Finance minister Nirmala Sitharaman identified manufacturing and services, and energy security among her budget priorities. For both, the budget seeks, “appropriate energy transition pathways that balance the imperatives of employment, growth and environmental sustainability”. To capitalise on these priorities, India must heed developments in international trade and its growing — but increasingly complex — links with energy security, the climate crisis, and environmental regulation.
Climate risks are now an economy-wide concern. Extreme weather can damage ports, airports and other infrastructure, resulting in supply chain disruptions. These spillover into the wider economy: Insurance costs of physical damage, food price shocks, and upsetting manufacturing and employment targets.
Meanwhile, industrial and trade policies in foreign jurisdictions could disrupt climate action elsewhere. After decades of advocating against government support to industries, advanced economies have doubled down on (green) industrial policy, such as the United States’ (US) Inflation Reduction Act and the European Union’s (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 had ~30%, ~10%, and ~16% shares of global clean energy spending. By contrast, India got ~3% and Africa received ~1%. By the end of 2024, these ratios would have barely budged. Further, when central banks in rich countries raise interest rates to combat inflation, the cost of finance for foreign currency-denominated debt for clean energy projects goes up. With the costs of intermediate imported goods also rising, manufacturing of cleantech finished products becomes even harder.
Energy and resource efficiency are critical for maintaining industrial competitiveness. Industry in India has consistently suffered due to high energy costs for them. But in rapidly growing economies, the push for energy efficiency can only go some of the way. With absolute energy demand rising, disruptions in the supply of fossil fuels or clean energy create major concerns. Trade agreements must respond to these concerns now by ensuring the security of supply of the fuels of the future.
India must prepare strategic responses for four kinds of trade barriers that will impact its climate ambitions and energy security concerns. First, price measures. Council for Energy, Environment and Water (CEEW) estimates that almost $10 billion of India’s exports to the EU could come under the purview of the Carbon Border Adjustment Mechanism (CBAM). The UK has also announced that it will implement a CBAM by 2027. The US is considering border adjustments for embedded carbon in traded goods. Rather than hope for relief from a moribund World Trade Organization, India must calculate the exposure to various sectors but also the opportunity that arises from sustainability measures, which could give Indian industry an edge in greener trade. The ongoing Free Trade Agreement (FTA) negotiations with the EU and the UK should also consider how India’s sustainability measures receive equivalent treatment so that our exports can jump some green tariff walls.
Secondly, non-price measures. Sustainability-driven non-tariff measures (NTMs) are on the rise (from 8% of all NTMs notified to the WTO in 1997 to 19% in 2021). EU regulations target heavy industries like chemicals as well as jobs-intensive industries such as textiles, vehicles and consumer electronics, which could adversely impact up to $27 billion of India’s exports to the EU.
India also has a strong interest in developing clean technologies with wide applications across industrial sectors. Green hydrogen is one, 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; cleantech is no exception. For instance, in green hydrogen, we find gaps in India’s standards at various stages of the value chain, namely production (such as biomass pyrolysis), storage (say, liquid hydrogen), transportation (through pipelines), or applications (say, aviation 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.
Thirdly, highly concentrated cleantech supply chains. Over 80% of upper-middle-income economies and 90% of lower-middle-income economies face concentrated imports (for rich countries, the ratio is under 60%). The poorer the economy, the greater the challenge for building green industries. India depends heavily on a handful of countries to meet more than 80% of its solar cell and module requirements. Unilateral industrial policy can help only to an extent. India needs strategic trade relationships where its comparative advantage in manufacturing certain components can be paired with that of key trading partners. Interdependent value chains can make India and its partners gain more cleantech export competitiveness.
Fourthly, intellectual property for cleantech. Five countries — Japan, the US, Germany, China, and South Korea — hold approximately 85% of renewable energy patents published during 2000-23. Most environmental patents granted will remain valid until after 2030, creating barriers for developing countries to attain them. Asking for technology transfer sounds nice in rhetoric but has a poor record in practice. India must leverage its renewed thrust on R&D for cleantech development and co-development with partner countries. Just customs duties on imports will prove insufficient.
Historically, trade has defined national development and international politics. The global economy is now being shaped by disruptive shifts in energy systems, advanced technologies and financial architectures. India’s industrial and trade policies and strategies must evolve too. The linkages between energy, trade and climate are too important to be left to simplistic formulations and response measures.
Arunabha Ghosh is CEO, Council on Energy, Environment and Water.The views expressed are personal
