FIT FOR 55

Context

  • Recently, the European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55 per cent by 2030 and to net-zero by 2050.

Key Details

  • It turns the EU’s announcement into law, protecting it from the winds of political change.
  • It opens new markets for Indian industry, for example for electric vehicles.
  • However, it also introduces a potentially adverse policy called the carbon border adjustment mechanism (CBAM).
    • CBAM is meant to discourage consumers from buying carbon-intensive products and encourage producers to invest in cleaner technologies.
    • The new CBAM is meant to level the playing field between domestic and imported products.
    • CBAM will require foreign producers to pay for the carbon emitted while manufacturing their products.
    • The adjustment will be applied to energy-intensive products that are widely traded by the EU, such as iron and steel, aluminium, cement, fertiliser, and electricity.

A cause for concern for India

  • India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap.
  • So, CBAM should be a cause for concern for it.
  • A UNCTAD study predicts that India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium.
  • India’s goods trade with the EU was $74 billion in 2020.

Way Forward

  • Indian Industry should enter clean technology partnerships with European industry.
  • Indian companies should invest in more renewable electricity and energy efficiency.
  • They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices.
  • The government can extend the perform-achieve-trade scheme to more industries and provide finance to MSMEs to upgrade to clean technologies.
  • WRI India’s analysis shows that carbon dioxide emissions from the iron and steel industry can be reduced from 900 million tonnes to 500 million tonnes in 2035 through greater electrification, green hydrogen, energy efficiency, and material efficiency.
  • India can try to diversify its exports to other markets and products.

INDIA AND EU

Context

  • Recently, the Prime Minister of India participated in the India-EU Leaders’ Meeting held in a hybrid format with the participation of leaders of all the 27 EU Member States as well as the President of the European Council and the European Commission.

Key Details

  • This is the first time that the EU hosted a meeting with India in the EU+27 format.
  • The meeting was the initiative of the Portuguese Presidency of the Council of the European Union.
  • During the meeting, the leaders expressed their desire to further strengthen the India-EU Strategic Partnership based on a shared commitment to democracy, fundamental freedoms, rule of law and multilateralism.
  • They exchanged views on three key thematic areas: i) foreign policy and security; ii) COVID-19, climate and environment; and iii) trade, connectivity and technology.
  • They discussed forging closer cooperation on combating the COVID-19 pandemic and economic recovery, tackling climate change, and reforming multilateral institutions.
  • India appreciated the prompt assistance provided by the EU and its member states to combat its second COVID wave. 
  • The leaders welcomed the decision to resume negotiations for balanced and comprehensive free trade and investment agreements.
  • Negotiations on both the Trade and Investment Agreements will be pursued on parallel tracks with an intention to achieve early conclusion of both agreements together.
  • This is a major outcome which will enable the two sides to realise the full potential of the economic partnership. India and the EU also announced dedicated dialogues on WTO issues, regulatory cooperation, market access issues and supply chain resilience, demonstrating the desire to deepen and further diversify economic engagement. 

Connectivity Partnership

  • India and the EU launched an ambitious and comprehensive ‘Connectivity Partnership’ which is focused on enhancing digital, energy, transport and people-to-people connectivity.
  • The Partnership is based on the shared principles of social, economic, fiscal, climate and environmental sustainability, and respect for international law and commitments.
  • The Partnership will catalyse private and public financing for connectivity projects.
  • It will also foster new synergies for supporting connectivity initiatives in third countries, including in the Indo-Pacific. 

Other Commitments

  • India and the EU leaders reiterated their commitment to achieving the goals of the Paris Agreement and agreed to strengthen joint efforts for mitigation, adaptation and resilience to the impacts of climate change, as well as providing means of implementation including finance in the context of COP26. India welcomed the EU’s decision to join CDRI.
  • India and the EU also agreed to enhance bilateral cooperation on digital and emerging technologies such as 5G, AI, Quantum and High-Performance Computing including through the early operationalization of the Joint Task Force on AI and the Digital Investment Forum. 
  • The leaders acknowledged the importance of a free, open, inclusive and rules-based Indo-Pacific and agreed to closely engage in the region, including in the context of India’s Indo-Pacific Ocean’s Initiative and the EU’s new strategy on the Indo-Pacific. 
  • Coinciding with the Leaders’ Meeting, an India-EU Business Roundtable was organized to highlight the avenues for cooperation in climate, digital and healthcare.
  • A finance contract of Euro 150 million for the Pune Metro Rail Project was signed by the Ministry of Finance, Government of India, and European Investment Bank.
  • India-EU Leaders Meeting has set a significant milestone by providing a new direction to the Strategic Partnership and giving a fresh impetus for implementing the ambitious India-EU Roadmap 2025 adopted at the 15th India-EU Summit held in July 2020.

