The Impact of the UK's Carbon Border Adjustment Mechanism on Indian Trade

What is the UK's Carbon Border Adjustment Mechanism (CBAM)?

The UK’s CBAM is a proposed carbon tax designed to target imported goods that exhibit high carbon emissions. Set to be introduced in 2027, this mechanism will focus on products such as aluminium, cement, ceramics, fertilisers, glass, hydrogen, and iron and steel.

How will the UK's CBAM affect Indian exports?

Under the CBAM, Indian products could encounter an additional cost equivalent to a 20–35% tariff. This increase may negate the advantages of zero duties that were established in the recent Free Trade Agreement (FTA) between India and the UK, particularly for goods that are emission-intensive.

What is India’s concern with the UK-India FTA regarding CBAM?

The Free Trade Agreement (FTA) remains silent on the issue of CBAM, failing to provide any exemptions or clauses that could mitigate its consequences. Indian officials have expressed that the country retains the right to retaliate against such additional charges.

Which Indian sectors are most likely to be impacted?

Sectors with significant carbon emissions, including steel, aluminium, fertilisers, cement, and ceramics, are expected to be the most affected. The total exports from India to the UK, valued at approximately $775 million, could face considerable challenges.

How is the EU's carbon tax relevant here?

The European Union is set to implement its own CBAM starting January 2026. Given that the UK’s CBAM aligns with this model, Indian exporters might encounter similar hurdles in both the UK and EU markets. Ongoing negotiations with the EU are also anticipated to conclude by the end of this year.

Has the UK offered any trade concessions to India?

Yes, under the FTA, the UK plans to grant duty-free access to 99% of Indian exports. In return, India is expected to progressively reduce duties on 90% of tariff lines and provide concessions on selected items including automobiles, whiskey, and gin.

What is India’s policy response?

India has articulated its concerns regarding the imposition of carbon taxes and has warned of potential retaliatory measures. The Commerce and Industry Ministry has indicated that such taxes could undermine the principles of free trade.

Why are such carbon taxes controversial?

Critics argue that Carbon Border Adjustment Mechanisms (CBAMs) serve as non-tariff barriers that disproportionately impact developing economies like India, where manufacturing processes often rely heavily on fossil fuels. Such measures could limit market access and disrupt fair competition.