EU’s climate plans: Fit for whom?

The European bloc’s green deal, that has many developing nations up in arms, blurs the lines between economic protectionism and ambition

This past fortnight, the European Commission released its ‘Fit for 55’ package. This includes 12 pieces of legislation that aim to change the EU’s existing framework for climate and energy policies in order to cut down on greenhouse emissions by 55% by 2030 compared to 1990 levels.

There are two objectives here. This target, which is more ambitious than the previous 40% reduction goal for 2030, is part of the EU’s short-term aim to become climate-neutral by 2050, and also to push the rest of the world to act on their 2015 Paris Agreement targets. The long-term objective is to push out a European “Green Deal” that will make the EU economy more sustainable, inclusive and competitive.

Some components of the package such as introducing a carbon border adjustment mechanism (CBAM) for carbon-intensive imports and a major overhaul of the Emissions Trading System (ETS) to include transport, shipping, aviation and buildings have drawn more attention than the rest. This is because some experts believe these “green reforms”, while good on paper, are likely to hurt not just unsuspecting consumers, but low-income countries, which are major exporters to the EU. Will these draft legislations lead to new forms of ‘greenwashing’ that serve to protect EU industries more than solve the climate crisis? The jury is still out on this.

But this is a cautionary tale for countries like India, which is a major exporter to the EU, where environmental, social and governance (ESG) investing is still in the nascent stage and policies against greenwashing are still a long way ahead.

Not trading lightly

The ‘Fit for 55’ package includes expanding the current ETS to include buildings and transport. While it has proven to be an effective decarbonisation tool in countries such as Germany, experts, workers’ unions and even France argue that the move will work to push up the electricity and fuel bills of already overburdened low-income households.

Making transport a part of the EU carbon market, for example, would push up fuel prices, but this factor alone will not incentivise people to drive less. Similarly for buildings, such a move will only push up energy bills and won’t decrease consumption, except for maybe higher-income households who would have the means to switch to low-carbon alternatives, say experts.

“Putting a price on carbon emissions of transport and buildings needs to be considered carefully in order for it to be a sensible climate policy. It is essential that existing regulatory measures and standards are maintained and strengthened. A key precondition is that a social redistribution instrument is put in place to ensure that lower-income households and consumers are not negatively impacted,” says Sam Van den Plas, policy director at Carbon Market Watch.

The Commission has recognised this unfair outcome and announced a €72 billion European social climate fund as part of the package to help those who will bear the cost burden of such a reform. The fund will receive support from revenue from the carbon price on buildings and transport. But questions over its limited size have been raised. The underlying problems that have led to its creation also remain unaddressed.

Legitimising greenwashing

As green norms become an increasingly common feature in governance, one persistent complaint has been the ambiguity of the language that is used in these pieces of legislation. This provides a thriving ground for greenwashing. The ‘Fit for 55’ package, sadly, is no different as already seen above in the ETS expansion plans, where the low-income consumer bears the environmental cost.

This fear of costs being public and profits being private can be extended to other proposals in the package, such as those on hydrogen reforms, in particular low-carbon hydrogen. These proposals seek to amend the existing Renewable Energy Directive, which was introduced by the EU in 2018, by setting a more definite decarbonisation deadline, revamping tax rates and basically making it easier to produce hydrogen. But once again, the truth lies between the words that have been said and those that have not been said. Green campaigners have repeatedly warned about the carbon footprint of low-carbon hydrogen, for it is just another term for fossil-based hydrogen. This means these tax breaks and allowances on emissions will eventually benefit fossil fuel firms that manufacture hydrogen. Public finance will, therefore, continue to fund the fossil fuel industry.

“While we welcome the emphasis on the ‘energy efficiency first’ principle, we regret that the package strongly overestimates the potential of both hydrogen and biomass as if they were a magic wand that could decarbonise all sectors. The environmental impacts of these expensive and rare resources are overlooked, while a broader perspective of decarbonisation, by saving emissions via the circular economy and rethinking production and consumption patterns, is largely dismissed,” says Davide Sabbadin, EEB senior Policy Officer for Climate and Circular Economy.

Another proposal under the package, CBAM, could have similar outcomes.

Pushing the boundaries

CBAM proposes imposing a levy on carbon-intensive imports such as aluminium, steel, cement, electricity and fertilisers from countries that don’t meet the EU’s environmental standards. The scheme starts in 2023 and allows countries to transition until 2025. From 2026 onwards, importers will have to buy CBAM certificates that will cover their carbon emissions at prices that are in line with the EU’s carbon price under the ETS. On paper, this creates a level playing field for the EU’s domestic manufacturers, who continue to pay high mandated decarbonisation costs and importers from low-income countries (LDCs), who continue to make products that are low on costs, but high on emissions. 

The European Commission says that its intention for introducing CBAM, is to reduce “carbon leakage”. This term refers to two trends– the first is when manufacturers in the EU move their carbon-intensive production abroad, to countries where environmental standards are lax; the second is when EU products are replaced by carbon-intensive imports. According to the Commission, carbon leakage shifts emissions outside Europe, seriously jeopardising the EU’s and global climate efforts.

Experts point out two major issues with this piece of legislation. One is that CBAM allows non-EU companies to individually assess its emissions as opposed to following the EU’s default emissions entities. This means a foreign firm could divert all its renewables-generated electricity towards manufacturing goods meant for the EU markets, and use the fossil-fuel generated power to make products for non-EU markets. This will achieve nothing apart from reallocating already existing renewable energy towards EU imports. In other words, this is just another form of greenwashing. 

