India Reserves Right to Reciprocate If UK CBAM Impacts FTA Gains: Sources

India will reciprocate if gains from the Comprehensive Economic and Trade Agreement (CETA), signed with the United Kingdom (UK) on July 24, gets compromised under the proposed Carbon Border Adjustment Mechanism (CBAM), sources said on Friday.

Notably, India's efforts to secure a concession for its small and medium enterprises under London's CBAM did not materialise under its free trade agreement. "In case the UK's CBAM measures impact India under the trade pact, then India reserves the right to balance it," sources said.

As a counter-measure, India can take away some of the concessions made under the free trade agreement (FTA) between London and New Delhi. However, the source also mentioned that while discussing the same during negotiations, it was taken into consideration that the carbon policy is still in its preparatory stage and it will take more than a year to be implemented.

The UK's CBAM is set to come into effect from January 1, 2027. Through this the UK government aims to ensure highly traded, carbon-intensive products from overseas face a comparable carbon price to that which would have been payable had they been produced in the UK, so that UK decarbonisation efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas.

The UK CBAM will place a carbon price on some of the most emissions-intensive industrial goods exported to the UK from the aluminium, cement, fertiliser, hydrogen and iron and steel sectors that are at risk of carbon leakage.

"By not securing a carve-out or exemption clause on CBAM, India lost a vital opportunity to protect its carbon-intensive exports. From January 2027, the UK can impose carbon taxes on Indian steel and aluminum, even as we grant UK goods duty-free access. That’s a serious asymmetry. Expect the same treatment in India’s FTA with the EU," said Ajay Srivastava, founder of New Delhi-based trade policy think tank Global Trade Research Initiative (GTRI).

The EU adopted CBAM in May, 2023 and it will come into effect from next year. Sources also confirmed that discussion with the EU regarding the same is also going on.

In May this year, GTRI estimated that India’s exports worth $775mn including iron, steel, aluminium, fertiliser and cement to the UK may face tax ranging between 14% and 24% once CBAM comes into effect.