How to turn overseas green regulation into export advantage

Why in the News

India has mostly resisted climate linked trade rules such as the European Union (EU)‘s Carbon Border Adjustment Mechanism (CBAM). These rules are now permanent and widening, so India should use the demand and prices they create to fund its early green industrialisation.

What is CBAM, and why can India not wish it away?

1. What it is: CBAM is an EU charge on carbon intensive imports such as steel, aluminium and fertilisers, matching the carbon cost EU producers pay. It works like a customs duty on pollution.
2. India’s objections: India calls CBAM protectionist, rules tracing a product’s origin intrusive, and sustainability clauses in trade deals an imposition of rich country standards. Some of this criticism is justified.
3. Free permits ending: The EU is withdrawing free carbon allowances (permits to emit) from its producers on a fixed schedule, and CBAM’s scope will widen.
4. Spreading model: Other economies that charge industry for emissions will face the same pressure to protect producers.
5. The takeaway: Green trade rules are a lasting feature of India’s export markets, not an irritant to negotiate away.

Why should foreign markets pay for India’s green start?

1. India still to be built: Most of the India of 2070, its net zero target year, is yet to be built, so building it around fossil fuels means paying twice: to build, then to replace.
2. Early cost problem: Cleaner technologies cost more at first. Regulated foreign markets can share that cost as India builds scale.
3. Green ammonia: India has found some of the world’s lowest prices for green ammonia, made with renewable power. Long term export contracts with Europe, Japan and Korea can finance early plants and cut costs through scale.
4. Home payoff: The same industry can later supply green fertiliser at home, replacing imported natural gas.

Which sectors can turn the rules into exports?

1. Aviation fuel: The EU’s ReFuelEU Aviation rule required 2% clean fuel in jet fuel from 2025, rising sharply. Ethanol blended into petrol can become sustainable aviation fuel (SAF) for export.
2. Steel: Carbon costs will lift European steel prices. India can use that price umbrella (room created by rivals’ higher costs) to fund cleaner blast furnaces and scrap based, later hydrogen based, steel.
3. Aluminium: Once CBAM counts indirect emissions from electricity, recycled aluminium and clean power smelters gain an export edge.
4. Electrical equipment: China holds about 30% of exports of transformers, cables, switchgear, batteries and solar equipment, and India under 2%. Without an industrial response, these could become a major import bill.
5. Transformer foothold: India supplies nearly 20% of the UK’s non European transformer imports but little to Europe.

How should India price carbon and prove it?

1. What a carbon price is: A carbon price is the fee an emitter pays for every tonne of greenhouse gas, so polluting costs money.
2. Price needed: India’s new carbon market, a credit trading scheme, needs a price of $30 to 50 a tonne to change investment in steel, hydrogen and fertiliser.
3. Revenue kept at home: CBAM deducts any carbon price paid in India, so a higher Indian price keeps that revenue in India.
4. Sector level targets: Sector wide targets, as in Europe, beat India’s plant specific ones, which reward high emitters and penalise efficient plants.
5. Carbon data systems: Carbon borders and digital product passports, digital records of a product’s emissions, need trusted data. India’s digital public infrastructure (DPI) model can deliver cheap carbon accounting, traceability and verification.

Challenges

1. Carbon price gap: Indian carbon credits trade far below EU prices, so CBAM still charges Indian exporters most of the difference.
2. Missing emissions data: Exporters without verified emissions data are charged on assumed default values, with yearly rising penalties.
3. MSME capacity: Micro, small and medium enterprises (MSMEs) lack the money and skills to measure emissions product by product.
4. Ethanol feedstock: Aviation fuel would compete for ethanol with petrol blending, which already leans heavily on grain.

Way Forward

1. Mutual recognition: India should use trade and green partnership agreements to win mutual recognition of its carbon accounting, testing and certification.
2. Contest and compete: India should still fight protectionism and seek transition time, technology and finance, but prioritise export advantage.
3. Tighter caps: The Bureau of Energy Efficiency, which sets sector targets, should tighten them over time so the credit price rises towards the EU’s.

Conclusion

Climate linked trade rules will tighten regardless, so India either pays them as a cost or uses them as a market. Credible carbon pricing at home by government and industry will decide which.

Matching Previous Year Question

“[2020] Which one of the following statements best describes the term ‘Social Cost of Carbon’? It is a measure, in monetary value, of the (a) long-term damage done by a tonne of CO2, emissions in a given year. (b) requirement of fossil fuels for a country to provide goods and services to its citizens, (c) efforts put in by a climate refugee to adapt to live in a new place. (d) contribution of an individual person to the carbon footprint on the planet Earth. ANSWER: (a)”