. India’s Carbon Credit Trading Scheme (CCTS) under the Indian Carbon Market (ICM), though new, can adopt best practices from the EU—particularly in cap-setting, registry transparency, and compliance enforcement. Collaboration can enhance institutional credibility and investor confidence.
2. Mutual Recognition and Deduction Mechanism:
A proposed linkage between EU ETS and ICM—where carbon prices paid in India are deducted from CBAM levies at EU borders—could establish the first framework for cross-border carbon equivalence. This would require shared methodologies for verifying carbon intensity, pricing parity, and maintaining verifiable emission data.
3. Capacity Building and Technology Transfer:
The EU can support India through technical assistance, digital MRV tools, and expertise in carbon accounting. This capacity-building partnership will bridge institutional gaps and help India transition towards a robust compliance-grade carbon market.
4. Collaborative Price Alignment:
Currently, carbon prices in the EU (€60–80/tonne) far exceed India’s (€5–10/tonne). To bridge this gap, a phased convergence mechanism—using Carbon Contracts for Difference (CCfDs) or minimum floor-price arrangements—can ensure equitable pricing and encourage deeper participation from developing countries.
What principles can address the issues associated with the EU’s CBAM?
Avoiding Protectionism:
Developing nations view CBAM as a potential trade barrier disguised as climate policy. Linking it to a transparent, cooperative carbon market can transform it into a legitimate tool for shared climate responsibility.
Ensuring WTO Compatibility:
A unified global market ensures non-discriminatory practices, minimizing trade disputes and aligning with World Trade Organisation (WTO) principles.
Safeguarding Sovereignty:
Voluntary, reciprocal market linkages protect national policy autonomy, ensuring cooperation without coercion.
Enhancing Predictability for Exporters:
Clear rules on mutual carbon price recognition will prevent double taxation, promote green manufacturing, and give exporters policy certainty for investment.
Conclusion:
A global carbon market mechanism offers a pathway toward harmonized climate action, sustainable finance flows, and equitable trade. By aligning efforts through EU–India cooperation, the world can move closer to achieving the Paris Agreement goals and a low-carbon global economy.
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The Source’s Authority and Ownership of the Article is Claimed By THE STUDY IAS BY MANIKANT SINGH
