Context: India has strongly opposed the UK’s proposed Carbon Border Adjustment Mechanism (CBAM), citing that it reserves the right to retaliate if the UK proceeds without granting fair exemptions to Indian exporters.
Relevance of the Topic Prelims : key facts related to carbon Border Adjustment Mechanism (CBAM) Mains : Impact of CBAM on Indian exports.
Carbon Border Adjustment Mechanism (CBAM)
- CBAM is a policy tool introduced by the European Union to ensure that imported goods are subject to the same carbon costs as products produced within the EU.
- It aims to prevent "carbon leakage," where companies shift production to countries with lower carbon standards to avoid carbon costs.
- The United Kingdom, though no longer part of the EU, is now planning its own version of CBAM, which has sparked fresh trade tensions with India. It is expected to start from January 1, 2027.
Also Read: Carbon Border Adjustment Mechanism
Impact of CBAM on Indian Exports:
- Reduce price competitiveness: Carbon tax on carbon intensive goods (steel, aluminium, cement, and fertilisers etc.) imported from India will make Indian goods more expensive than local or other compliant imports reducing price Competitiveness
- Undermines FTA benefits: While the FTA might reduce or eliminate tariffs, Indian exports could still face hefty carbon taxes, potentially far exceeding the UK’s current average tariff rate of under 2%.
- Burden on MSMEs: MSMEs often lack the resources to measure and report carbon emissions, making CBAM compliance costly and potentially forcing them out of export markets.
India’s Response
- India has labelled the CBAM as an unfair measure and a violation of the "common but differentiated responsibilities" (CBDR) principle.
- CBDR principle is a multilateral climate negotiations which says developed and developing countries should not be treated the same when it comes to climate responsibilities. Developed nations, having polluted more historically, must bear a greater responsibility.
- India had requested the UK for Special treatment for Indian MSMEs under CBAM and a ‘rebalancing mechanism’ – a clause in the trade deal that would compensate Indian exporters if they suffer losses due to this tax. However the UK remains unwilling to grant any concession under CBAM.
- India inserted a clause related to rebalancing inside the “General Exceptions” chapter of the trade agreement draft. In global trade rules (like WTO’s GATT agreement), this chapter says a country can take actions that normally break trade rules, if it is doing so to protect the environment or public health.
- So, this protects India from legal trouble at the WTO, if it takes action against the UK’s carbon tax.
Also Read: India and UK conclude Free Trade Agreement
India must negotiate with UK firmly to ensure that market access gained through tariff elimination is not undermined by other barriers.