India's Exports Worth $775 Million To Britain May Be Impacted By U.K.'s Carbon Tax From 2027: GTRI

India's exports worth $775 million to the U.K. may be impacted due to Britain's decision to introduce carbon tax on products such as iron and steel, aluminium, fertiliser and cement, from 2027, economic think tank GTRI said on Monday.

The U.K. government on Dec. 18 decided to implement its Carbon Border Adjustment Mechanism (CBAM) starting 2027, according to the Global Trade Research Initiative (GTRI) report.

It said the U.K. calls it the import carbon pricing mechanism. The CBAM will initially focus on sectors like iron, steel, aluminum, fertiliser, hydrogen, ceramics, glass, and cement.

The U.K., after the European Union (EU), will be the second economy to implement CBAM. Britain will soon work out detailed rules of the scheme, but it will in principle follow the EU model.

"Indian exports to the U.K. of value $775 million may attract CBAM tax in the U.K. starting 2027. The value of specific exports like iron, steel ($565.7 million), aluminum ($101.5 million), ceramics (82.8 million), and glass ($25 million), totalled at $775.3 million for FY23, representing 6.8% of the total exports (to the U.K.) subject to CBAM," GTRI Co-Founder Ajay Srivastava said.

Exports of these goods in 2021-22 was about $995 million.

The tax could range from 14-24% of the import value on full phase-out of free allowances under the ETS (Emission Trading System).

The rates have been calculated considering emission intensities the current U.K. ETS prices. For the EU, tax range is 20-35%.

"The UK CBAM aims to prevent carbon leakage. Carbon leakage is the phenomenon of companies moving production to countries with weaker environmental regulations to avoid paying carbon prices in the UK. Thus, the main aim is to ensure imports are subject to the same rate of carbon tax as the UK producers pay through UK's Emission Trading System (ETS)," he said.

He added that by doing so, the U.K. government hopes to provide fair competition for its domestic manufacturers and ensure that its decarbonisation efforts contribute to a real reduction in global emissions.

The GTRI report said the tax will be calculated based on the estimated carbon emissions involved in the production of these imported goods.

Countries with carbon pricing schemes equivalent to the U.K.'s will be exempt from this tax.

Both the U.K. 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 then 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.

"The ETS Authority is currently consulting on how to better target free allocations of carbon allowances and is considering the design of a new Supply Adjustment Mechanism to enhance the scheme's effectiveness," it added.

It also said the U.K. CBAM follows the EU model. However, the U.K. is also considering implementing voluntary product standards and developing a framework to measure the carbon content of goods.

These initiatives are aimed at promoting low-carbon products and supporting other decarbonization policies.