India to retaliate if UK introduces carbon tax, says official | Business News

“Both countries have agreed that if the UK introduces CBAM, India reserves the right to retaliate. If India taxes these products domestically, then the industry will not have to pay the tax in the UK. That tax could be utilised to finance India’s sustainability initiatives,” the official said.

Earlier this month, The Indian Express reported that the UK remained unwilling to grant any concession under CBAM, with the carbon tax being a significant sticking point between the two nations. India initially proposed a carve-out for MSMEs and later suggested a ‘rebalancing mechanism’ requiring the UK to compensate Indian industries for losses incurred due to the regulation.

This paper reported that a ‘rebalancing mechanism’ article had been inserted into the ‘general exceptions’ chapter of the negotiating text between the two countries. This provision would enable India to claim compensation for its losses and ensure the UK does not raise a dispute against India at the World Trade Organization (WTO).

The general exceptions chapter in international trade agreements, such as the General Agreement on Tariffs and Trade (GATT), allows countries to implement measures that might “otherwise violate trade rules,” provided they are justified on grounds such as public health or environmental protection, according to the WTO.

Ajay Srivastava, former trade officer and head of the Global Trade Research Initiative (GTRI), stated: “The UK’s proposed CBAM poses a significant concern for Indian exports, as the regulation would result in the UK gradually imposing higher taxes on imports based on their carbon footprint, potentially far exceeding the UK’s current average tariff rate of under 2%.”

“While the FTA might reduce or eliminate tariffs, Indian exports could still face hefty carbon taxes, unlike UK exports to India,” he added.

Srivastava emphasised that India must remain vigilant on non-traditional trade topics such as labour, environment, gender, and intellectual property rights when dealing with developed countries, as these often necessitate domestic policy changes.

“Even if the UK agrees to eliminate tariffs on sectors like textiles, Indian exporters may still have to meet stringent UK sustainability requirements. This could adversely affect Indian exports, particularly in labour-intensive sectors. India must negotiate firmly to ensure that market access gained through tariff elimination is not undermined by other barriers,” he said.

Finance Minister Nirmala Sitharaman and Commerce and Industry Minister Piyush Goyal have labelled the CBAM, or carbon tax, as an “unfair” measure and a violation of the “common but differentiated responsibilities” (CBDR) principle of multilateral climate negotiations.

This principle asserts that while all countries must act on climate change, their responsibilities are not equal due to differing levels of economic development.