Even after sealing a Free Trade Agreement (FTA) earlier this month, India’s goods exports worth approximately $775 million to the United Kingdom face the looming threat of steep carbon-related tariffs under the UK’s upcoming Carbon Border Adjustment Mechanism (CBAM), a British official confirmed on Tuesday.
CBAM: A Climate Policy with Trade Consequences
Originally introduced by the European Union and later adopted by the UK, CBAM is designed to levy tariffs—potentially up to 35%—on imports of carbonintensive goods such as iron, steel, and aluminum. The policy aims to prevent “carbon leakage” by ensuring imported products meet the same environmental standards as domestic goods.
Although the FTA significantly opens up UK markets—offering duty-free access to 99% of Indian exports—CBAM was notably kept outside the trade pact.
“Mechanisms like CBAM are generally not part of such agreements,” the UK official noted, confirming industry fears that certain Indian products could still face hefty charges under the climate tax.
India’s Pushback Falls Short
During FTA negotiations, India had lobbied for a carve-out for MSMEs (micro, small, and medium enterprises), citing the high compliance burden of CBAM’s data-heavy requirements. Exporters raised concerns over the protection of confidential manufacturing data and warned that mandatory carbon disclosures could cripple smaller players.
India had also proposed a “rebalancing mechanism”—a form of compensation for Indian industries affected by CBAM—which was not accepted.
While the trade agreement appears generous on the surface, offering near-complete duty-free access to Indian exports, trade experts caution that CBAM duties could neutralize these benefits. A 20–35% carbon tariff could effectively reintroduce trade barriers for key Indian sectors despite the FTA’s headline concessions.
An Indian government official recently signaled that India retains the right to retaliate, suggesting the country may consider imposing its own domestic carbon tax on affected sectors. This could potentially redirect revenue toward India’s sustainability efforts while sidestepping CBAM’s external costs.
What’s at Stake in 2027?
CBAM is slated for implementation in 2027, with the UK initially targeting sectors such as steel, aluminum, fertilizers, hydrogen, glass, cement, and ceramics.
Trade think tank Global Trade Research Initiative (GTRI) estimates that Indian exports worth $775 million will be exposed to CBAM’s penalties unless protective measures are introduced.
Ajay Srivastava, GTRI’s founder, stated, “By failing to secure a CBAM exemption, India has left the door open for the UK to impose carbon taxes from 2027, even as Indian markets grant duty-free access to British goods. This is a glaring imbalance—and likely a sign of things to come with the EU FTA.”
WTO Challenge on the Horizon?
With no bilateral resolution achieved, India may turn to the World Trade Organization (WTO), arguing that CBAM breaches Special and Differential Treatment (SDT) principles. These provisions advocate flexibility for developing nations in adopting new trade-related regulations.
However, experts caution that the WTO’s Dispute Settlement Body remains dysfunctional, and the process of securing a ruling could stretch beyond CBAM’s 2027 rollout. Even if a challenge proceeds, the outcome may not include a repeal—modifications or adjustments to the policy are a more likely result.
EU Holds Firm Against Global Opposition
In a parallel development, the European Union rejected Russia’s request for consultations at the WTO over CBAM, citing Moscow’s invasion of Ukraine. Russia has alleged that the policy serves as a protectionist tool rather than a genuine climate measure.
In its filing, Russia claimed that CBAM is being used to “boost EU competitiveness and attract green investment” by limiting imports. The EU responded that it would not engage with Russia while it continued to breach international law.
India’s landmark FTA with the UK, while opening new doors for trade, has failed to shield carbon-intensive exports from climate-linked tariffs. As the 2027 CBAM deadline approaches, India faces a strategic challenge: push for WTO-level changes, negotiate bilateral exemptions, or build a domestic carbon framework that turns a climate tax liability into a sustainability opportunity.