Breathe Easy—For Now: India Ducks UK’s Border Tax with Tactical Grace

India's recent Free Trade Agreement with the United Kingdom has fueled furor over the upcoming climate-related Carbon Border Adjustment Mechanism (CBAM) that will be launched in 2027. Although the UK carbon tax was not mentioned in the agreement per se, India has achieved a diplomatic understanding that provides room for future corrective measures.

Significant developments and implications

The UK carbon border adjustment levy will be charged on carbon-producing imports such as steel, aluminium, cement, and fertilisers, with tariffs of between 14 and 24 percent

India was unable to get CBAM exemption on a formal footing in the FTA, resulting in export competitiveness concerns of value worth USD 775 million

Other than the exclusion, India is entitled to rebalance concessions in case CBAM undermines trade gains, as indicated by a note verbale between the two governments

Strategic positioning and direction ahead:

India flagged CBAM as a non-tariff trade barrier during negotiations, arguing it disproportionately affects developing economies

Trade and Commerce Minister Piyush Goyal threatened to retaliate in case carbon duties are levied, terming such duties discriminatory

India is considering local green certification and levies linked to sustainability to compensate for the effect of CBAM and preserve international climate norms

Despite the UK's continued assertion that CBAM remains non-enforceable and hence beyond the legal text of the FTA, the two nations agreed to return to the negotiating table as implementation draws near. Indian exporters keep their fingers crossed for the time being as policymakers prepare for the balancing act between climate diplomacy and trade.

Sources: Outlook Business, The Hindu Business Line, New Indian Express, Economic Times, BusinessWorld, OrissaPOST, MSN India