Exports worth $775 million are in the crosshairs as the UK unveils CBAM, which is likely to pose a new set of challenges and opportunities in global trade dynamics
In a strategic move that could reset economic dynamics, the United Kingdom unveiled plans on December 18 to introduce a Carbon Border Adjustment Mechanism (CBAM) in 2027. The potentially disruptive decision is poised to significantly dent India's $775 million exports to the UK.
The Global Trade Research Initiative (GTRI), a renowned economic think tank, has cautioned that crucial sectors such as iron, steel, aluminium, fertilisers, and cement will bear the brunt of this carbon tax. The UK, set to become the second economy after the European Union (EU) to implement CBAM, aims to tackle carbon leakage and level the playing field for domestic producers.
The GTRI report reveals that Indian exports to the UK, totaling $775 million, may be subject to the CBAM tax, with specific goods like iron ($565.7 million), steel, aluminium ($101.5 million), ceramics (82.8 million), and glass ($25 million) in the crosshairs. This amounts to 6.8 percent of the total exports to the UK and reflects a significant impact on India's trade landscape.
Ajay Srivastava, Co-Founder of GTRI, emphasised the potential severity of the tax, ranging from 14 to 24 percent of the import value, based on the full phase-out of free allowances under the Emission Trading System (ETS). The UK government's primary objective is to prevent carbon leakage, a phenomenon where companies relocate production to countries with lax environmental regulations to evade UK carbon prices.
The tax calculation for imported goods will be based on the estimated carbon emissions produced during their production. However, countries with carbon pricing schemes equivalent to the UK's will be exempted from this tax. The UK and the EU have implemented ETS systems to regulate greenhouse gas emissions, and the CBAM will work alongside the existing UK ETS.
In addition to mirroring the EU model, the UK is exploring initiatives such as voluntary product standards and a framework to measure the carbon content of goods. These measures align with the broader goal of promoting low-carbon products and supporting comprehensive decarbonisation policies.
As the UK moves ahead with these transformative changes, the international business community, including India, faces the challenge of adapting to a carbon-conscious trade landscape that prioritises environmental sustainability and fair competition. The repercussions of the UK's Carbon Border Adjustment Mechanism are poised to reverberate across the global economic stage, leaving nations and industries on high alert.