Back to Basics

European Union and India

  • The ties between India and the EU date back to the early 1960s, with India being one of the first countries in the European Economic Community to develop diplomatic relations.
  • The Cooperation Agreement was signed between the two in 1994, creating partnerships beyond commercial and economic cooperation.
  • In 2000, the first India-EU Summit took place. The relationship was upgraded into a ‘Strategic Partnership’ in 2004.
  • A Delegation for Relations with India was formally constituted in the European Parliament in 2007.
  • Relations between the European Union and the Republic of Indiaare currently defined by the 1994 EU–India Cooperation Agreement.
  • The EU is a significant trade partner for India and the two sides have been attempting to negotiate a free trade deal since 2007.
  • Indo-EU bilateral trade (excluding services trade) stood at US$104.3 billion in the financial year 2018–19.

Economic Relations

  • The EU is India’s largest trading partner, while India is the EU’s 9th largest trading partner.
  • The EU is the second-largest destination for Indian exports after the United States.
  • The 27-nation EU, as a whole, was India’s largest trading partner in 2018.
  • The bilateral trade in 2018-19 stood at $115.6 billion – exports were valued at $57.17 billion and imports at $58.42 billion.
  • The EU’s share in foreign investment inflows to India has more than doubled from 8% to 18% in the last decade. This makes the EU an important foreign investor in India.
  • The EU’s FDI stocks in India are significant.
  • Around 6,000 European companies are present, providing directly 1.7 million jobs and indirectly 5 million jobs in India.
  • Indian companies invested over €50 billion in Europe since the year 2000.
  • India is benefiting from the unilateral preferential tariffs under the EU Generalised Scheme of Preferences (GSP), which links unilateral trade preferences with respect for human and labour rights.

India-EU trade pact

  • India plans to start negotiations on investment and trade agreements with the European Union (EU). 
  • These are likely to run into the same problems as the discussions that began on a comprehensive free trade agreement in 2007 but were aborted due to differences on movement of professionals, labour, human rights and environmental issues and India’s high tariffs, inconsistent tax regime and non-payment of arbitral awards.
  • Before COVID-19 and Brexit, the EU had the same GDP as the United States and was one of India’s major trade and investment partners.
    • Being the largest democracies and unions of linguistically, culturally and ethnically diverse States, both the EU and India are well suited for a special relationship, but the reality is that the status is one without any spark of mutual chemistry.

People to People Relations:

  • India and the EU organize Festivals of culture (e.g. Europalia-India festival), exchanges on heritage such as yoga & Ayurveda etc.
  • Both signed Horizontal Agreement on Civil Aviation in 2018 to boost bilateral travel and tourism.
  • Both sides also inked the Common Agenda on Migration and Mobility (CAMM) in 2016 as a framework for cooperation on migration.
  • There are over 50,000 Indian students currently studying in various European Universities, many of whom are under EU’s Erasmus Mundus scholarship programme for higher education.

Maritime Cooperation

  • Maritime security has emerged as a critical area of cooperation between India and the European Union.
  • The Joint Action Plan adopted in 2005, highlighted and emphasized on maritime cooperation. In the past few decades, both India and the EU have stressed on the idea of freedom of navigation, maritime piracy, and adherence to United Nation Conventions on the Law of the Sea (UNCLOS) and the development of the blue economy and maritime infrastructure.
  • Both have identified the Indo-Pacific as the new avenue for maritime cooperation. In January 2021, India and the EU hosted the first Maritime security dialogue in a virtual format.

Climate Change

  • In the realm of climate change, India-EU relations have witnessed a commitment of international agreements such as the Kyoto Protocol and the Paris agreement.
  • They have been collectively pushing for a comprehensive framework for global governance on climate change.
  • The EU has also invested in numerous programmes such as India-EU water partnership, solar park programme, and Facilitating Offshore Wind in India (FOWIND).
  • One of the major investments was the signing of the 200 million EUR loan agreement between the EIB and the Indian Renewable Energy Development Agency.
  • Collaboration on climate change is central to the relationship between India and the European Union (EU). Since 2016, the EU and India have together pursued a Clean Energy and Climate Partnership (CECP), which focuses on developing cooperation in clean energy and the implementation of the Paris Agreement, including in the area of energy efficiency, renewable energy, smart grids, storage, sustainable finance, and climate mitigation and adaptation. 

