India-U.K. Free Trade Agreement and Carbon Border Adjustment Mechanism
The free trade agreement (FTA) between India and the U.K. is praised by India's Minister for Commerce and Industry, Piyush Goyal, as a significant achievement. However, it faces challenges due to the U.K.'s Carbon Border Adjustment Mechanism (UK-CBAM), which is set to be implemented in January 2027. This mechanism, similar to the EU's CBAM, targets emissions in sectors like steel and aluminum.
Key Issues and Challenges
- UK-CBAM will increase costs for Indian exporters of aluminum and steel, as they will have to match the U.K.'s carbon price, currently approximately $66 per tonne of CO₂, leading to a cost increase of 20%-40%.
- Deductions for carbon pricing in exporting countries are permitted, but the scope of these deductions is unclear.
- A significant disparity exists between India's projected carbon price and the U.K.'s current carbon price.
- The unilateral setting of carbon prices disrupts international commitments under frameworks like the Paris Agreement.
Global Carbon Pricing and Coordination
- The International Monetary Fund (IMF) proposed an International Carbon Price Floor (ICPF) with differentiated pricing for countries based on income levels.
- The World Economic Forum suggests a phased approach to global carbon pricing, including linking regional carbon markets to create a cohesive system.
Recommendations for India
- The Indian government should streamline implicit carbon taxes into a unified carbon market framework.
- Initiatives like the draft climate finance taxonomy are essential for boosting clean tech investments.
- Proactive collaboration between the government and industry is necessary to enhance competitiveness and join a global carbon market.
In conclusion, India must embrace clean technologies not just as compliance tools but as pathways to efficiency, while the government facilitates this transition by enacting a cohesive carbon pricing system.
