India cautions of a response if the UK enforces a Carbon Tax through CBAM. Lets learn more!

Carbon Border Adjustment System (CBAS)

CBAM is a regulatory instrument launched by the European Union to guarantee that imported items face the same carbon expenses as those manufactured inside the EU.

Its goal is to stop "carbon leakage," which occurs when firms relocate production to nations with less strict carbon regulations to evade carbon expenses.

The United Kingdom, while no longer a member of the EU, is currently developing its own CBAM, leading to new trade tensions with India. It is anticipated to commence on January 1, 2027.

Effect of CBAM on Indian Exports:

Decrease price competitiveness: The carbon tax imposed on carbon-intensive products (such as steel, aluminum, cement, and fertilizers) brought in from India will raise the cost of Indian goods compared to local or other compliant imports, thereby diminishing price competitiveness.

Erodes FTA advantages: Although the FTA may cut or remove tariffs, Indian exports may still encounter substantial carbon taxes, which could greatly surpass the UK's existing average tariff rate of less than 2%.

Strain on MSMEs: Many MSMEs typically do not have the means to gauge and disclose carbon emissions, resulting in expensive CBAM compliance that could exclude them from export markets.

India's Reaction

India has characterized the CBAM as an unjust approach and a breach of the "common but differentiated responsibilities" (CBDR) principle.

The CBDR principle in multilateral climate discussions states that developed and developing nations should be regarded differently regarding their climate responsibilities. Historically, developed countries, having contributed more to pollution, should accept a larger responsibility.

India sought special consideration from the UK for Indian MSMEs under CBAM and a 'rebalancing mechanism'—a provision in the trade agreement that would indemnify Indian exporters against losses incurred from this tax. Nonetheless, the UK continues to be reluctant to provide any concessions regarding CBAM.

India included a provision pertaining to rebalancing within the “General Exceptions” section of the trade agreement draft. According to global trade regulations (such as the WTO's GATT agreement), this chapter states that a nation may take measures that usually violate trade rules, provided these actions are intended to safeguard the environment or public health.

This safeguards India from legal issues at the WTO if it takes measures against the UK’s carbon tax.

India should engage in strong negotiations with the UK to guarantee that the market access achieved through tariff removal is not hindered by additional obstacles.