Another concern with CBAM is that major exporters to the EU, such as China, the US and India, worry that the lucrative EU market will eventually close the doors on them in the long run as a result of the stringent green norms. According to experts, the Commission must introduce mitigating measures to ensure CBAM doesn’t harm the economies of LDCs, which have already taken a hit as a result of the COVID-19 pandemic. India has already expressed its displeasure over the carbon border tax, calling it “regressive” with “no principle of equality adhered to”. This sentiment that these mechanisms are protectionist rather than progressive is echoed across the developing world.

And the discontent is now showing, spilling over into other trade and climate change negotiation platforms. Last week, India expressed dissatisfaction with the mid-century timeline set by developed countries for net-zero emissions at a G20 meeting in Naples, and called for aggressive targets for emissions cuts by 2030 from the developed world. This was followed by the Indian contingent skipping a crucial G20 meeting on climate change.

A ripple effect

By introducing measures such as CBAM, expanding its ETS to include transport and buildings, and banning new petrol and diesel cars from 2035 onwards, the EU’s message is clear– “lead or be left behind”. The EU is on a mission to clean house and any country wanting to export emissions-heavy products covered by CBAM might need to pay a price for that. This includes India.

“Countries like India will be unfairly at a disadvantage as their products will no longer be competitive. So while India has accelerated the deployment of clean energy to reduce their carbon footprint, it will take them a few years to shift their industries to adopt clean energy. The EU should either delay the imposition of carbon taxes on the developing work for some years or compensate them financially for the loss on account of such taxes. Further, the EU should provide technology support for developing countries to adopt cleaner technologies,” says Vibhuti Garg, Energy Economist, IEEFA.

To its credit, however, the EU has not completely shut its doors to carbon-heavy imports from LDCs and has mentioned that a “dialogue with third countries should continue and there should be space for cooperation and solutions that could inform the specific choices that will be made on the details of the design of the measure.”

India-EU: A growing partnership

Between 2010 and 2020, India’s trading partnership with the EU has steadily grown. In 2020, India was the eleventh-largest partner for EU exports of goods (1.7 %) and also the eleventh-largest partner for EU imports of goods (1.9 %). For India, the EU is India’s third-largest trading partner. According to the Indian Ministry of Commerce, India exported $216.88 billion worth of goods to Europe over the past five years. Major exports include organo-inorganic compounds, petroleum oils other than crude, medical supplies, motor vehicle parts, clothes and shoes. Needless to say, some of these products are carbon-intensive. CBAM, therefore, is bound to affect this relationship.

India’s economy, which has already been hit hard by the COVID-19 pandemic, is also at a nascent stage when it comes to ESG. While Indian businesses and investors are waking up to the importance of sustainable products, a transition is still a long way ahead.

The country’s market regulator, Securities and Exchange Board of India (SEBI) has already taken the first step. It has asked the top 1,000 listed companies to publish an annual Business Responsibility and Sustainability Report (BRSR), first voluntarily in the 2022 financial year, and then compulsorily from 2023 onwards.

The BRSR is to include data on the company’s carbon emissions, discharge of other effluents, and reports on the privacy and data security of customers. The BRSR is based on the nine principles of the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business put forth by the Ministry of Corporate Affairs in 2011.

According to these guidelines, businesses should:

●      Businesses should conduct and govern themselves with Ethics, Transparency and Accountability

●      Provide goods and services that are safe and contribute to sustainability “throughout their life cycle”

●      Promote the well-being of “all employees”, including those in its value chain

●      Respect the interests of and be responsive to all their stakeholders, including those who are marginalised, disadvantaged and vulnerable

●      Respect and promote human rights

●      Respect, protect and make efforts to restore the environment

●      When engaged in influencing public and regulatory policy, should do so in a responsible and transparent manner

●      Support inclusive growth and equitable development

●      Engage with and provide value to their consumers in a responsible manner.

A recent NSE study that analysed ESG in 50 listed companies, however, found while policy disclosures were a strong point, environment and social factors did not get the same weightage. “Companies have largely scored better on policy disclosures followed by governance factors, compared to environment and social factors. This can be attributed to the fact that governance reforms have transformed into laws by various regulatory agencies within India, in the last two decades,” the study stated.

Concerns, therefore, for exporters, big and especially small, in India and other countries like it, where the ESG transition is just beginning, are legitimate. ESG reforms such as “Fit for 55” have been packaged as a roadmap to a sustainable future not just for the EU, but for the world at large. And it is not an exact science. Policy makers, with the EU at the helm, will play it by the ear and continue to introduce revisions and reforms to their version of the Green Deal.

EU’s package of climate legislations represents a monumental shift towards decarbonisation. Making carbon more expensive, for the nation bloc, is an unavoidable consequence of broader, more aggressive climate action. But while the EU will hope that this package will set a precedent for similar legislation and tax adjustments in other parts of the world, it is clear who the winners and losers are in this ambition. Developing countries, like India, that have large export volumes with the developed world, are justifiably wary of the implications this will have for their trade interests. But while demands for rich countries to step up action are legitimate, they cannot come without recognition that the developing world is not immune from blowback. With the rifts deepening, the next G20 meet in October and then the COP26 in November will be closely watched battlefields that are likely to define the lines of control between equity and ambition.