EU’s Fit for 55 and its impacts – UPSC GS3

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Fit for 55:
  • The European Commission adopted the Fit for 55 Package of proposals. It aims to make the EU’s climate, energy, land use, transportation, and taxation policies fit for lowering greenhouse gas emissions by 55% by 2030 (relative to 1990 levels).
Impacts:
  • The Fit for package opens new markets for the Indian industry, for example, electric vehicles.
  • However, it also introduces a globally unprecedented carbon border adjustment mechanism (CBAM) for pricing imported carbon.
  • It also includes a major overhaul of the Emissions Trading System (ETS) where polluting industries can purchase carbon credits to offset their carbon emissions. The changes will drive the price of carbon credits higher and will tax polluting industries more harshly.
What is CBUM (carbon border adjustment mechanism)?
CBAM will impose a border fee on imports in carbon-intensive sectors like steel, cement, and fertilizers from nations with lower environmental standards than the EU. The scheme would start in 2023 with a transition period until 2025.
Advantages of CBAM:
  • Mechanism will reduce carbon leakage.
  • Provide EU manufacturers a level playing field: This will offer EU manufacturers, that are paying the expenses of legally mandated decarbonization, a competitive advantage over foreign competitors who can create products at a cheaper cost and with higher emissions.
  • Encourage producers to invest in cleaner technologies: With fit for 55, the foreign producers will be required to pay for the carbon released while making their products under CBAM. Manufacturers will be encouraged to invest in greener technologies as a result of this.
What are the impacts of CBAM over India?
  • India does not have its own carbon tax or cap. So, CBAM should be a cause for concern, as it would result in an increase in existing duties payable on Indian exports of certain products to the EU.
  • According to UNCTAD STUDY: India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium.
What should the Indian industry do to prepare for the new regulations?
  • Indian industry should start clean technology partnerships with the European industry.
  • Indian companies should invest in more renewable electricity and energy efficiency.
  • Indian industries can adopt science-based targets for emission reduction and internal carbon pricing to incentivize low-carbon options.
  • The government can extend the perform-achieve-trade scheme to more industries and provide financial assistance to MSMEs to upgrade to clean technologies.
  • India can try to diversify its exports to other markets and products.
    • For example: India could increase its market share of crude steel compared to more carbon emission intensive producers like China, Russia, and Ukraine.
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