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.

2. 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.

3. 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.