Green trade will be important for industrial growth

Finance Minister Nirmala Sitharaman has listed manufacturing and services and energy security as priorities for her budget. In both cases, the budget seeks “appropriate energy transition pathways that balance the imperatives of jobs, growth and environmental sustainability.” To capitalize on these priorities, India must pay attention to the growth of international trade and its growing—but increasingly complex—linkages with energy security, the climate crisis and environmental regulation.

Climate risks are now an economy-wide problem. Extreme weather events can damage ports, airports and other infrastructure, causing supply chain disruptions. These spill over into the economy: insurance costs for physical damage, food price shocks and disruptions to production and employment targets.

Meanwhile, industrial and trade policies in foreign jurisdictions can undermine climate action elsewhere. After decades of advocating against government support for industry, advanced economies have redoubled their efforts in favor of (green) industrial policies, such as the United States (US) Inflation Reduction Act and the European Union (EU) Green Deal industrial plan.

A related challenge is the continued concentration of sustainable finance in advanced economies. In 2019, China, the US, and the EU accounted for ~30%, ~10%, and ~16% of global clean energy spending, respectively. By comparison, India received ~3% and Africa ~1%. These figures are expected to barely change by the end of 2024. Moreover, as central banks in rich countries raise interest rates to combat inflation, the cost of financing foreign-denominated debt for clean energy projects is rising. As the intermediate costs of imported goods rise, producing finished clean-tech products becomes even more difficult.

Energy and resource efficiency are key to maintaining industry competitiveness. India’s industry has consistently suffered from high energy costs. However, in rapidly growing economies, the push for energy efficiency can only be partially effective. As absolute energy demand increases, disruptions to fossil fuel or clean energy supplies are a major concern. Trade agreements must now address these concerns by ensuring the security of future fuel supplies.

India needs to prepare strategic responses to four types of trade barriers that will affect its climate ambitions and energy security concerns. First, pricing measures. The Council on Energy, Environment and Water (CEEW) estimates that almost $10 billion of Indian exports to the EU could fall under the Carbon Border Adjustment Mechanism (CBAM). The UK has also announced that it will implement CBAM by 2027. The US is considering border adjustments for embedded carbon in traded goods. Rather than hoping for relief from the dying World Trade Organisation, India needs to calculate the exposure across sectors, but also the opportunity, that comes from sustainability measures that could give Indian industry an advantage in greener trade. The ongoing negotiations for a free trade agreement (FTA) with the EU and the UK should also consider how India’s sustainability measures will be treated in an equivalent way, so that our exports can overcome some green tariff barriers.

Second, non-price measures. Sustainability-driven non-tariff measures (NTMs) are on the rise (from 8% of all NTMs reported to the WTO in 1997 to 19% in 2021). EU rules target heavy industries such as chemicals as well as employment-intensive industries such as textiles, vehicles and consumer electronics, which could adversely affect up to $27 billion of India’s exports to the EU.

India is also strongly interested in developing clean technologies with broad applications across various industrial sectors. Green hydrogen is one of them, but other intermediate goods such as green steel, green cement and green ammonia are also important. What defines them as green? Standards and certification have a long history of being used as non-tariff barriers; clean technologies are no exception. For example, in the case of green hydrogen, we find gaps in Indian standards at various stages of the value chain, namely production (such as biomass pyrolysis), storage (such as liquid hydrogen), transport (via pipelines) or applications (such as jet fuels). Filling gaps in standards and finding ways to align with other countries should be a priority, especially when billions of dollars are being invested.

Third, highly concentrated cleantech supply chains. More than 80% of upper-middle-income economies and 90% of lower-middle-income economies struggle with concentrated imports (less than 60% for rich economies). The poorer the economy, the greater the challenge of building green industries. India is heavily dependent on a handful of countries to meet more than 80% of its solar cell and module requirements. A unilateral industrial policy can only go so far. India needs strategic trade relationships in which its comparative advantage in manufacturing some components can be combined with that of key trading partners. Interdependent value chains can make India and its partners more competitive in cleantech exports.

Fourth, intellectual property for clean technology. Five countries—Japan, the US, Germany, China, and South Korea—account for about 85% of renewable energy patents issued between 2000 and 2023. Most of the environmental patents that have been granted will remain valid until 2030, creating barriers for developing countries to obtain them. The plea for technology transfer sounds nice in rhetoric but has a poor track record in practice. India must leverage its renewed emphasis on R&D to advance clean technology and co-develop with partner countries. Import tariffs alone will not be enough.

Historically, trade has defined national development and international politics. The global economy is now being shaped by disruptive changes in energy systems, advanced technologies, and financial architectures. India’s industrial and trade policies and strategies must evolve as well. The links between energy, trade, and climate are too important to be left to simplistic formulas and responses.

Arunabha Ghosh is the Director General of the Energy, Environment and Water Council. The views expressed are personal