A green industrial policy for CBAM key to securing India-EU FTA benefits

The tariffs that Trump irrationally imposed on India would inflict pain. Growing other export markets has therefore become an immediate necessity. The EU market is about as large as the US market, and an early conclusion of the FTA (Free Trade Agreement) with the EU that is being negotiated would certainly go a long way in offsetting the loss in the US market. Duty-free access to the EU market for labour-intensive products, especially garments, would create more jobs at the bottom of the pyramid. 

The phased introduction of CBAM (Carbon Border Adjustment Mechanism) by the EU is a major global development. This is a graded tax that would be imposed on imports to the extent the embedded carbon — that is, the carbon emissions in making a product — exceeds the standards that are notified. These standards would reflect the consensus within the EU on the feasible and acceptable carbon content in the production of a particular good. These standards would evolve with experience and become more stringent. To the Europeans, this is a pioneering initiative. Reducing carbon emissions and becoming net zero requires that not only direct emissions within the EU come down but also the embedded emissions in all the products that are imported and consumed decline to net zero. The EU imports most of the manufactured goods it consumes. The CBAM is expected to drive the transition of manufacturing globally away from carbon emissions and the use of fossil fuels. 

 

The response to the CBAM in many circles is that this is a unilateral tariff barrier being created outside the WTO and is, therefore, not permissible. Going further, it is seen as adversely impacting all developing countries as they seek to sell more to Europe, develop their economies, and create more jobs. This view is, however, not coming in the way of the implementation of the CBAM. 

How should we look at the CBAM? As the CBAM is a given, India needs to accept it and not let it come in the way of concluding the FTA. The best that we could hope for and achieve through our capable negotiators is to get time and agreed glide paths for major segments of our exports to become CBAM compliant without these exports attracting any CBAM duties in the interim period. This could be an additional negotiated benefit. The gains from an early FTA would be enormous. But to be able to derive the full benefit from an FTA with the EU under a CBAM regime, a new green industrial policy is called for. What should be the key elements of this industrial policy and its instruments? 

The first step would be the introduction of a regime of two standards — one the existing one for the domestic market, and the other new CBAM standards for export to the EU. Certification of compliance with the CBAM standards would need to be acceptable to the EU. This would require credible, traceable digital systems of measuring and recording the carbon footprint of the full value-addition chain of the goods to be exported. An acceptable certification system should be part of the FTA. This would be a huge, challenging task as inputs get sourced from small and micro enterprises across the country. Exporters cannot put together such a system easily. Only the central government can do it. The certification fee may be initially subsidised. As exports rise, this subsidy can be reduced and then withdrawn. 

The government would need to assist different sectors to achieve CBAM standards with tailor-made programmes evolved in partnership with industry. Technical support, soft financing, and incentives would be the key components of a new Green Production Linked Incentive (GPLI). It would be a good idea for the existing sectoral PLI schemes to be subsumed in the new GPLI after the expiry of the dates of the ongoing PLI schemes. Financial support by the government for green manufacturing should be welcomed by the EU and would certainly not be in breach of our WTO commitments, as green manufacturing is outside the existing agreements.

 

A new Green Industrial Bank with government backing may also be created. This could quickly provide financing for the creation of new green production capacities to produce CBAM-compliant goods for the European market. Two parallel streams of financing for the creation of new production capacity — one the existing one, and a new one for the creation of CBAM-compliant goods — may be the optimal way to proceed. The advantage of a separate financial institution would be that it would have a narrow focus and the success of the management would be judged by outcomes on the single parameter of financing green manufacturing. India has in theory the ‘late mover’s’ cost advantage, as new state-of-the-art green capacity can be created for meeting demand in the EU while existing capacity can meet growing domestic demand.

 

For MSMEs, the government could select the major exporting clusters for a concentrated effort at reducing the embedded carbon content to make them CBAM compliant. One easy, affordable, and quick way would be to get the electricity distribution companies (DISCOMs) to provide carbon-free electricity to these units at actual cost. There is enough solar power capacity being created in the country. Battery storage systems are becoming cheaper. A user-friendly open access regime for the carriage of green electricity is already in place. About 70 per cent of the electricity being supplied in the country is thermal and, with one stroke, these units would be using carbon-free electricity and dramatically lowering the embedded carbon in the goods they produce.

 

We should seize this opportunity, conclude the FTA with the EU, and introduce a new GPLI. Decisive and speedy action in consultation and partnership with industry would lead to a surge in private investment. India may finally achieve the breakthrough in manufacturing and export of goods that has been eluding it so far.

 

The author is former secretary, DIPP, Government of India, and distinguished fellow, ISID (Institute for Studies in Industrial Development) 

---

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or Business Standard newspaper.