logo logo

Carbon tax hurdle looms over India-UK FTA talks

Mint | 5 April 2023

Carbon tax hurdle looms over India-UK FTA talks

NEW DELHI : India’s proposed free trade agreement with the UK could face a major roadblock, as the latter is considering imposing a carbon tax akin to the European Union’s policy, which proposes to levy steep tariffs on imports with higher carbon footprints.

An EU-style carbon border adjustment mechanism (CBAM) is expected to dent India’s metal exports to the UK even if India and the UK agree on significant tariff concessions, experts said. India and the UK have completed six rounds of negotiations and are expected to sign the agreement shortly.

However, both the governments have refrained from announcing any deadline to complete negotiations.

The EU carbon tax, also known as CBAM, aims to cut carbon emissions by imposing a levy on imported goods based on their carbon footprint.

The proposal triggered trade tensions with EU’s trading partners, including India, who call it a protectionist tool that makes their goods less competitive in the EU market.

India has opposed measures such as CBAM and has called it “discriminatory" in a letter to the World Trade Organization (WTO).

According to the UK’s 126-page-long consultation paper titled ‘Addressing carbon leakage risk to support decarbonization,’ implementation of CBAM is a “possible" carbon leakage policy measure. The consultation period for the UK’s carbon tax ends on 22 June.

“CBAM will result in the UK gradually taxing all imports at rates much higher than the UK’s current import tariff rates. UK’s average tariff rates are less than 2%. These may become zero post-India-UK FTA. But Indian exports will still need to pay carbon tax at much higher rates. As India is at an advanced stage of finalizing its FTA with the UK, it must seek clarification on this issue," former Indian Trade Service officer and founder of Global Trade Research Initiative (GTRI) Ajay Srivastava said.

Srivastava added that the UK identified products such as cement, chemicals, glass, iron and steel, non-ferrous metals, non-metallic minerals, paper and pulp, refining, fertilizers, and power generation, and the list will gradually cover all products in a few years. He added that the UK initiated consultations to levy the carbon border tax from 2026, the same year the EU intends to do it, and the key objective is to prevent carbon leakage.

“The UK will also introduce mandatory product standards by 2027 to prohibit the import of products with high emission intensity," Srivastava said.

Experts are of the opinion that the CBAM proposed by Europe and the UK runs counter to the Paris Agreement on climate change, which saw developed countries agree to bear a greater burden in climate mitigation as they are responsible for generating nearly 80% of the historical carbon emissions.

“A CBAM would introduce a carbon price on imported products. This would reflect both the carbon emitted in their production together with any gap between the carbon price applied in the country of origin and the carbon price that would have been incurred had they been produced in the UK," the paper stated.

Carbon leakage refers to shifting of UK’s production to another country with lower or no carbon tax.

Last month, UK prime minister Rishi Sunak said the UK and EU could coordinate on the new carbon border tax. The UK exited the European Union in 2020.

Among the several goals the UK aims to achieve through CBAM is reducing dependence on Russian energy imports.

Decarbonizing the UK industry forms an important part of delivering the energy transformation needed to achieve net zero at home and so contributes to a further reduction in our share of carbon emissions globally.

“It will reduce our dependence on foreign energy and allow us to make Putin’s illegal invasion of Ukraine a turning point as we strengthen Britain’s energy security and hasten the transition. If this is to move from aspiration to reality, then UK business must be able to invest in decarbonization..," the report further added.

Explaining the need to introduce CBAM, the paper explained that it is not yet clear what overall impact carbon leakage measures deployed by other jurisdictions could have on UK exports; however, “unless the UK takes similar steps, they could result in a risk of diversion of higher carbon products to the UK as traders seek to avoid new charges".

According to industry estimates, India has around 78GW of installed captive power capacity, of which around 56GGW is fuelled by coal.

The carbon tax proposal has triggered trade tensions between developed and developing countries. Several countries, including India, have called the measure discriminatory.

Mint had earlier reported that India is considering imposing retaliatory tariffs on European Union exports in response to the bloc’s proposed carbon tax that could disrupt over $8 billion worth of Indian metal exports to the EU.

 source: Mint