When it comes to international trade, we think of GDP, the balance of payments, or foreign exchange. Climate change is not something that comes to our minds, even though it is perhaps one of the most critical components when talking about trade patterns, the rising environmental costs, etc., which can adversely impact a country's imports and exports.
According to the Organisation for Economic Co-operation and Development (OECD), climate change can impact supply, transport, and distribution chains, particularly maritime shipping. More importantly, it says, "climate change is expected to decrease the productivity of all production factors (i.e., labour, capital, and land), which will ultimately result in output losses and a decrease in the volume of global trade."
India is in a unique position when it comes to climate change. It is among the top three nations in greenhouse gas emissions.
But it also has a low per capita carbon footprint that is 60% lower than the global average. The government is pushing the idea of India as a climate-responsible economy, and several steps towards renewable energy and green manufacturing practices underline this.
Why does this matter to global trade? It does because every country's trade heavily depends on what other countries are doing to win the climate war. Here are a few ways the 'climate change-international trade' relationship will play out in the years ahead.
Simply put, a carbon tax is levied on industries that produce carbon dioxide through their operations. The idea behind imposing such a tax is to encourage companies to switch to production methods that do not release greenhouse gases and CO2 into the atmosphere.
The International Monetary Fund (IMF) believes that a carbon tax is the most effective way of reducing harmful emissions.
The carbon tax is levied depending on the carbon content of fossil fuels. Add this to the rising fossil fuel prices, and it is easy to see why India will benefit by moving to renewable energy sources and green vehicles.
Carbon Border Tax
Recently, a new form of the carbon tax has vexed countries like India. This is the European Union's (EU) carbon border tax.
Earlier this year, the EU parliament adopted a resolution to implement a Carbon Border Adjusted Mechanism (CBAM). Under this, all goods entering the EU from countries that do not implement stringent measures to curb greenhouse gas emissions would be taxed at the borders. Reports say the UK and the US are considering similar proposals.
The EU (and probably the US and UK) believe that imposing a carbon border tax will compel countries to follow cleaner production processes and greener technologies.
On the other hand, Brazil, South Africa, India, and China--the BASIC Group, have jointly opposed this tax.
They claim the move is discriminatory and against the spirit of international cooperation and climate change agreements under which developed nations are responsible for providing financial and technical aid to developing economies to fight climate change.
The EU is India's third-largest trading partner and accounted for 11% of India's global trade in 2020. According to data from the commerce ministry, India's exports to the EU were worth $41.4 billion in 2020-21.
The proposed carbon border tax on Indian goods will make Indian goods more expensive and therefore less attractive to overseas buyers.
On the positive side, India may not have to pay a steep price for some exports, notably steel, produced in a carbon-efficient manner. However, there is a long way to go before all exports from India can be said to be entirely green.
As of now, there is still no clarity about how the EU will assess the emission levels of specific products. However, it is evident that India may struggle in one of its biggest export markets, at least in the near term.
The Silver Lining
While the fight against climate change can cost countries through border taxes, it can also benefit economies.
In Sustainable Development Impact Summit's report, the World Economic Forum (WEF) quoted a Chatham House study that said yields of staple crops could fall by nearly a third by 2050 if governments don't ramp up commitments made under the Paris agreement.
The WEF report says this has already impacted global pasta production, as maize yields globally have fallen significantly.
India may be well placed to plug some of the gaps for a few crops. For instance, Brazil, the world's largest sugar producer, has seen its sugarcane crop ravaged by drought and unseasonal frost. India, the next largest producer of the commodity, can benefit from this.
There are reports that Indian traders have signed sugar export contracts five months ahead of shipments as buyers predict a further fall in Brazil's production, prompting them to secure supplies from India.
This rarely happens, as Indian traders sign deals just a couple of months ahead of shipments and only after the government announces the export subsidy.
Ironically, even as exports are set to look up, sugar production may fall marginally this year. Reports say that the government plans to divert a part of the sugarcane crop into ethanol manufacturing. This is part of the government's bid to reduce dependency on fossil fuels.
Climate change could make or break India. Suppose the country continues on its current path of encouraging clean and green manufacturing, sustainable agriculture, and reducing greenhouse gas emissions. In that case, it could be a significant player in the global arena.
(The author is CEO/Co-founder, Drip Capital.)
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