Subject: Bilateral Relations

Mentor’s Comment

The European Union’s Carbon Border Adjustment Mechanism (CBAM) will enter its definitive phase from January 1, 2026, imposing a carbon-linked levy on imports based on embedded emissions. This marks a major shift because, for the first time, global trade access is increasingly being linked to carbon intensity of production rather than conventional tariffs alone. For India, sectors such as steel, cement, aluminium, fertilizers, electricity, and hydrogen face direct exposure.

What is the Carbon Border Adjustment Mechanism (CBAM)?

1. It is the European Union’s policy tool designed to put a fair price on carbon emitted during the production of carbon-intensive goods entering the EU. 
2. By charging importers for embedded emissions, it aims to prevent “carbon leakage,” ensuring EU producers are not at a disadvantage compared to foreign producers and encouraging cleaner global industrial production.

Key Aspects of CBAM:

1. Purpose: Mitigates the risk of carbon leakage, where companies move production to countries with lenient environmental regulations.
2. Covered Sectors: Initially, CBAM covers imports of iron and steel, cement, fertilizers, aluminum, hydrogen, and electricity.
3. How it Works: Importers must report the GHG emissions embedded in their products. From 2026, they will need to purchase “CBAM certificates” to pay for these emissions, aligned with the carbon price paid by EU producers under the EU Emissions Trading System (ETS).
4. Goal: The policy is a central part of the “Fit for 55” package, aiming for a 55% reduction in greenhouse gas emissions by 2030, compared to 1990 levels.

How is CBAM reshaping the rules of global trade?

1. Carbon-linked Market Access: Links export competitiveness to embedded carbon emissions rather than only product quality or price competitiveness.
2. Carbon Leakage Prevention: Imposes charges on imported products to prevent industries from relocating production to countries with weaker environmental regulations.
3. Trade Governance Shift: Moves global trade away from traditional tariff barriers toward climate-linked compliance mechanisms.
4. Policy Diffusion: Encourages wider adoption of carbon-pricing policies by developed economies, increasing compliance burdens globally.
5. Competitiveness Redefinition: Makes production efficiency dependent not only on cost but also on carbon efficiency of manufacturing processes.
6. Example: The EU’s CBAM applies to steel, cement, aluminium, fertilizers, electricity, and hydrogen, sectors with high embedded carbon intensity.

Why does CBAM pose a major challenge for India’s exports?

1. Export Competitiveness Risk: Increases costs for carbon-intensive exports entering the European market.
2. Steel and Aluminium Exposure: Creates immediate vulnerabilities because these sectors depend significantly on European markets and involve carbon-intensive production.
3. Compliance Burden: Forces exporters to adopt cleaner technologies and stricter reporting systems to retain market access.
4. Profit Margin Compression: Shrinks margins as firms absorb additional compliance costs or face stricter contractual requirements.
5. Buyer Preference Shift: Encourages European buyers to prefer low-emission suppliers, reducing competitiveness of carbon-intensive exporters.
6. Example: Although EU importers formally pay CBAM charges, the burden may shift to Indian exporters through stricter contracts and supplier selection mechanisms.

How could CBAM indirectly affect India’s domestic economy?

1. Fertilizer Price Transmission: Raises input costs because India imports fertilizers from regions affected by CBAM-related carbon pricing.
2. Import Cost Escalation: Increases prices of imported emission-intensive goods, affecting production costs domestically.
3. Agricultural Vulnerability: Raises fertilizer costs, potentially affecting farm profitability and food prices.
4. Inflationary Pressure: Creates cost-push inflation through higher import prices of industrial inputs.
5. Supply Chain Spillover: Extends impacts beyond directly targeted export sectors through global production linkages.
6. Example: Major fertilizer exporters to India, Egypt, Russia, Morocco, and China, may pass carbon-compliance costs into export prices.

How is CBAM different from traditional non-tariff measures (NTMs)?

1. Structural Difference: Functions as a price-based and quantifiable carbon levy, unlike conventional product standards.
2. Compliance Nature: Traditional NTMs rely on qualitative product standards, whereas CBAM directly prices embedded emissions.
3. Reduced Interpretational Scope: Creates measurable obligations linked to carbon emissions rather than broad compliance requirements.
4. Carbon Accountability: Establishes a direct relationship between production emissions and market access.
5. Key Distinction: Traditional product standards determine whether a product qualifies for entry. CBAM determines how expensive market access becomes based on carbon intensity.

Why are developing countries particularly vulnerable to carbon-linked trade barriers?

