India Retains Option to Retaliate Against UK's Planned Carbon Tax

Strategic Insights -

India and the United Kingdom on Thursday signed the comprehensive economic and trade agreement (CETA), aimed at doubling trade between the two countries by 2030 from the current level of $56 billion. However, a conundrum has emerged in the wake of the agreement, as India retains the option to retaliate against the UK's planned Carbon Border Adjustment Mechanism (CBAM) through "rebalancing" tariffs on British goods. The British law on CBAM is still not enacted, and the issue was not included in the free trade agreement due to its lack of legal basis.

Key Takeaways:

  • India has the option to retaliate against the UK's planned Carbon Border Adjustment Mechanism (CBAM) with proportionate "rebalancing" tariffs on British goods.
  • The India-UK free trade agreement, signed on Thursday, does not mention the proposed British move to implement CBAM from 2027 due to its lack of legal basis.
  • Commenting on the CBAM issue, Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), said that if Indian exports still face CBAM levies while UK goods enter India duty-free, it risks turning a balanced FTA into a one-sided bargain.
  • India has raised concerns with the European Union (EU) regarding carbon leakage, where firms in the EU move carbon-intensive production abroad to countries with less stringent climate policies.
  • The UK's planned CBAM is aimed at reducing carbon leakage, but its implementation would have a material impact on Indian interests and could lead to counter tariff measures.

Statistics:

  • Current level of trade between India and the UK: $56 billion.
  • Target for doubling trade between India and the UK by 2030: $112 billion.
  • Number of tariff lines covered by CETA for 100% duty-free market access for Indian goods in the UK: almost 99%.
  • Year from which the UK plans to implement the Carbon Border Adjustment Mechanism (CBAM): 2027.

Sources:

  • "India and UK sign comprehensive economic and trade agreement" - Hindustan Times
  • "Commenting on the CBAM issue, Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), said" - Global Trade Research Initiative (no exact date mentioned)