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India’s challenge of scaling Europe’s carbon wall

  • The border carbon adjustment tax proposed by the EU would hurt India but it also presents an opportunity for it to bolster its domestic industry and transform itself into a technology-provider to the world.

In what is likely to be the first in a series of global moves to address the issue of ‘carbon leakage’—shifting carbon-intensive production to geographies with no commitments to reduce carbon—the EU plans to impose a border carbon adjustment (BCA) tax on all goods entering the European Union (EU) from countries it deems as not having compatible carbon reduction policies. It is a crucial part of the European Green Deal—a set of integrated policy initiatives by the European Commission with the overarching aim of making Europe climate neutral by 2050.

It is by no means a fait accompli, but the recent EU deal for a post-covid stimulus of 750 billion euro also reinforces the need for such a tax to take effect—to provide additional revenues to the states in support of their borrowings. The BCA is likely to come into force by 2023. While being an instrument to reduce global emissions, it is equally a protectionist measure for manufacturing within the EU.

India, despite having ambitious goals and already bearing a disproportionate share of the global mitigation burden, is likely to be impacted by this new tax. That’s because the EU is India’s third-largest trading partner. Bilateral trade in 2018-19 was $115.64 billion, comprising Indian exports to the EU of $57.20 billion and imports of $58.43 billion. The exports are certainly at risk, and with the Democratic presidency campaign gaining steam in the US, the carbon threat looms large over Indian industry.

Some of the traditional high-carbon exports from India are likely to lose market access, blocked by the carbon wall. Commodity exports will take the biggest hit as they are the most carbon-intensive.

Equally, the BCA opens up new export opportunities as global value chains are interconnected and massive investments anywhere will catalyze opportunities to the best value provider. It would also induce sizable European green investments into India if bankable projects are proactively started. An example of this can be found in the way China captured the global market for solar photovoltaic cell manufacturing when the EU and the state of California signaled their appetite to make the transition to clean energy. The same story repeated when northern Europe wanted to promote electric cars and, picking up cues, China mounted a response that made it the global powerhouse in the manufacture of components crucial to electric vehicles. In 2020, with the pandemic in the backdrop and looking to give a fillip to industry, the EU is signalling an appetite for low carbon production. It won't take much time for other advanced economies to follow suit. India cannot afford to miss the boat. To capture the opportunity, it needs to create a cost-effective, low-carbon products ecosystem in India.

Data is key to understanding the carbon footprint of products and there is no officially endorsed source of this information in India. In its absence, estimates from international agencies such as the International Energy Agency would be resorted to, and even here the resolution is coarse and will not do India any favours. Voluntary carbon labeling might kick-start much-needed discussions and build domestic capacity to embed carbon in the products India exports. A database hosted by the Council on Energy, Environment and Water provides estimates of carbon emissions at an industrial unit level and this could be a useful starting point to resolve it down to the product level.

Industrial electricity tariffs in India are one of the highest in the world. This made industry explore options outside of utility-based supply. Captive renewable energy (RE) installations and access to round-the-clock RE power for large industrial units and roof-top solar energy for micro, small and medium enterprises could hasten the transition. While the electrification of industry is a holy grail of sorts, India can make small beginnings in sectors where the replacement of fossil fuels is cost effective.

In many areas, replacing coal with natural gas at the prevailing low prices would yield economically competitive products, especially steel. The gains are not only by way of reduced greenhouse gas emissions but also improved local air quality and the concomitant health benefits. A shift away from the dependence on coal and ultimately to fuels like RE-derived hydrogen is impending. While the technology is still nascent, India will see a near tripling of production capacity in steel, and the economics would be a lot more favourable for green-field projects. India should leverage international green funds to support the capital intensive low-carbon industrialization via sophisticated financial products.

The core modules in technologies such as green hydrogen and the process modifications needed for the use of hydrogen in place of current fuels represent opportunities for R&D investment and the concomitant gains in creating new intellectual property and local production of industrial equipment. Many Indian industrial houses are more at ease licensing or procuring technology developed overseas, rather than building in-house R&D. There is, thus, a need to provide a clear vision of the role these will play and create an ecosystem conducive to investment. The Atmanirbhar Bharat campaign could help drive this shift, in not just removing our dependence on the outside world for run-of-the-mill production but also gaining an advantage in the high-technology race.

A carbon price imposed on Indian exports will make our industry less competitive. It is possible that we might pass on the additional costs to end consumers to retain market share. However, with increasing investment into low-carbon production within the EU and elsewhere, we will have to do more to remain attractive. This also presents India an opportunity to be a leading provider of the technology, create new jobs and improve the prospects of cleaning up our environment while preserving productivity.

These are the authors’ personal views.

The authors are, respectively, young professional, Niti Aayog, and research fellow, Council on Energy, Environment and Water.

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