SMEs in the Crosshairs: How CBAM Threatens India–UK Trade Gains

India's Free Trade Agreement (FTA) with the UK has been making headlines recently. The outcomes of this agreement and how it is going to bolster both of the countries' economies are well-reached at the discussion table of the local tea stalls. However, a potential conundrum lies within the agreement: the omission of the Carbon Border Adjustment Mechanism (CBAM), which could undermine the very benefits the agreement aims to deliver. 

A UK official said at least $775 million worth of export goods from India to the UK continue to face the risk of higher duties under the CBAM despite the Free Trade Agreement (FTA) concluded at the beginning of this month.

CBAM can seek to put a tariff of up to 35% on carbon-intensive products such as steel, iron and aluminium, fertilisers, hydrogen, glass, ceramics, and cement. The scope of this list might expand in future.

After exporters told the Ministry of Commerce and Industry that they were unable to meet its extensive data requirements, they raised concerns that complying with the carbon tax could compromise the private trade data of manufacturers. As a result, India sought during the negotiations to obtain an exemption for MSMEs from the CBAM policy.

Ajay Srivastava, founder of GTRI, stated, "By not securing a carve-out or exemption clause on CBAM, India lost a vital opportunity to protect its carbon-intensive exports." The carbon tax could impact Indian exports worth $775."From January 2027, the UK can impose carbon taxes on Indian aluminium and steel, and even grant duty-free access to UK goods. That's a serious imbalance. Expect the same treatment in India's FTA with the EU," he said. 

India could challenge the regulation at the WTO, citing that CBAM violates special and differential treatment (SDT) provisions. In terms of climate, SDT advocate longer implementation periods for developing countries to protect their trade interests.

Russia also argued at the WTO that CBAM was a highly trade-restrictive and discriminatory mechanism under the guise of climate policy.

In its submission, Russia stated, “As the EU itself acknowledges, ‘the introduction of a CBAM leads to a reduction in imports into the EU27,’ while simultaneously using the CBAM as a tool to enhance competitiveness and stimulate additional investment within the EU.”

Understanding CBAM

The Carbon Border Adjustment Mechanism (CBAM) is a climate-centric trade policy. This initiative was introduced by developed economies like the European Union and the United Kingdom to control carbon emissions associated with imported goods. It operates by imposing a tariff on imported goods according to their carbon footprint, thereby reflecting the same carbon pricing applied to local industries. The process aims to decrease "carbon leakage," where most of the companies might shift their production to countries with lower environmental restrictions, undermining global climate goals. The United Kingdom is set to take effect version of CBAM from January 1, 2027, which covers emission sectors like steel, iron, cement, aluminium, fertilisers, and hydrogen. CBAM is framed as a tool to ensure environmental accountability, sparking debates worldwide, particularly among developing countries such as India.

Conclusion

Indian exporters–especially small and medium enterprises (SMEs)-- stand at a critical juncture as the UK's CBAM approaches implementation. Without awareness and preparation, businesses could lead to severe disruptions. There is an urgent need for nationwide seminars to drive SMEs with the proper knowledge and tools required to navigate the carbon compliance landscape. 

foreign trade | Foreign Trade Agreement | India UK Free Trade Agreement