1. Technology Constraints: Face limited access to low-carbon technologies and cleaner industrial systems.
2. Cost Asymmetry: Experience higher transition costs because carbon-neutral production remains expensive.
3. Equity Concerns: Encounter climate-linked barriers despite historically lower contributions to global emissions.
4. Market Access Restrictions: Risk exclusion from developed markets if carbon standards tighten further.
5. Trade Negotiation Imbalance: Face pressure to comply despite differences in developmental capacity.
6. Example: India’s ongoing Free Trade Agreement (FTA) negotiations with the European Union continue even as CBAM raises concerns regarding fair market access.

What domestic reforms must India undertake to remain competitive?

1. Clean Energy Investment: Strengthens industrial decarbonisation through renewable energy and cleaner fuel adoption.
2. Carbon Efficiency: Improves industrial competitiveness through lower emission-intensive production processes.
3. Industrial Modernisation: Facilitates adoption of cleaner technologies in steel, cement, aluminium, and fertilizer sectors.
4. Soil Health Management: Reduces fertilizer dependency through effective implementation of the Soil Health Card Scheme and balanced nutrient application.
5. Domestic Production Capacity: Lowers import vulnerability by expanding local manufacturing of emission-intensive inputs.
6. Carbon Policy Framework: Ensures gradual implementation of domestic carbon-pricing mechanisms.

How should India respond at the international level?

1. Equitable Trade Negotiation: Seeks fair treatment for developing countries in climate-linked trade regimes.
2. Transition Support: Demands technology transfer and transitional finance from developed countries.
3. Climate Justice Framework: Strengthens arguments around Common But Differentiated Responsibilities (CBDR).
4. Multilateral Coordination: Builds coalitions among developing countries against discriminatory carbon-linked trade measures.
5. WTO Compatibility Concerns: Questions whether climate-linked tariffs violate principles of non-discrimination in trade.

Conclusion

CBAM represents a structural transformation in global trade where carbon intensity increasingly determines market access. For India, the challenge lies not merely in adapting to climate-linked trade regimes but in balancing industrial competitiveness, developmental priorities, and climate commitments. A calibrated strategy combining domestic industrial decarbonisation, technology adoption, and equitable global negotiations will remain essential.

Mentor’s Comment

The United States has allowed a key sanctions waiver on Russian seaborne crude to expire. This has forced major buyers like India to navigate stricter compliance amid volatile global energy markets. This shift restricts access to discounted Russian oil. The development comes at a time of heightened geopolitical instability in West Asia, maritime disruptions in critical sea lanes, and increasing vulnerability of global supply chains.

How does the U.S. decision alter the global energy equilibrium?

1. Sanctions Tightening: Restricts Russia’s ability to export seaborne oil freely, potentially reducing global supply flexibility and increasing market volatility.
2. Fragile Balancing Mechanism: Disturbs the earlier Western approach of sanctioning Russia while simultaneously preventing global price spikes through selective flexibility.
3. Geopolitical Spillover: Intensifies vulnerabilities caused by the Ukraine conflict, Red Sea disruptions, Iran-related tensions, and maritime insecurity.
4. Price Sensitivity: Alters freight rates, insurance premiums, and tanker availability, creating ripple effects across oil-importing nations.
5. Contradiction in Western Objectives: Creates tension between reducing Russia’s oil revenues and maintaining lower inflation and uninterrupted energy flows globally.

Why is India particularly vulnerable to disruptions in Russian oil trade?

1. Import Dependence: India imports nearly 90% of its crude oil requirements, making external energy shocks economically significant.
2. Third-Largest Oil Importer: India ranks among the world’s largest energy consumers, increasing exposure to global price fluctuations.
3. Discounted Russian Crude: Russian oil after 2022 acted as an economic stabiliser by reducing import bills and improving refinery margins.
4. Inflation Transmission: Rising crude prices increase transport costs, food inflation, fertiliser subsidies, and household expenditure.
5. Industrial Competitiveness: Expensive energy raises manufacturing costs and affects export competitiveness.
6. Supply Diversification: Russian imports reduced overdependence on West Asian suppliers and provided flexibility during global disruptions.

How do energy shocks transmit into India’s economy?

