Will India escape the UK’s carbon border tax? There’s reason for optimism

The UK has agreed not to impose the carbon border tax on India even though the two countries’ brand-new trade pact makes no mention of the contentious levy, two Indian government officials aware of the matter said.

The Carbon Border Adjustment Mechanism (CBAM) was not discussed as part of the trade talks since the UK is yet to roll out the policy, the people cited above said on the condition of anonymity. Instead, the matter was taken up separately through a parallel track with UK counterparts.

“They have agreed, in principle, not to implement CBAM on Indian goods. This understanding exists outside the FTA, but it reflects mutual recognition of each other’s concerns,” one of the two officials said.

Queries sent to the Union commerce ministry and the UK Embassy in New Delhi remained unanswered till press time.

The CBAM acts as a carbon import tax on goods from countries with weaker climate rules. This could make products from India, especially things like steel and cement, more expensive and less competitive when sold to the UK.

However, if the UK indeed imposes CBAM on Indian exports, New Delhi will adopt countermeasures to protect its domestic industry, the person cited above said.

India communicated to UK officials that CBAM is a disguised trade barrier that penalizes developing countries for their stage of industrial growth, the second official added. The UK has not enforced CBAM so far, unlike the European Union which began a transitional phase last year. The UK’s CBAM is set to be implemented on 1 January, 2027.

India, on its part, is also pushing for recognition of its domestic climate mitigation efforts, including carbon markets and green technology adoption, as part of broader sustainability cooperation.

Industry experts pointed to the need for a formal written assurance on CBAM. Pankaj Chadha, chairman of the Engineering Export Promotion Council (EEPC), said, “It’s a good diplomatic move if the matter has been resolved. But side deals like these need to be documented somewhere so that they can serve as a template while negotiating with the EU.”

On Thursday, India and the UK unveiled a Comprehensive Economic and Trade Agreement (CETA) that aims to boost bilateral trade to $112 billion by 2030 by lowering or eliminating tariff barriers on many items. India is expecting a surge in engineering goods exports to the UK, with industry projections pointing to a near-doubling over the next five years.

The UK is currently India’s sixth-largest market for engineering exports, and with CETA bringing tariffs down to zero — from a peak of 18% — the removal of duty barriers is expected to drive a sharp rise in shipments of electric machinery, auto parts, industrial equipment, and construction machinery.

India’s total engineering exports reached an all-time high of $116.67 billion in 2024–25, of which $4.28 billion was accounted for by exports to the UK, as per the commerce ministry data. With the UK’s global imports in the sector valued at $193.52 billion, Indian exporters now see a clear runway to expand their market share.

The government has estimated that India’s engineering exports to the UK could cross $7.5 billion by 2029–30, riding on annual growth of 12–20% in key segments.

“This agreement supports India’s broader target of achieving $300 billion in engineering exports by 2030. With the UK’s advanced manufacturing sector opening up, Indian firms—especially MSMEs—now have a real opportunity to integrate into global value chains,” Chadha said.

The zero-tariff regime is seen as a major win for India’s MSME base, particularly in the iron and steel sector. Immediate and full elimination of duties—previously as high as 10% for Chapters 72 and 73—will boost price competitiveness for ferrous exports.

India currently supplies just $887 million worth of iron and steel products to the UK, representing a mere 4.8% of the UK’s $18.46 billion annual import demand in this category. Even a modest gain in market share could sharply lift India’s exports toward the $7.5 billion target.

With India’s global exports in iron and steel already at $22.36 billion, the government estimates that redirecting just one-third of this volume to the UK could be sufficient to achieve the five-year projection.

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