Context: Countries worldwide are taking rapid steps towards transitioning to green energy trade and combatting climate change. While these efforts are commendable, they have given rise to protectionist measures aimed at boosting the renewable energy sector for market capture. This has raised concerns of economic rivalry and neo-protectionism. In this article, we will explore how various countries are implementing such measures and their impact on global trade, with a focus on India’s perspective

Protectionism Examples for green energy trade:

Inflation Reduction Act (IRA) in the US:

• The Inflation Reduction Act (IRA), enacted in August 2022, allocates approximately $370 billion in subsidies. This is mainly through tax credits, over ten years for the renewable energy sectors.
• The act includes a “Domestic Content” clause to qualify for these benefits.

EU’s Carbon Border Adjustment Mechanism (CBAM):

• The EU introduced the world’s first Carbon Border Adjustment Mechanism to combat “carbon leakage.”
• CBAM aims to impose a tax on products originating from countries with less stringent environmental regulations than the EU.
• Emerging economies, including BRICS nations and the US, have criticized CBAM for its potential green energy trade barriers.

US Proposal for a “Carbon Club”:

• In December 2022, the US proposed the creation of a “carbon club,” a multinational group that would offer favorable terms for metals trade among its members using green technologies.
• This club would impose tariffs on steel and aluminum imports from countries such as China.

UK’s Consideration of a Carbon Border Tax:

• The UK is contemplating a carbon border tax on steel imports to support domestic producers’ investments in green technologies.

Challenges Posed by WTO:

• The World Trade Organization (WTO) aimed to reduce trade barriers and promote equal treatment of products to enhance global commerce and stabilize the world economy.
• However, developed countries utilized offshore manufacturing to take advantage of cheaper labor and fewer environmental regulations, effectively “exporting” their emissions to other countries.
• The rich world’s focus on market-based policies like carbon taxes rather than industrial policies hindered the growth of the green industry and the potential for economic diversification.

Impact on India:

• As the US and EU are among the top destinations for Indian exports, these protectionist laws will affect Indian businesses.
• CBAM specifically targets Indian exports such as steel, aluminum, and iron.
• India’s lack of a domestic carbon price makes it challenging to estimate the impact of CBAM on its industries.
• The mechanism favors large industry players with the resources to invest in green technologies, potentially disadvantaging smaller players.
• While India has expressed concerns about CBAM, initiating a dispute at the WTO might not be the best approach due to its extensive trade relations with the EU.

Way Forward:

• India must be cautious about leading a campaign against these developed countries’ laws, as it also aspires to develop its domestic green technology manufacturing sector.
• India can seek partnerships with the EU to become a production hub for green technologies emerging from Europe.
• Collaborative research and development initiatives in green technologies within the US and EU can benefit India.
• India’s role as the leader of the G20 economies presents an opportunity to advocate for a more equitable trade regime amidst the climate crisis and foster solidarity with the Global South.

Conclusion:

Protectionist measures aimed at boosting the renewable energy sector have emerged as countries transition to green energy. While these measures may have unintended consequences on global trade. They also present opportunities for collaboration and equitable growth in the green technology sector. Balancing economic interests with climate objectives is essential for a sustainable and inclusive global transition to clean energy.

Read Also: Managing Climate Finance Mechanisms