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UK’s Carbon Tax May Undermine India-UK FTA Gains

India’s preferential access to the UK market under the recently concluded India-UK Free Trade Agreement (FTA) may face significant hurdles due to the UK’s planned Carbon Border Adjustment Mechanism (CBAM), set to be introduced in 2027. While the FTA offers zero tariffs for 99% of Indian product lines, it remains silent on exemptions from carbon taxes, raising concerns that Indian exports — especially emissions-intensive goods like iron and steel, cement, aluminium, and ceramics — could face additional levies of 20–35% tariff equivalent, according to the Global Trade Research Initiative (GTRI).

Though the FTA lacks an explicit clause shielding Indian exports from CBAM, Indian officials clarified that New Delhi has reserved the right to retaliate or rebalance concessions should such taxes be enforced. This mirrors India’s stance in ongoing FTA talks with the European Union, which will roll out its own CBAM in January 2026. On this matter, Commerce Minister Piyush Goyal has publicly warned both the UK and EU of potential countermeasures if Indian exporters are unfairly targeted.

As it stands, Indian exporters could lose part of the tariff benefits negotiated in the FTA due to carbon-related levies. The GTRI estimates that around $775 million worth of Indian exports to the UK may be impacted. Meanwhile, the UK will continue to enjoy zero-duty access for its exports to India under the FTA, including on products like automobiles, whiskey, and gin — sectors where India has agreed to gradual tariff concessions.

The issue highlights a critical trade-environment nexus, with carbon taxes emerging as a new non-tariff barrier, potentially undermining developing economies’ competitiveness. As CBAM mechanisms gain traction globally, India’s strategic response will be pivotal to defending its trade interests while transitioning toward low-carbon manufacturing.