1. Higher Crude Prices: Increase landed import costs, widen the current account deficit, and pressure the rupee.
2. Strait of Hormuz Vulnerability: Disruptions create supply uncertainty because a large share of India’s crude and LPG imports transit through these waters.
3. Shipping Insurance Surge: Raises transportation costs due to higher war-risk premiums during geopolitical tensions.
4. Freight Disruptions: Delay cargo movement, affect inventory management, and create stock-management pressure.
5. Refinery Stress: Constrains refining margins and increases sourcing complexity.
6. Fuel Logistics Pressure: Affects LPG and petroleum product supply chains, increasing domestic energy stress.

Table: How Energy Shocks Affect India

Why are sanctions increasingly colliding with market realities?

1. Fear Premium: Oil prices react not only to shortages but also to anticipated disruptions, often driving prices sharply upward.
2. Hydrocarbon Dependence: Despite renewable expansion, global transport, aviation, petrochemicals, agriculture, and trade logistics remain heavily oil-dependent.
3. Revenue Resilience: Russia can continue earning substantial revenues through elevated prices despite reduced export volumes.
4. Market Pragmatism: Previous temporary waivers reflected recognition that excessive restrictions destabilise global markets.
5. Energy-Economics Contradiction: Harder sanctions risk worsening inflation and energy insecurity for importing economies.

How is energy security being redefined in the 21st century?

1. Shift from Physical Scarcity: Energy insecurity now stems less from supply shortages and more from disruptions in shipping, sanctions, tanker blacklisting, financial restrictions, and payment barriers.
2. Geopolitical Embeddedness: Energy flows increasingly reflect geopolitical alignments rather than purely commercial logic.
3. Maritime Risks: Strategic chokepoints such as the Strait of Hormuz and Bab-el-Mandeb have become central to global energy security.
4. Financial Vulnerability: Banking restrictions and sanctions increasingly shape energy access.
5. Strategic Competition: Energy trade is increasingly influenced by rival geopolitical blocs.

What long-term energy strategy should India adopt?

1. Strategic Petroleum Reserves (SPR): Expands emergency crude storage to cushion temporary supply disruptions.
2. Supply Diversification: Reduces excessive dependence on any single geography through diversified sourcing.
3. Domestic Exploration: Strengthens indigenous oil and gas production capacity.
4. Refining Flexibility: Enhances refinery capability to process multiple crude grades.
5. Alternative Energy Expansion: Accelerates renewable energy, green hydrogen, biofuels, and electric mobility.
6. Gas Infrastructure: Expands LNG terminals and gas networks to diversify the energy basket.
7. Maritime Security Preparedness: Strengthens naval capabilities to secure critical sea lanes.
8. Strategic Autonomy: Preserves independent energy decision-making amid competing geopolitical blocs.

Conclusion

The tightening of restrictions on Russian oil underscores the growing fusion of geopolitics and energy economics. For India, the challenge extends beyond temporary price volatility to structural energy vulnerability. Long-term resilience will depend on diversified sourcing, stronger reserves, domestic exploration, maritime preparedness, and accelerated clean-energy transition. In an increasingly fragmented world, energy security will remain central to economic sovereignty and strategic autonomy.

Mentor’s Comment

The Prime Minister of India visited Oslo, Norway on May 18 and 19 for the 3rd India-Nordic Summit. This visit was important as India’s ties with Nordic countries are entering a strategic phase. Earlier, relations focused on climate, innovation and digitalisation. However, the Ukraine war, NATO expansion, Arctic competition and critical mineral concerns have increased the region’s strategic importance for India. The Arctic is warming over three times faster than the global average, affecting India’s monsoon, Himalayan glaciers and maritime security, making closer Nordic engagement increasingly important.

How Has the Strategic Context of India-Nordic Relations Changed?

1. Shift in geopolitical environment
   1. Ukraine War: Reshaped Europe’s security architecture and altered strategic calculations.
   2. Trans-Atlantic Strains: Renewed uncertainty in European security has increased Nordic strategic importance.
   3. NATO Expansion: Finland and Sweden joining NATO has transformed Nordic security architecture.
   4. Russia-China Polar Partnership: Expands geopolitical competition into Arctic spaces through cooperation on shipping and energy.
2. Transition from functional to strategic cooperation
   1. Earlier Focus: Climate cooperation, digitalisation, innovation and blue economy dominated engagement.
   2. Present Requirement: Strategic depth involving security, maritime logistics, supply chains and critical technologies.
3. Growing convergence
   1. Technology Cooperation: Shared interests in semiconductors, AI, batteries and advanced manufacturing.
   2. Supply Chain Resilience: Reduces overdependence on concentrated global manufacturing hubs.

Why Has the Arctic Become Strategically Significant for India?

