India can take counter-balancing steps if UK's CBAM plans erode FTA concessions, sources say

Prime Minister Narendra Modi and UK's Prime Minister Keir Starmer AFP Photo

India and the United Kingdom (UK) have agreed that New Delhi can take appropriate measures to ensure market access provided under the free trade agreement (FTA) isn't eroded if London implements a proposed Carbon Border Adjustment Mechanism (CBAM), a policy that puts a price on the carbon emitted by imports.

"As the UK's CBAM proposal is still at a preparatory stage and may be implemented only from 2027, in the event that the UK's proposed CBAM results in adverse effects for the covered products, India will take appropriate measures to ensure market access provided under the FTA isn't eroded," sources said on July 25.

The UK government will implement CBAM by 2027.

The liability applied by the CBAM will depend on the greenhouse gas emissions intensity of the imported good and the gap between the carbon price applied in the country of origin (if any) and the carbon price that would have been applied had the good been produced in the UK, according to the British government.

Sources explained, "the CBAM issue has also come up in the context of European Union (EU), EU had also given some dates on implementation, so we were engaging with EU on this. Then UK also came up with CBAM plans, so we raised it with the UK that due to CBAM our concessions should not be eroded. But UK's CBAM is yet not in force, they are just contemplating and the year of implementation is 2027."

Even in the talks for a trade deal with the EU, CBAM has been one of the key sticking points for India.

EU approved CBAM in 2023 and is expected to be implement it from January 2026, seeking to impose tariffs on imports of high-carbon goods including steel, cement and aluminium, aiming to reach net-zero greenhouse emissions by 2050.

While, the UK has agreed that India can take appropriate counter balancing measures if it implements CBAM, it isn't part of the FTA signed on July 24, since the UK is yet to implement this levy.

"So it is an understanding that India can take counter balancing measure if they impose CBAM in future,' the official added.

CBAM is specifically expected to impact Indian exports of steel and iron products.

This at a time when India has got full tariff elimination from the current rates of 10-percent, for iron and steel products under the trade deal with the UK.

India currently supplies only $887 million, which is around 4.8 percent of UK’s total import demand in these categories.

"Even capturing 30–40 percent of UK’s import share could push exports in these categories close to the $7.5 billion target," the commerce ministry said on July 25.

India ships $22.36B globally in these items, therefore redirecting just around 33-percent of its global exports to the UK could meet the target, the ministry added.