Global Warming and Climate-Change Considerations

Global warming has been a topic of discussion since the early 1990s. Initially, it was confined to conferences, treaties, and corporate social responsibility reports. However, it began to influence the real world through changes in the global financial system, particularly as business leaders shifted focus from fossil fuels to renewable energy.

The Carbon Border Adjustment Mechanism (CBAM)

• The CBAM is set to be implemented in the European Union (EU) in January of the following year.
• It is a measure to accelerate global decarbonisation and combat global warming, which is especially beneficial for countries like India that are vulnerable to climate change impacts.
• There is a misconception that the CBAM is a form of protectionism; however, it is similar to a value-added tax (VAT), serving as a destination-based tax ensuring tax neutrality across producers globally.

Implications for Indian Business Strategy and Trade Diplomacy

Indian firms must reassess their business strategies, as reliance on fossil fuels and "pollution hero" strategies can no longer be viable due to CBAM.

• Indian exporters may face disadvantages compared to countries like China, where renewable energy consumption is significantly higher.
• The transition to CBAM requires India to rethink its electricity policy and trade diplomacy.

Global Trade System and Strategic Responses

• Two major shocks impacting the global trade system are US protectionism and the CBAM.
• India needs to focus on forming a deep trade agreement with the EU, accepting CBAM as a boundary condition instead of seeking exemptions.

Carbon Pricing and Domestic Policy

The rational response to CBAM is developing a domestic carbon-pricing framework in India.

• India has started a Carbon Credit Trading Scheme (CCTS), but its implementation requires caution.
• A carbon tax is proposed as a simpler and more administratively feasible alternative, which can integrate with the Goods and Services Tax and provide price certainty for firms.

Conclusion and Strategic Recommendations

The world is progressing in combating carbon-dioxide emissions through mechanisms like CBAM. For India to navigate this effectively, it must:

• Shift its perspective on carbon adjustments, treating them with the same respect as VAT.
• Develop a trade strategy that seeks deep integration with the EU.
• Implement a domestic fiscal policy that internalises carbon pricing through a robust carbon tax mechanism.