How the EU Complicates India's Climate Initiatives
It defies any sense of equity that countries facing rising sea levels, or like Pakistan which suffered a flash flood in 2022, submerging a third of the country, should borrow on commercial terms to cope.
The Paris Agreement in 2015 required that the world's emissions of carbon dioxide should fall by 43 percent by the year 2030 if we were to limit the temperature rise to 1.5 degrees Celsius. In the last ten years, world emissions have continued to rise, with no signs of peaking.
Climate change is an existential crisis for the world. Thus the COP meetings generate a lot of enthusiasm. If the stakes were not so high, there is room for cynicism.
The missed emission targets, the fact that fossil fuel producers have hosted these meetings in the last two years, the inability to break the logjam on major issues, etc. while the small island nations face the prospect of being submerged, do not inspire confidence. Add to this bleak scenario, the re-election of Donald Trump in the US. Multilateral institutions were struggling, even without this latest blow.
The two issues that are proving intractable are (1) the funding of the poor countries to meet climate challenges; and (2) the overdue discussion on the interface between international trade laws and climate policies of countries (or blocs).
A start was made on the funding issue in Copenhagen in 2009 with a promise by the developed countries to transfer $100 billion annually. This target was not met until 2022.
At Baku, developing countries are talking about at least $ 1 trillion worth of annual transfers. There is also some continuing disagreement about what should constitute climate finance. Developing countries feel it should include only grants and concessional loans. But there is pressure to include commercial loans in it also. It defies any sense of equity that countries facing rising sea levels, or like Pakistan which suffered a flash flood in 2022, submerging a third of the country, should borrow on commercial terms to cope.
With the coverage of loans moving from mitigation to adaptation, and loss and damage, even the $ 1 trillion seems inadequate. Given the developed countries had not come good on the $ 100 billion promise in the past, it seems unlikely that multiples of that amount would be raised easily.
The second issue that cannot be put on the backburner is the use of trade restrictions to meet climate objectives. The EU is implementing its CBAM policy: the CBAM involves imposing tariffs on imports from countries that do not “price” carbon appropriately, and hence, use carbon-intensive methods of production. All imports to the EU will be subject to this test. Other developed countries want to emulate it. As it stands, there is no room in these proposals for equity considerations.
Of course, the EU can feel pleased that it is helping reduce carbon emissions, by punishing carbon-intensive imports. This, however, is not the case with the recently proposed tariffs on the Chinese BEVs. Here, the trade restriction would increase global emissions by slowing down the move towards green vehicles. The common thread in both these moves is the protection of EU jobs.
However, the developing economies, who were not responsible for creating the climate problem, are not given the freedom to pursue their development agenda. China and India would have liked a discussion of the CBAM issue, but it was disallowed (so far) because the Baku COP was, apparently, not the forum to discuss trade issues. It was pointed out that the WTO had declined to discuss CBAM as well because it did not want to deal with environmental issues. There has to be a forum where these matters can be thrashed out. Failing which, we will see trade wars.
Indian Climate Policies
India is affected in a big way by climate change, with 46 percent of its work force in agriculture, producing about 15 percent of its GDP. Indian agriculture is weather-dependent, mostly on the summer monsoon; heat and the timing of rain are very important.
According to one projection (Robert Delink et al in Environment and Resource Economics (2019)), with a rise in global temperature of 2.5 degrees in 2060, OECD Europe will stand to lose 0.4 percent of its GDP, while India will lose 4.5 of its GDP. This seems to suggest adaptation expenditure is a priority. Adaptation may not have private funds flowing in, thus public funding is required.
Turning to mitigation, we see that the share of power generation and industry in India’s total emissions are, respectively, 53 percent and 25 percent.
The decarbonizing industry in India has to be two tracks. Big units in steel, cement, and oil refining may find it in their interest to decarbonize e.g. because of CBAM-type pressures (now, or in the future). Steel could move from using fossil fuels to e.g. green hydrogen, from coal furnaces to cleaner electric ones. These changes are expensive, and may not happen quickly.
The second track in the industry involves a lot of small units that are labor-intensive. These are very polluting and would probably close if forced to switch to cleaner fuels without financial and technological support. These include brick kilns, dyeing, pulp and paper, mining, etc.
Turning to power generation this is mainly from coal-fired plants, and, as we speak, more coal power stations are being built. Electricity is sold at low prices, sometimes given free. Thus, unless the demand side is tackled, this sector will continue to be a bottleneck.
As part of its Paris commitments, India has promised to achieve a net zero position in 2070. However, it has concentrated on reducing carbon intensities, while the increased scale of energy demand with growth has dominated this decline in intensity, causing aggregate emissions to rise.
India, then, needs to put a brake on aggregate emissions. Very tentative plans are being made to introduce carbon pricing, starting possibly with free allowances. In this India is not like China, which has made impressive progress in installing renewables, still more than half of Indian electricity generation is from thermal (state-owned) power plants; and its aggregate emissions are still rising.
Turning to CBAM, it is not clear that it would be resolved at the WTO. As a result, the private players in India are not clear about the future. As in China’s case, with CBAM in place, the carbon price differentials would mean large tariffs. Indian industry talks of raising prices of steel and aluminum by 20 to 35 percent in EU markets.
Should India devote resources to mitigation or adaptation? The EU carbon pricing through CBAM will limit the options
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
