Context

On July 14, the European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55 per cent by 2030 and to net-zero by 2050.

Implications of Fit for 55

• Legal backing: It turns the EU’s announcement into law, protecting it from the winds of political change.
• Opportunity for India: It opens new markets for Indian industry, for example for electric vehicles.
• CBAM: However, it also introduces a potentially adverse policy called the carbon border adjustment mechanism (CBAM).
• CBAM is meant to discourage consumers from buying carbon-intensive products and encourage producers to invest in cleaner technologies.

What is CBAM?

• The EU has had a carbon emission trading system since 2005.
• With Fit for 55, the EU’s carbon price is likely to go up.
• High carbon price will make the EU’s domestic products more expensive than imports from countries that do not have such rules.
• The new CBAM is meant to level the playing field between domestic and imported products.
• CBAM will require foreign producers to pay for the carbon emitted while manufacturing their products.
• The adjustment will be applied to energy-intensive products that are widely traded by the EU, such as iron and steel, aluminium, cement, fertiliser, and electricity.

Why CBAM is a cause for concern for India?

• India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap.
• So, CBAM should be a cause for concern for it.
• A UNCTAD study 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.

Way forward for Indian Industry

• Clean technology partnerships: Indian Industry should enter clean technology partnerships with European industry.
• Invest in renewables:  Indian companies should invest in more renewable electricity and energy efficiency.
• Incentivise low-carbon choices: They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices.
• Schemes and Government financing: 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 export: India can try to diversify its exports to other markets and products.

Consider the question “What is carbon border adjustment mechanism (CBAM) introduced by the EU? What are its implications for Indian industry?” 

Conclusion

At present, the CBAM may seem obstructionist. But over the long-term, it can provide regulatory certainty to industry by harmonising carbon prices, and Indian industry can position itself as a strong player in the trade landscape of the future.

Back2Basics: UNCTAD

• UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
• Its headquarters are located in Geneva, Switzerland, and have offices in New York and Addis Ababa.
• UNCTAD is part of the UN Secretariat.
• IT report to the UN General Assembly and the Economic and Social Council but have own membership, leadership, and budget.
• It is also part of the United Nations Development Group.

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