India-UK Free Trade Pact Signed: Tariff Boost for Indian Exports, But UK’s Carbon Tax Raises Concerns

With the aim to double trade from $56 billion to over $100 billion by 2030  India and The United Kingdom has finalized India-UK Free Trade Agreement (FTA) on July 24, 2025. The agreement gives a new dimension to the business relation of both countries with enhanced market access and Lower tariffs for 99% of Indian exports to the UK. But The Carbon Border Adjustment Mechanism (CBAM) of Britain and its implications for sustainability have emerged as critical points of contention.

The agreement provides zero duty opportunity to 99% of Indian exports to the UK bossing sectors like agribusiness, Clothing and textiles, and manufacturing. While Britain also get easy access to huge market of India, with India committing to significant tariff reductions over the next decade.

This will a progressive and forward looking  step towards inclusive economic growth with anti-corruption, consumer protections, labour rights, gender equality, and environmental sustainability. A special subcommittee on sustainability aims to ensure the agreement aligns with global climate goals.

The agreement simplifies customs processes by minimizing paper documentation and promoting digital solutions, with regulations available online in English. It also addresses digital and digitally enabled services, fostering growth in tech sectors.

The deal is expected to create over three times the current employment generated by UK-related exports in India over the next five years, while supporting UK businesses in sectors like engineering and renewable energy.

Despite these advancements, the absence of provisions addressing the UK’s CBAM has raised concerns about the deal’s long-term benefits for India, particularly for carbon-intensive exports.

Starting January 1, 2027, Britain will introduce a carbon tax (CBAM) on products that cause a lot of pollution—like steel, aluminum, cement, fertilizers, glass, and ceramics. This tax, similar to one already used by the European Union, is meant to stop companies from shifting production to countries with weaker environmental rules. The tax will be around 14–24% of a product’s value and will include both direct and hidden carbon emissions from the entire supply chain.
 
India exports nearly $775 million worth of goods—especially steel and aluminum—to the UK. These exports could become less competitive because they might get taxed, while UK products enter India duty-free. This uneven setup may reduce the benefits India hoped to gain from its free trade deal with Britain.
 
India says CBAM goes against the Paris Agreement’s principle of "Common but Differentiated Responsibilities" (CBDR), which means poorer countries with fewer emissions should get more flexibility. Indian leaders, including Commerce Minister Piyush Goyal and Finance Minister Nirmala Sitharaman, argue the tax is unfair and would hurt developing economies like India.

Even though the India-UK trade deal doesn’t directly protect India from Britain’s carbon tax (called CBAM), India has kept the right to take action if its exports are badly affected. It can remove some trade benefits given to the UK. India might also complain about CBAM at the World Trade Organization (WTO), but winning there may be hard because of slow decisions and strong support for CBAM in Europe. So, it’s more likely that the tax rules may be adjusted a bit rather than scrapped completely.

The trade deal shows that both countries care about the environment. But it also brings some challenges for India. It allows flexibility in making eco-friendly policies, as per WTO rules. Still, it includes topics like labor rights, environment, and gender equality, which may require India to update some of its own policies to meet strict UK standards.

India is already working on climate action through its Carbon Credit Trading Scheme (CCTS), which started under a law from 1986. This system will begin properly in 2025–26 and will cover polluting sectors like cement, steel, and aluminum. It tracks both direct pollution and indirect pollution from electricity use. It also connects with India’s PAT program to improve energy efficiency. Non-regulated companies can also buy and sell carbon credits, which helps build a strong market. By 2030, India wants to set pollution limits for each sector to match its goal of becoming net-zero by 2070.

India’s system focuses on reducing emissions per unit of output (called emissions intensity), instead of just cutting total emissions like Western countries do. This suits India’s needs better as it grows and still needs more energy. The program also encourages investing in clean technologies like hydrogen fuel and eco-friendly jet fuel, helping India become a leader in climate finance.

The UK’s CBAM and India’s CCTS show different methods of fighting climate change. Britain’s system cuts overall emissions to reach net-zero by 2050, while India’s system tries to lower emissions intensity so it can continue growing and manage limits in solar energy and other renewables, especially at night.

Harmonizing these approaches, as discussed during FTA negotiations, remains unresolved due to differences in measurement techniques.
The India-UK Free Trade Agreement (FTA) brings good chances for both countries to work together. For example, the UK can share its knowledge in clean energy and eco-friendly infrastructure. One UK company, Arup, is already helping with big Indian projects like modernizing railway stations.
 
But India has to stay careful. UK’s strict environment rules must not become unfair trade hurdles—especially for sectors like textiles that depend heavily on workers.
 
This FTA is a major step forward in trade relations. Still, the problem of the UK’s carbon border tax (CBAM) hasn’t been fully solved. India has the right to respond if needed, but in future talks—like with the European Union—it’s important to ask for longer time to adjust or even exemptions. The EU’s CBAM, starting January 2026, may also cause trouble. It could lead to 20–35% tax on India’s $100 billion exports to Europe.
 
India is already working on green initiatives like the Carbon Credit Trading Scheme and the Green Credit Program. These efforts will help it deal with global carbon tax rules. Through special groups in the FTA, India and the UK can talk and work out solutions—like matching carbon standards or accepting India's green taxes as a valid offset against UK charges.
 
The trade deal between India and the UK shows that both countries want to grow their economies while also caring about the environment. But the UK's new carbon tax rules (CBAM) might make it harder for Indian exporters to compete.

India has found ways to reduce the risk of losing trade because of this. However, since India wasn’t given an exemption from the UK’s carbon tax, it highlights how difficult it can be to match trade rules with climate goals.

To protect its economy and support green development, India can improve its carbon trading system and stand strong in future trade talks. The success of this deal depends on how well both nations balance making money with protecting the planet—and it could be a model for fair trade in a world that’s serious about climate change.

(Source: Compiled from multiple news reports)