EU to impose BCA tax; the new measure will have a adverse impact on India

The EU plans to impose a border carbon adjustment (BCA) tax as part of the measures to tackle the issue of carbon leakage. The tax is imposed on all goods entering the European Union (EU) from countries which do not have proper carbon reduction policies.

It is part of the European Green Deal which aims at making Europe climate neutral by 2050.

The BCA is likely to come into force by 2023. It can be seen as a protectionist measure for manufacturing within the EU as well as an attempt to reduce global emissions.

EU being India’s third-largest trading partner, this new tax will have an adverse impact on India. Bilateral trade in 2018-19 was $115.64 billion, comprising Indian exports to the EU of $57.20 billion and imports of $58.43 billion.

The exports are certainly at risk. Also, the carbon threat looms large over Indian industry. Commodity exports, being carbon-intensive, will be affected badly.

Equally, the BCA opens up new export opportunities and also it would induce sizable European green investments into India if bankable projects are proactively started.

An example of this can be found in the way China captured the global market of photovoltaic cell manufacturing and established itself as the global powerhouse in manufacturing components crucial to electrical vehicles when they pick the cue of EU taking interest in the respective arenas.

The EU and the state of California signaled their appetite to make the transition to clean energy. In 2020, the EU is signaling an appetite for low carbon production. Soon advanced economies will follow the suit.

In order to capture this opportunity, India needs to create a cost-effective, low-carbon products ecosystem in India

Data is key to understanding the carbon footprint of products and there is no officially endorsed source of this information in India.  Voluntary carbon labeling might kick-start much-needed discussions and build domestic capacity to embed carbon in the products India exports.

A database hosted by the Council on Energy, Environment and Water provides estimates of carbon emissions at an industrial unit level and this could be a useful starting point to resolve it down to the product level.

 High industrial electricity tariffs in India made industry explore options outside of utility-based supply. Captive renewable energy (RE) installations and access to RE power for large industrial units and roof-top solar energy for micro, small and medium enterprises could hasten the transition.

India can make small steps in sectors where the replacement of fossil fuels is cost effective.

In many areas, replacing coal with natural gas at low prices would yield economically competitive products, especially steel. This not only reduce the greenhouse gas emissions but also improve local air quality and the concomitant health benefits.

A shift away from the dependence on coal and ultimately to fuels like RE-derived hydrogen is impending. With these measures India will see a near tripling of production capacity in steel, and the economics would be a lot more favorable for green-field projects.

India should leverage international green funds to support the capital intensive low-carbon industrialization via sophisticated financial products.

The core modules in technologies such as green hydrogen and the process modifications needed for the use of hydrogen in place of current fuels represent opportunities for R&D investment.

Many Indian industrial houses are more at ease licensing or procuring technology developed overseas, rather than building in-house R&D. There is, thus, a need to provide a clear vision of the role these will play and create an ecosystem conducive to investment.

The Atmanirbhar Bharat campaign could help drive this shift, in not just removing our dependence on the outside world for run-of-the-mill production but also gaining an advantage in the high-technology race.

A carbon price imposed on Indian exports will make our industry less competitive. With increasing investment into low-carbon production within the EU and elsewhere, we will have to do more to remain attractive. This also presents India an opportunity to be a leading provider of the technology, create new jobs and improve the prospects of cleaning up our environment while preserving productivity.