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
- 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.
- Global Governance Issues:
- CBAM seen as unilateral & protectionist, undermining UNFCCC and Paris Agreement principles of common but differentiated responsibilities (CBDR).
- Fragmented Carbon Markets:
- Different pricing across countries creates trade distortions, leakage, and compliance burdens.
Way Forward for India
- 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.
- 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.
- 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.