Rethinking carbon pricing and taxes , Pg7

Key Highlights:

• The India-U.K. FTA, while beneficial, doesn't address the impact of the U.K.'s Carbon Border Adjustment Mechanism (UK-CBAM), set to begin in January 2027.
• UK-CBAM will initially target hard-to-abate sectors like steel and aluminum, potentially increasing costs for Indian exporters by 20-40%.
• India's current carbon pricing, including the Carbon Credit Trading Scheme (CCTS), is significantly lower than the U.K.'s, leading to potential cost disadvantages.
• A global carbon pricing agreement is essential to prevent fragmented systems that disrupt supply chains and hinder climate goals.

Detailed Insights:

• The UK-CBAM mirrors the EU's CBAM by imposing charges on imports to match the carbon price paid by domestic producers.
• While the India-U.K. FTA reduces tariffs to zero, the CBAM could negate these benefits due to carbon pricing disparities.
• The Bureau of Energy Efficiency estimates India's carbon price at $8–10 per tonne of CO₂, compared to the U.K.'s $66 per tonne.
• Fragmented carbon markets raise compliance costs, disrupt supply chains, and undermine both growth and climate goals.
• The International Monetary Fund (IMF) proposed an International Carbon Price Floor (ICPF) with tiered pricing for different income countries.
• The Indian government should streamline implicit carbon taxes into a unified carbon market framework for better carbon price discovery.
• Revenues from carbon taxes should be reinvested in industrial decarbonisation to enhance competitiveness.

Key Concepts Involved:

• Carbon Border Adjustment Mechanism (CBAM): A tariff on imports based on the amount of carbon emissions associated with their production.
• Carbon Credit Trading Scheme (CCTS): A market-based system where companies can buy and sell carbon credits to meet emission reduction targets.
• International Carbon Price Floor (ICPF): A proposed agreement setting a minimum carbon price across countries, with tiered pricing based on income levels.