Key Takeaways
- The United Kingdom plans to launch its Carbon Border Adjustment Mechanism (CBAM) in 2027, applying a carbon‑based import charge on goods such as iron, steel, aluminium, fertiliser, cement, hydrogen, ceramics and glass.
- Economic think‑tank GTRI estimates that India’s exports worth USD 775 million to the UK could be affected, with iron and steel alone accounting for USD 893.4 million in FY 2025‑26.
- The India‑UK Free Trade Agreement (FTA) is set to enter into force on 15 July 2024; its implementation had been delayed by the UK’s steel safeguard measures.
- UK steel safeguard rules cut duty‑free import quotas by 60 % and raise tariffs to 50 % on excess volumes, but about 85 % of India’s steel shipments to the UK were already exempt, and the FTA secures market access for the remainder through country‑specific and residual quotas.
- Commerce Secretary Rajesh Agarwal confirmed that India and the UK are actively discussing the CBAM regulation, emphasizing that the FTA preserves India’s steel market access and offers comparatively higher quotas than other UK trading partners.
Background on the UK Carbon Border Adjustment Mechanism (CBAM)
The UK government announced in December 2023 that it will introduce its own Carbon Border Adjustment Mechanism (CBAM) beginning in 2027. Modeled after the EU’s CBAM, the UK calls the policy an “import carbon pricing mechanism.” It will initially target carbon‑intensive sectors including iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement. Under the scheme, importers will face a charge that could range from 14 % to 24 % of the product’s value once free allowances under the UK Emissions Trading System (ETS) are fully phased out. The mechanism aims to level the playing field for domestic producers by preventing carbon‑leakage from jurisdictions with weaker climate policies.
Potential Impact on Indian Exports
According to the Global Trade Research Initiative (GTRI), India’s exports to the UK that could be subject to the CBAM amount to roughly USD 775 million. Iron and steel products constitute the largest share, with FY 2025‑26 shipments valued at USD 893.4 million—representing a significant portion of India’s total merchandise exports to the UK, which stood at USD 13.4 billion. Other potentially affected items include aluminium, fertilisers and cement. The imposition of a carbon tariff would increase the landed cost of these goods in the UK market, possibly reducing demand unless Indian producers adopt lower‑carbon production methods or secure exemptions through diplomatic negotiations.
India‑UK Free Trade Agreement (FTA) Context
The India‑UK FTA, concluded after extensive negotiations, is scheduled to come into force on 15 July 2024. Its implementation had been postponed because the UK introduced steel safeguard measures that threatened to restrict Indian steel imports. Once those safeguard issues were resolved, both sides confirmed that the FTA would be enacted as agreed. The pact covers a broad range of sectors—including automobiles, whisky, textiles and services—aiming to deepen bilateral trade and investment while providing predictable market access for exporters on both sides.
UK Steel Safeguard Measures
In March 2024 the UK unveiled steel safeguard measures that apply uniformly to all trading partners. The policy reduces duty‑free steel import quotas by 60 % effective 1 July 2024, and any imports exceeding the revised quota will be subjected to a tariff of 50 %, up from the current 25 %. The stated objective is to shield domestic steel producers from a surge of global overcapacity that could depress prices and undermine UK steelmaking. These measures are temporary, subject to review, and are intended to provide relief while the UK adjusts its longer‑term trade and industrial policies.
India’s Steel Exports to the UK and Safeguard Exemptions
Despite the safeguard rules, approximately 85 % of India’s steel exports to the UK were already exempt from the new restrictions. The remaining shipments—covering 188 specific items worth USD 137 million—were brought under the purview of the safeguard measures. However, the FTA now secures market access for these goods through a combination of country‑specific quotas and residual quotas. Country‑specific allocations are pre‑negotiated volumes reserved for India, while residual quotas are open to all suppliers on a first‑come, first‑served basis, fostering competition but guaranteeing a baseline level of access for Indian exporters.
Mechanisms for Market Access Under the FTA
Under the India‑UK FTA, exporters can avail themselves of two types of quota arrangements. Country‑specific quotas are fixed volumes allocated exclusively to India, ensuring predictability for planners and reducing the risk of quota exhaustion. Residual quotas, by contrast, are pooled volumes that any eligible supplier can fill; they are administered on a first‑come, first‑served basis, which means timely shipment documentation and logistics become critical. This hybrid approach seeks to balance guaranteed access with market‑driven flexibility, allowing Indian steel producers to compete while still benefiting from preferential treatment under the trade pact.
Statements from Commerce Secretary Rajesh Agarwal
Commerce Secretary Rajesh Agarwal highlighted ongoing dialogues between India and the UK concerning the CBAM framework. He noted that the CBAM regulation is still under development and has not yet been finalized, but both governments are actively engaged in discussions to understand its scope and potential impact. Agarwal also emphasized that the FTA has successfully preserved India’s steel market access, stating that “our quotas in the steel sector are comparatively higher compared to other trading partners of the UK.” His remarks underscore India’s strategy of leveraging the FTA to mitigate adverse effects from upcoming carbon‑border measures while continuing to push for favorable terms in broader trade discussions.
Broader Implications for India‑UK Trade Relations
Beyond steel, the CBAM could affect other export‑intensive sectors such as automobiles, whisky, textiles and chemicals, all of which feature prominently in the India‑UK FTA agenda. The UK’s move to price carbon at the border aligns with its climate ambitions but introduces a new non‑tariff barrier that Indian exporters must navigate. Simultaneously, the FTA’s provisions on services, investment and intellectual property aim to create compensating opportunities. Industries will need to assess their carbon footprints, explore low‑carbon technologies, and possibly seek exemptions or adjustments through bilateral dialogues to maintain competitiveness in the UK market.
Future Outlook and Next Steps
The UK’s CBAM is slated for rollout in 2027, providing a window for Indian industries to adapt. Ongoing talks between the two governments will likely focus on technical details such as measurement methodologies, verification procedures, and possible sector‑specific accommodations. Meanwhile, the FTA’s entry into force on 15 July 2024 will immediately lock in preferential tariff rates and quota benefits, offering a degree of certainty amid the evolving carbon‑price landscape. Policymakers in New Delhi are expected to monitor the UK’s ETS developments closely and consider domestic incentives for green steel and low‑carbon aluminium production to pre‑emptively reduce exposure to future carbon tariffs.
Conclusion
The intersection of the UK’s forthcoming Carbon Border Adjustment Mechanism and the newly‑implemented India‑UK FTA creates a complex but manageable environment for Indian exporters. While the CBAM threatens to impose additional costs on carbon‑intensive goods like iron, steel, aluminium, fertilisers and cement, the FTA secures vital market‑access safeguards—particularly through country‑specific and residual quotas—that can cushion the impact. Continued diplomatic engagement, as affirmed by Commerce Secretary Rajesh Agarwal, will be essential to shape the CBAM’s design in a way that balances climate objectives with trade interests. By proactively improving the carbon efficiency of export sectors and leveraging the preferential terms of the FTA, India can aim to sustain and even expand its presence in the UK market despite the looming carbon‑border adjustments.