Problem of adjustments

Context: EU law on foreign companies paying for carbon emissions will pose a challenge to India.

Background: 

• On July 14, 2021, the European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55%  by 2030 and to net zero by 2050.
• This is a welcome step for climate action since it turns the EU’s announcement into law, protecting it from the winds of political change. It opens new markets for Indian industry, for example for electric vehicles.
• It also introduces a potentially adverse policy called the Carbon Border Adjustment Mechanism (CBAM).

About CBAM:

• Provides a level playing field: The EU has had a carbon emission trading system since 2005, with a current market price of 50 euros per tonne of carbon. 
• With Fit for 55, the EU will bring more sectors into this trading scheme and tighten its allocation of permits. This will increase the domestic manufacturing prices in comparison to imports.
• The new CBAM is meant to level the playing field between domestic and imported products.
• Gradual rollout: The EU Parliament’s endorsement is expected to take two years, which will be followed by a three-year transition period before the CBAM is imposed in 2026.

Issues with CBAM:

• Impact on India:
  • CBAM will be applied on energy-intensive products like iron and steel, aluminium, cement, fertiliser etc., for e.g. automobile manufacturers may buy domestic low-carbon steel rather than imported high-carbon steel.
  • India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap.
  • A UNCTAD study released on July 14 predicts that India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium — India’s goods trade with the EU was $74 billion in 2020.
• Complex to administer: 
  • The adjustment rate will vary by country and product, depending on the carbon intensity of the production technology and the electricity mix.
  • It will require verification of data reported by every foreign supplier, including intermediate products from third countries.
  • It may have to rely on country defaults or sectoral benchmarks at the risk of less than perfect outcomes.

Way Forward:

• Enter into clean technology partnerships with European industry: For example, such partnerships can help enhance the competitiveness of its high-technology stainless or alloy products.
• Invest in more renewable electricity and energy efficiency: They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices. 
  • The government can extend the perform-achieve- trade scheme to more industries and provide finance to MSMEs to upgrade to clean technologies. 
  • WRI India’s analysis shows that carbon dioxide emissions from the iron and steel industry can be reduced from 900 million tonnes to 500 million tonnes in 2035 through greater electrification, green hydrogen, energy efficiency, and material efficiency.
• Diversify its exports to other markets and products: For instance, increase the market share of crude steel compared to more emission-intensive producers like China, Russia and Ukraine.