Carbon tax threatens trade deals

The West and Japan are taking steps to impose a carbon tax that threatens to hurt a large chunk of India’s exports.

About 40 percent of Indian exports will be affected by the proposed carbon border tax (CBT) as the EU and several developed countries such as the UK, Canada, Japan and the US explore their options for a carbon tax.

The proposed CBT will be between 20 percent and 35 percent for most products, and analysts said the country should only sign FTAs ​​after the vexing issue has been resolved.

The EU will start working on the details of the companies and sectors that can be taxed in six months, with the aim of levying the levy from January 2026. The UK has published a detailed consultation paper for early adoption of CBT.

The UK will also introduce mandatory product standards by 2027 to ban imports of high-emission products.

Canada has announced plans to create its own CBT, while the US and Japan have also expressed their preferences for such a tax. The US currently does not have an adequate carbon pricing mechanism.

It is estimated that these countries will start charging CBT on imports between 2026 and 2028, analysts said.

First, the EU collects CBT on steel, aluminum, cement, fertilizer, hydrogen and electricity. The product list will be gradually expanded and will include all products that are exported to the EU by 2034.

The UK proposes product coverage and timelines similar to those of the EU.

India ships 38.3 percent of its exports to the EU, UK, Canada, Japan and the US. CBT will hit all of these products as system coverage expands.

Products that could be affected include cement, chemicals, glass, iron and steel, nonferrous metals, nonmetallic minerals, paper and pulp, refining, fertilizers and power generation. The list will gradually include all these products.

CBT rates vary by product and production process. For example, CBT for cement could be 90 percent of the product value. The rates are well above the average EU import tariff of 2.2 percent for finished products.

“A high CBT will make FTA-led zero tariffs meaningless. For example, 85 percent of trade between India and Japan is conducted without import duties. If Japan introduces CBT, Japanese products will enter India duty-free, but Indian products will pay high CBT,” said Ajay Srivastava, co-founder of the Global Trade Research Initiative (GTRI).

“India is at an advanced stage of finalizing its Free Trade Agreement with the UK, it needs to seek clarification on this issue. CBT should be the top agenda for any FHA discussion on India.”

He said India needs to set up a carbon trading mechanism that will ensure the net impact of CBT becomes less or zero in some cases.

“When the US imposed import tariffs on steel and aluminum from India, we retaliated by levying import tariffs on an equal weighting of US imports. India needs to think about developing a similar system to combat CBT.”

Biswajit Dhar, Trade Economist at Jawaharlal Nehru University said: “Trade talks are moving towards regulatory standards that have far greater implications and need to be explored before moving on to any agreement. There are several contentious points in these standards, relating to environment, labour, intellectual property rights and data protection, among others, which would require changes to Indian laws if we were to accept the UK and EU demands.”

India has opposed measures like CBT, calling them “discriminatory” in a letter to the World Trade Organization (WTO).

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