Why in News: India–U.K. Free Trade Agreement (FTA) signed recently, but its gains may be offset by the U.K.’s upcoming Carbon Border Adjustment Mechanism (UK-CBAM), effective January 2027.
Introduction
- India’s recently concluded India–U.K. Free Trade Agreement (FTA), hailed as a “gold standard” by the Commerce Minister, promises tariff reductions and improved market access.
- However, its benefits risk being eroded by the upcoming U.K. Carbon Border Adjustment Mechanism (UK-CBAM), effective from January 2027.
- This measure mirrors the European Union’s CBAM and aims to level the playing field by imposing carbon-linked tariffs on imports.
- The development raises critical concerns about India’s export competitiveness, climate policy alignment, and multilateral trade fairness.
UK-CBAM and Its Implications for India
- Scope of CBAM: Covers both direct and indirect emissions for hard-to-abate sectors (steel, aluminium), including emissions from electricity use. To be expanded later.
- Tariff Neutralisation: U.K.’s current carbon price is ~$66/tCO2, implying a 20–40% cost increase for Indian exporters post-2027.
- FTA vs CBAM: Though the FTA reduces tariffs (0–6% → zero), CBAM offsets these gains.
- Credit Provisions: CBAM allows deductions for carbon prices in exporting countries. But uncertainty remains whether U.K. will recognise India’s implicit levies (coal cess, Renewable Purchase Obligations) beyond the explicit Carbon Credit Trading Scheme (CCTS).
- Price Gap: India’s projected carbon price ($8–10/tCO2) vs U.K.’s $66/tCO2 highlights competitiveness risks.
Broader Concerns
Trade & Competitiveness
- Export-oriented sectors (steel, aluminium, cement in future) face higher compliance costs.
- May trigger retaliatory tariffs → risk of trade tensions.
- Distorts the “level-playing field” promised under WTO.
Fragmented Carbon Markets
- Different pricing regimes across EU, U.K., China, India → increases reporting and monitoring costs.
- Leads to carbon leakage (industries relocating to low-regulation jurisdictions).
- Multilateralism undermined; Paris Agreement principles sidestepped.
Equity & Climate Justice
- Uniform carbon pricing disregards diverse energy mixes, developmental priorities, and technological capacities of countries.
- Developing countries bear disproportionate compliance burden.
Domestic Gaps in India
- Multiple overlapping levies (coal cess, RPOs, state-level taxes).
- CCTS is yet to mature, with weak price discovery and monitoring mechanisms.
- Industry sees clean tech more as compliance than competitiveness tool.
Global Perspectives on Carbon Pricing
IMF (2021): Proposed International Carbon Price Floor (ICPF):
- $25/t for low-income nations.
- $50/t for middle-income.
- $75/t for high-income.
World Economic Forum Proposal:
- Three-phased approach: minimum standards, linking regional carbon markets, harmonised monitoring & reporting.
- Multilateral Reports (2024): Warn of distortions & leakage due to fragmented carbon markets → call for global coordination.
India’s Strategic Options
Domestic Policy Action
- Unify Carbon Pricing: Streamline implicit taxes into a single explicit carbon tax under CCTS.
- Carbon Price Discovery: Transparent monitoring and stricter emission caps.
- Revenue Utilisation: Plough carbon tax revenues into industrial decarbonisation & clean tech.
- Climate Finance Taxonomy: Finalise Ministry of Finance’s taxonomy to attract investors.
Trade Diplomacy
- Negotiate flexibilities in FTAs (similar to U.S.–EU agreement on CBAM).
- Align with like-minded developing economies to demand recognition of domestic carbon costs.
- Push for multilateral dialogue under WTO & UNFCCC to address inequities.
Industry Strategy
- Adopt clean technologies as efficiency enhancers, not just compliance burdens.
- Invest in renewable integration, hydrogen, carbon capture, and efficiency standards.
- Leverage government incentives (PLI schemes, green bonds, tax credits).
Way Forward
- Short Term: Consolidate domestic carbon pricing under CCTS, negotiate carve-outs/recognition of Indian levies in FTAs.
- Medium Term: Build regional carbon market linkages (India–ASEAN, BRICS, China).
- Long Term: Work toward a Global Carbon Pricing Framework with tiered responsibilities, ensuring equity, finance, and technology transfer.
UPSC Relevance
GS Paper II – Governance & International Relations
- India–U.K. Free Trade Agreement and emerging trade barriers.
GS Paper III – Economy & Environment
- Carbon Pricing & Carbon Border Adjustment Mechanisms (CBAMs) as new-age trade–climate instruments.
Mains Practice Question
Q. The United Kingdom’s upcoming Carbon Border Adjustment Mechanism (CBAM) poses both a challenge and an opportunity for India’s trade and climate strategy. Critically analyse its implications for India’s exports and suggest measures to build a coherent carbon pricing framework that balances competitiveness with climate commitments. (GS-III, 250 words)