India’s recent free trade agreement (FTA) with the U.K. promises enhanced market access. However, the introduction of the U.K.’s Carbon Border Adjustment Mechanism (UK-CBAM) from January 2027 poses challenges. UK-CBAM will impose costs on carbon emissions embedded in imports, especially in steel and aluminium sectors. This new policy could offset the benefits of tariff reductions under the FTA and affect India’s export competitiveness.
Overview of the India-U.K. Free Trade Agreement
The India-U.K. FTA eliminates tariffs on key exports like steel and aluminium. Previously, U.K. tariffs ranged from 0 to 6%. Post-agreement, these duties fall to zero, seemingly benefiting Indian exporters. The deal aims to increase bilateral trade and strengthen economic ties.
Introduction and Scope of UK-CBAM
UK-CBAM will start in 2027 targeting industries with high emissions. It covers direct emissions and indirect ones such as electricity use in production. Initially focused on steel and aluminium, its scope will widen to other products over time. The mechanism charges importers a carbon price aligned with UK domestic rates, currently about $66 per tonne of CO₂.
Impact on Indian Exports and Industry
Although tariffs reduce to zero, UK-CBAM imposes a carbon cost on Indian exporters. India’s carbon price is estimated at $8–10 per tonne, far below the U.K.’s $66. This gap means Indian exporters could face a 20-40% cost increase. Whether the U.K. will recognise India’s existing carbon levies beyond the Carbon Credit Trading Scheme (CCTS) remains unclear. This uncertainty threatens export competitiveness.
Challenges of Carbon Pricing Fragmentation
Multiple uncoordinated carbon pricing systems cause market distortions, compliance costs, and trade disruptions. The U.K.’s unilateral carbon price contradicts multilateral climate commitments under the Paris Agreement. Emission levels and energy mixes vary across countries, making a single global carbon price difficult. Fragmented systems risk leakage and undermine net-zero goals.
Global Efforts Towards Carbon Pricing Coordination
International bodies advocate for harmonised carbon markets. The International Monetary Fund proposed an International Carbon Price Floor with tiered prices for different income groups. The World Economic Forum suggests phased global integration of carbon markets through minimum standards, linked regional systems, and harmonised reporting. Such cooperation could reduce fragmentation and ease trade tensions.
India’s National Strategy and Policy Recommendations
India must unify existing carbon levies into a single explicit carbon tax under the CCTS. This would improve price transparency, ease compliance, and maintain industrial competitiveness. Revenues should fund industrial decarbonisation and clean technology. The government’s draft climate finance taxonomy aims to attract green investments. Proactive domestic action is crucial amid rising protectionism and fragmented global carbon policies.
Questions for UPSC:
- Critically analyse the impact of Carbon Border Adjustment Mechanisms on international trade and global climate goals.
- Explain the challenges of implementing a uniform global carbon pricing system and suggest possible solutions with examples.
- What are the implications of rising protectionism on multilateral trade agreements? How can developing countries safeguard their interests?
- With suitable examples, comment on the role of national carbon markets in achieving emission reduction targets and supporting sustainable development.
