UK’s Proposed Carbon Border Tax (CBAM)

Source: IE

Context: India has stated it will retaliate if the UK imposes a carbon tax (CBAM) on Indian exports starting January 2027, calling it a violation of the CBDR (Common But Differentiated Responsibilities) principle under international climate agreements.

About CBAM (Carbon Border Adjustment Mechanism):

• What is CBAM?

• It is a form of carbon tax on imports imposed by developed countries (like the EU or UK) based on the carbon intensity of production in the exporting country. Aims to prevent carbon leakage by equalizing carbon prices between domestic and imported goods. The UK’s version of CBAM is expected to start from January 1, 2027. Sectors like steel, aluminium, cement, and energy-intensive goods are likely to be affected first.

• It is a form of carbon tax on imports imposed by developed countries (like the EU or UK) based on the carbon intensity of production in the exporting country.

• Aims to prevent carbon leakage by equalizing carbon prices between domestic and imported goods.

• The UK’s version of CBAM is expected to start from January 1, 2027.

• Sectors like steel, aluminium, cement, and energy-intensive goods are likely to be affected first.

• India’s Key Concerns:

• Unfair Discrimination: CBAM disproportionately affects developing countries like India that have lower per capita emissions but higher carbon intensity due to developmental needs. Violation of CBDR: It goes against the UNFCCC and Paris Agreement principle of “common but differentiated responsibilities“, which acknowledges that developing countries require more time and support to decarbonize. Double Taxation Risk: Indian industries may have to pay both a UK border carbon tax and domestic environmental levies, reducing competitiveness. Impact on MSMEs: India sought a carve-out or exemption for labour-intensive MSME sectors such as textiles and leather, which was not granted.

• Unfair Discrimination: CBAM disproportionately affects developing countries like India that have lower per capita emissions but higher carbon intensity due to developmental needs.

• Violation of CBDR: It goes against the UNFCCC and Paris Agreement principle of “common but differentiated responsibilities“, which acknowledges that developing countries require more time and support to decarbonize.

• Double Taxation Risk: Indian industries may have to pay both a UK border carbon tax and domestic environmental levies, reducing competitiveness.

• Impact on MSMEs: India sought a carve-out or exemption for labour-intensive MSME sectors such as textiles and leather, which was not granted.

• Implications for Indian Trade: Even with FTA tariff cuts, exports could face effective protectionist barriers due to Indian exports in textiles, ceramics, engineering goods, steel may be disproportionately hit due to sustainability compliance costs. Could necessitate new regulations, ESG standards, and carbon tracking mechanisms within India. Risk of CBAM expanding to cover labour, IPR, and environmental compliance clauses, impacting India’s trade sovereignty.

• Even with FTA tariff cuts, exports could face effective protectionist barriers due to

• Indian exports in textiles, ceramics, engineering goods, steel may be disproportionately hit due to sustainability compliance costs.

• Could necessitate new regulations, ESG standards, and carbon tracking mechanisms within India.

• Risk of CBAM expanding to cover labour, IPR, and environmental compliance clauses, impacting India’s trade sovereignty.