1. Climate Security
   1. Rapid Warming: Arctic warming occurs more than three times faster than the global average.
   2. Monsoon Linkages: Loss of ice in the Barents-Kara Sea affects variability in India’s summer monsoon.
   3. Sea-Level Rise: Polar melting threatens India’s coastlines, ports and island territories.
2. Economic Opportunities
   1. Shipping Routes: Melting Arctic ice enables navigation through the Northern Sea Route along Russia’s Arctic coast.
   2. Trade Connectivity: Arctic maritime routes may reduce shipping time between Asia and Europe.
   3. Energy Access: Facilitates access to hydrocarbons and alternative energy networks.
3. Security Dimensions
   1. Military Competition: The Arctic increasingly is witnessing strategic competition among major powers.
   2. Critical Infrastructure Risks: Vulnerability of undersea communication cables and digital infrastructure has increased.
4. Scientific Relevance
   1. Research Presence: India operates Himadri Research Station in Norway.
   2. Institutional Mechanism: India became an observer in the Arctic Council in 2013.
   3. Scientific Diplomacy: Supports climate monitoring and atmospheric research.

How Do Nordic Countries Enhance India’s Strategic Interests?

1. Norway
   1. Maritime Expertise: Strengthens shipping technology and sustainable maritime systems.
   2. Deep-Sea Mining: Creates opportunities in seabed resource cooperation.
2. Sweden
   1. Critical Minerals: Supports diversification in rare earths and iron ore supply chains.
   2. Advanced Manufacturing: Strengthens India’s industrial ecosystem.
3. Denmark
   1. Greenland Access: Holds strategic significance due to Greenland’s Arctic location.
   2. Shipping Routes: Enhances maritime connectivity prospects.
4. Finland
   1. Arctic Technologies: Provides expertise in cold-region infrastructure and defence technologies.
5. Iceland
   1. Geothermal Expertise: Supports renewable energy cooperation.

Can India Convert Arctic Changes into Economic Opportunities?

1. Maritime Connectivity
   1. Chennai-Vladivostok Corridor: Extending connectivity to Nordic ports can improve India-Europe trade integration.
   2. Northern Maritime Access: Strengthens alternative logistics routes amid disruptions in traditional chokepoints.
2. Shipping and Logistics
   1. Ice-Class Fleet Requirement: India requires a fleet of Arctic-capable vessels by 2030.
   2. Shipbuilding Expansion: Strengthens domestic maritime manufacturing capacity.
3. Industrial Cooperation
   1. Semiconductors: Nordic expertise complements India’s manufacturing ambitions.
   2. Green Hydrogen: Enables clean-energy partnerships.
   3. Battery Technology: Strengthens energy storage ecosystem.
4. Critical Minerals
   1. Supply Chain Diversification: Reduces excessive dependence on China-dominated processing ecosystems.

What Institutional Measures Can Strengthen India’s Arctic Strategy?

1. Special Arctic Envoy
   1. Dedicated Diplomacy: India currently lacks a permanent observer role unlike several European countries.
   2. Strategic Coordination: A Special Envoy for Arctic Affairs can institutionalise engagement.
2. Arctic-Himalaya Climate Cooperation
   1. Climate Monitoring: Joint mechanisms can track climate impacts affecting monsoons and glacial systems.
   2. Scientific Data Sharing: Strengthens predictive climate resilience.
3. India-Arctic Economic Forum
   1. Industrial Linkages: Connects Indian industry with opportunities in shipping, infrastructure and energy.
   2. Investment Facilitation: Enhances public-private partnerships.
4. Maritime Cooperation
   1. Port Modernisation: Nordic expertise supports resilient and sustainable ports.
   2. Shipping Digitisation: Strengthens logistics efficiency.

What Are the Challenges Before India’s Arctic Turn?

1. Insufficient Ice-Class Ships: Restricts India’s ability to utilise Arctic routes.
2. Great Power Rivalries: Russia-West tensions complicate Arctic engagement.
3. High Infrastructure Costs: Arctic operations require advanced technology and significant investments.
4. Governance Constraints/ Observer Status: India lacks formal decision-making power in the Arctic Council.

Conclusion

The Oslo Summit represents a strategic inflection point in India-Nordic relations. The Arctic’s growing geopolitical and economic relevance means that India can no longer treat Nordic engagement as peripheral or climate-centric. A calibrated “northward turn” through Arctic diplomacy, resilient supply chains, maritime cooperation and clean-energy partnerships can strengthen India’s strategic autonomy, climate resilience and economic competitiveness.