Rethinking Carbon Pricing and Taxes

GS2 – International Relations

Context
  • India’s FTA with the U.K., termed the gold standard, brings tariff benefits.
  • However, the U.K. is set to implement its Carbon Border Adjustment Mechanism (UK-CBAM) in January 2027, modeled on the EU-CBAM.
  • This move threatens to offset India’s trade gains, especially in steel and aluminium sectors.
About the UK-CBAM
  • Covers direct and indirect emissions in hard-to-abate sectors like steel and aluminium, including electricity used in production.
  • Will expand to other products later.
  • Operates by charging imports the same carbon price as paid by U.K. domestic producers.
  • Current U.K. carbon price: $66 per tonne of CO2.
Impact on India’s Exports
  • Under the India–U.K. FTA → tariffs for Indian steel & aluminium exports reduced to 0%.
  • From 2027, these exports face UK-CBAM charges.
    • Cost increase projected: 20%–40% for Indian exporters.
  • India’s current carbon pricing under the Carbon Credit Trading Scheme (CCTS): ~$8–10 per tonne CO2.
  • Large gap between Indian and U.K. carbon prices → risks severe competitiveness loss.
Key Challenges for India
  1. Recognition of Indian Carbon Levies:
    • India has implicit costs (coal cess, renewable purchase obligation, CCTS).
    • Unclear if U.K. will accept these as valid deductions.
  2. Global Governance Issues:
    • CBAM seen as unilateral & protectionist, undermining UNFCCC and Paris Agreement principles of common but differentiated responsibilities (CBDR).
  3. Fragmented Carbon Markets:
    • Different pricing across countries creates trade distortions, leakage, and compliance burdens.
Way Forward for India
  1. National Actions
  • Unify carbon framework – integrate existing levies into CCTS (Carbon Credit Trading Scheme).
  • Single carbon tax – ensures clear price signals & easy compliance.
  • Recycle revenues – invest carbon tax proceeds into decarbonisation & clean tech.
  • Climate finance taxonomy – adopt MoF draft to attract private investment in green technologies.
  1. International Strategy
  • Push global coordination – advocate in WTO, G20, UNFCCC for fair carbon pricing rules.
  • Coalition with developing nations – counter inequitable CBAM (Carbon Border Adjustment Mechanism) measures.
  • Bilateral safeguards – explore trade-friendly flexibilities (e.g., U.S.–EU model) to protect Indian exports.
  1. Industry Perspective
  • Reframe clean tech – see it as a driver of efficiency & competitiveness, not just compliance.
  • Future readiness – prepare for stringent carbon standards in export markets.
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