This is the season of trade threats. There was much consternation about President Trump’s tweet two months earlier that “India has long had a field day putting tariffs on American products. No longer acceptable!”. This came in the wake of retaliatory tariffs slapped by India in response to the US’s termination of India’s participation in the Generalized System of Preferences (GSP).
On the horizon, though, are more ominous threats from developed countries with the intent of prodding India to substantially enhance its commitments under the Paris Climate Agreement to address climate change and global warming. These may take the shape of tariffs and non-tariff barriers on Indian exports. International aid flows and concessional finance will be impacted, as will foreign portfolio investments influenced by new regulatory requirements in markets like the European Union (EU). The damage to India’s economic interests could be large, even as Corporate India struggles to adapt to climate change and find new opportunities for growth.
The international community is beginning to ask searching questions about the role that developing countries play in the fight against climate change. India is the third largest producer in the world of climate change inducing greenhouse gas emissions, after China and the US. At various international fora, including the forthcoming Climate Action Summit called by the United Nations Secretary General next week, India’s actions to curb the growth of greenhouse gases will be under scrutiny.
India’s commitments under the Paris Climate Treaty, including the reduction of the carbon intensity of its GDP by 33-35% by 2030, and the generation of 40% of its energy from renewable sources, will in fact not yield a decline in greenhouse gas production; with the targeted economic expansion outlined in the recent Economic Survey, greenhouse gas production is slated to increase in India. Meanwhile, compensating short-term goals set by the government, including the promise to create 100 GW of solar power capacity by 2022, appear very difficult to achieve given the current run-rate.
Unfortunately, India’s growing emissions come at a time when the Intergovernmental Panel on Climate Change (IPCC) has concluded that global emissions need to fall by 45% from 1990 levels by 2030 to constrain the worst impacts of global warming. These impacts – including unbearable heat waves, extreme climatic events like torrential rainfall as well as drought, changes in cropping patterns, and sea level rise – are already being felt across the globe. Cities like Paris and New York, as well as the UK Parliament, have declared “climate emergencies”, and a green surge was visible in the recent European Parliamentary elections.
The responses that are taking shape include the European Commission’s Draft Rules for an EU framework which puts Environment, Social and Governance (ESG) considerations at the heart of the financial system; these will soon require all asset managers to disclose the ESG performance of their investment portfolios. Consequently, corporates that are non-compliant on issues like reducing their carbon footprint will be progressively excluded from the investment portfolios of the largest fund managers in the world. The recent action by Norway’s sovereign wealth fund to dump fossil fuel stocks is a sign of things to come. Guided by regulation, corporates in the developed countries will also start excluding from their supply chains companies in the developing world that are non-compliant with climate change mitigation standards.
Likewise, on international aid, statements from Britain’s Department for International Development indicate a relook at aid spending to incorporate measures like resilience to climate change and reducing environmental harm.
It is only a matter of time before international trade flows, and the levers they offer to influence the climate agenda, start receiving the attention of Western governments.
The Indian government and the corporate sector are key stakeholders who will have to work hard to defend India’s position. The government will rightly argue climate ethics – the unfairness of asking developing countries that have major developmental challenges to embrace structural changes to solve the problem of climate change that has, at least in terms of legacy greenhouse gas emissions, been predominantly caused by the developed world. Indeed, on per capita emissions, India falls well over 100 places in the world rankings of biggest greenhouse gas producers. Hence the government’s emphasis on the “common but differentiated responsibility” of developing countries. It will also highlight the gross inadequacy of financial flows and technology assistance from the developed countries to the developing countries. Grants, loans and project finance of $100 Bn a year to tackle climate change have been long promised by developed countries, but only around 20% of this amount currently flows to developing countries.
The Indian corporate sector, meanwhile, must demonstrate greater resource use efficiency, and invest in both greenhouse gas mitigation and climate adaptation. Awareness is certainly increasing, with events like the Chennai floods of 2015, which disrupted business continuity at some of India’s largest IT campuses, vividly bringing home the damage climate change can cause. The risks of business model disruption and stranded assets in major sectors of the economy like automobiles, power and construction are high. Witness the agitated reactions of two-wheeler companies to the Niti Ayog’s proposed 2025 deadline for full migration to electric two-wheelers.
Corporate India needs to step up its investments on R&D and innovation, in order to adapt to the disruptive changes ahead, and to tap the opportunities presenting themselves in emerging spaces like electric mobility, renewable energy, waste management, and green buildings.
We are in the midst of a climate emergency which can stimulate irrational actions on the part of developed countries. India will have to substantially enhance its focus on climate risks, and seek international support. If the transition is not managed well, India could emerge as the villain of the piece, rather than one of the biggest victims of climate change.
This post was originally published in The Hindustan Times dated Sep 19, 2019