EU’s ‘Fit for 55’ legislation might cost India to lose $1-1.7 billion in exports of energy-intensive products, including aluminium

The European Union’s new legislation, Fit for 55 which was introduced on 14th July to reduce its GHG emissions by 55% by 2030 and to net-zero by 2050. This has been highly appreciated as the EU’s climate change action transformed into law, safeguarding it from the winds of political change.  It will open fresh markets for Indian industry such as for electric vehicles; however, it also instigates a definitively unfavourable policy known as the carbon border adjustment mechanism (CBAM).

Since 2005, the European Union has had a carbon emission trading system, with a current market price of 50 euros per tonne of carbon. Now, with Fit for 55, the EU will drive more sectors into this trading scheme and hardens its granting of permits. The European Union’s carbon price will strive its domestic products more expensive than imports from the nations without any such laws, so the new CBAM is created to match up the circumstances between domestic and imported products.

CBAM will stress overseas producers to settle for the carbon emitted while manufacturing their products, as adding the price of carbon signifies to disappoint consumers from buying carbon-intensive products and encourage producers to invest in cleaner and greener technologies. The adjustment will be applied to energy-intensive products that are widely traded by the EU, including aluminium.

This might also impact downstream industries like automobile manufacturers may buy domestic low-carbon aluminium rather than imported high-carbon aluminium. India is Europe’s third-largest trading partner, and it does not have its carbon tax or cap. So, CBAM should be a root for disquiet for it. On 14th July 2021, a United Nations Conference on Trade and Development (UNCTAD) study released envisions that India will lose $1-1.7 billion in exports of energy-intensive products such as aluminium and steel, while India’s goods trade with the EU was $74 billion in 2020.

The CBAM will unquestionably be very complex to administer, as the adjustment rate will vary by country and product, depending on the carbon intensity of the production technology and the electricity mix. It will require verification of data reported by every foreign supplier, including intermediate products from third countries. It may have to rely on country defaults or sectoral benchmarks, at the risk of less than perfect outcomes.

The EU Parliament’s endorsement is expected to take two years, which will be followed by a three-year transition period before the CBAM is imposed in 2026.