UK-India free trade deal heads for green shift under Labour leadership

With the UK pushing for greener business practices, a free trade agreement with India will have to balance trade facilitation with stringent environmental standards

Now that Labour is leading the UK, the dynamics of international trade, in particular the Free Trade Agreement (FTA) with India, are poised for transformation. Labour’s emphasis on climate change and its advocacy for mechanisms such as the Carbon Border Adjustment Mechanism (CBAM) are likely to influence the future of this trade agreement.

Labour Party’s Environmental Agenda

A key aspect of Labour’s policy is its strong commitment to environmental sustainability. Under Keir Starmer’s leadership, the party has set ambitious targets to tackle the climate crisis, aiming to decarbonise the UK economy by 2030, well ahead of current targets. Labour plans to invest heavily in renewable energy and introduce tougher carbon regulations. The UK Climate Change Act 2008 mandates the UK to achieve net zero carbon emissions by 2050, and Labour’s policies aim to accelerate this transition.

Labour’s Green New Deal is a central part of this push, aligned with the global urgency to meet and exceed the Paris Agreement targets. As a result, the party’s approach to trade, including the India-UK FTA, is likely to reflect its commitment to green policy. Labour’s aggressive stance on climate action will shape its trade policy, embedding sustainable development in international agreements.

Impact on India-UK FTA

Labour’s emphasis on environmental sustainability is expected to influence the ongoing negotiations for a free trade agreement with India. Traditionally, free trade agreements have placed an emphasis on reducing tariffs and trade barriers to facilitate trade. However, under Labour, the India-UK free trade agreement is likely to include climate-related provisions.

India has also made progress on renewable energy and efforts to reduce carbon emissions. But its economy remains heavily dependent on fossil fuels. This poses a challenge in meeting Labor’s strict environmental requirements. The transition to cleaner energy will require significant investment, and India’s economic growth could be affected by these requirements. Balancing trade promotion and environmental sustainability will be a central theme in discussions on the FTA.

The role of the Carbon Border Adjustment Mechanism (CBAM)

Labor’s Carbon Border Adjustment Mechanism (CBAM) is a policy to impose a carbon tax on imported goods based on their carbon content, levelling the playing field for domestic industries. This ensures that foreign producers pay the same carbon price as domestic ones, preventing carbon leakage and promoting global emission reductions.

For India, CBAM poses significant challenges, especially for industries such as steel, aluminium and cement, which have high carbon footprints. As the world’s second largest steel producer, India’s exports to the UK will be subject to higher production costs under CBAM, potentially impacting competitiveness.

To cope with this, Indian industry would need to adopt cleaner technologies and low-emission production methods. The Indian government may need to offer subsidies or incentives to facilitate this transformation.

Green Trade Opportunities

Despite the challenges, CBAM also provides an opportunity for India and the UK to expand green trade. Labour’s focus on renewables and green technologies could open doors to cooperation in sectors such as solar, wind and electric mobility.

India’s growing renewable energy market positions it as an ideal partner for the UK in achieving shared sustainable development goals. By aligning trade policy with environmental goals, both nations can ensure that economic progress is achieved responsibly. The Labour leadership is ushering in a new era for the UK-India FTA, with climate change and CBAM at its heart.

(The author is the founder and CEO of Earthood)