Carbon Tax Threatens $775 Million Indian Exports to UK

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India's exports to the United Kingdom (UK) worth USD 775 million may face the impact of Britain's decision to introduce a carbon tax on products such as iron and steel, aluminum, fertilizer, and cement from 2027, according to a report by the economic think tank Global Trade Research Initiative (GTRI).

Implementation of Carbon Border Adjustment Mechanism (CBAM)

The UK government announced its decision to implement the Carbon Border Adjustment Mechanism (CBAM) starting in 2027. The CBAM, also known as the import carbon pricing mechanism, aims to prevent carbon leakage and ensure that imports are subject to the same rate of carbon tax as UK producers pay through the UK's Emission Trading System (ETS).

Sectors Impacted by CBAM

The CBAM will initially focus on sectors with high carbon emissions, including iron, steel, aluminum, fertilizer, hydrogen, ceramics, glass, and cement. Indian exports of these goods to the UK totaled USD 775.3 million in FY23, representing 6.8% of the total exports to the UK subject to CBAM.

Tax Rates and Calculation

The carbon tax under CBAM could range from 14% to 24% of the import value on the full phase-out of free allowances under the ETS. The tax rates have been calculated considering emission intensities and current UK ETS prices. For comparison, the tax range for the EU's CBAM is 20% to 35%.

Exemptions and ETS

Countries with carbon pricing schemes equivalent to the UK's will be exempt from the CBAM tax. Both the UK and the EU have implemented ETS to cap and reduce greenhouse gas emissions. These systems work by setting a limit on the total amount of carbon emissions allowed and issuing permits to emitters. Companies must purchase permits for each ton of carbon they emit, and the price of these permits is determined by supply and demand. The CBAM will work in conjunction with the UK ETS.

Additional Initiatives

In addition to CBAM, the UK is considering implementing voluntary product standards and developing a framework to measure the carbon content of goods. These initiatives aim to promote low-carbon products and support other decarbonization policies.

The UK's decision to introduce CBAM may have significant implications for Indian exports to the UK. Indian exporters of iron and steel, aluminum, fertilizer, and cement should closely monitor the developments related to CBAM and take necessary steps to mitigate its impact on their businesses.