Cooperation on Data Protection and Regulation

  • In the 15th India-EU Summit, both sides highlighted on driving a ‘human-centric’ digital transformation.
  • The Roadmap 2025 document for the first time reflected the need to build effective cooperation on data protection and regulation.
  • The differences in regulatory frameworks for data protection in India and the EU surfaced during the trade negotiations wherein the EU refused to accord India with ‘data secure’ status.
  • India and the EU have committed to work together in developing new standards and approaches for international ICT standardization since 2015.
  • During the 15th India-EU Summit, both sides agreed for greater convergence of the regulatory frameworks through data adequacy decision for the facilitation of cross-border data flow as well as engaging in dialogue regarding safe and ethical usage of AI and 5G.

Science and Technology collaboration:

  • EU is supporting the Mobilize Your City (MYC) programme in India currently in three pilot cities to reduce their urban transport-related Green House Gas (GHG) emissions.
  • India and the EU set up an Energy Panel in 2005 for cooperation in energy and energy security and both cooperate on forums such as EU-India Clean Energy Cooperation and India-EU Water Partnership.
  • Also, both have official mechanisms in fields such as Digital Communications, 5G technology, Biotechnology, artificial intelligence etc.
  • India has contributed towards the EU’s satellite navigation system

Challenges

  • European Union’s close ties with China are because of its high dependence on the Chinese market.
    • In certain areas—such as climate change—China is a close partner, while in areas like technology and renewable energy, they are selective partners only. With regard to 5G networks, EU maintains the need to be ‘realistic and reasonable’. 
    • On the other hand, EU and China are systemic rivals as well; they hold diverging views on political fundamentals, human rights, and the role of civil society. Human rights violations in the Xinjiang province or the threat to democratic space in Hong Kong represent ‘red lines’ in EU’s relations with China. In this context, EU’s political institutions are closer to those of India—a factor that has helped to strengthen bilateral partnership between the two.
  • While India’s bilateral relations with EU member states — like Germany, France and the UK — developed substantially, it did not lead to the expected intensification of ties with the grouping.
  • Stalled EU-India BTIA
  • India accounts for only 1.9% of EU total trade in goods in 2019, well behind China (13.8%).
  • It views EU primarily as a trade bloc, preferring bilateral partnerships with Member States for all political and security matters. This is evident from lack of substantive agreements on matters such as regional security and connectivity.
  • It is unclear how U.K.’s withdrawal from EU will affect India’s relation with EU as whole.
  • The European Parliament was critical of both the Indian government’s decision to scrap Jammu and Kashmir’s special status in 2019 and the Citizenship (Amendment) Act.
  • Other areas of concerns for the Indian side are legally binding clauses on human rights, and social and environmental and labour standards.
  • India-EU development cooperation spans several decades and encompasses issues like health, education, poverty reduction, water and sanitation.
  • The EU has demanded the lowering of tariffs on wines, spirits, dairy and automobiles, but India has raised concerns that this could result in European imports flooding the market without any reciprocal access to the European market.
  • The EU expects India to strengthen its IPR regime, which may have a critical impact on India’s vast pharmaceutical and generic drug sector.
  • India and the EU have also been unable to reach an agreement on IPR. 
  • Another major concern for India is to get recognised as a data-secure country by the EU. Without this, the flow of sensitive data can be hindered, increasing operating costs for Indian businesses in the EU. 

Need of the Hour

  • Given India’s growing regional and international relevance, it is crucial for the EU to renew its focus on developing the economic, political and defence partnership.
  • With the establishment of an investment facilitation mechanism for EU investments in India in 2017, there is a renewed focus on facilitating ease of doing business norms for EU investors in India.
  • The Indian government’s decision to limit the number of international donors marked a concrete step towards changing the dynamics of development cooperation with the EU.
  • The development partnership provides India and the EU a platform to formulate a comprehensive approach and policy framework towards various global challenges.
  • India and the EU are working closely on several fronts that cover the Sustainable Development Goals (SDGs) — such as the smart cities initiative (SDG 11), clean water and sanitation (SDG 6) and climate action (SDG 13). The two have become key stakeholders in global efforts to combat climate change through the framework of Clean Energy and Climate Change Partnership, 2017.

Three issues will likely define their future economic trajectory — Brexit, FTA negotiations and post-COVID-19 economic recovery.

  1. Since 2019, India and the UK have been the top five investors in each other’s economies. The UK’s exit from the EU will not only have an economic implication for the grouping but for the larger world economy, and India is not immune to this phenomenon. India considers the UK as a gateway to continental Europe and with it exiting the EU, Indian firms will lose this advantage.
    1. Brexit could provide India the opportunity to reset its trade and economic ties with the UK and the EU.
  2. The BTIA is crucial because both India and the EU are large markets and India’s demographic dividend can help the EU with the movement of skilled labour and professionals. 
  3. The priority area for India and the EU remains the post-COVID-19 economic recovery. Over the past few months, the pandemic has expanded into an economic crisis, a geopolitical shock and a social challenge. Tackling its impacts requires multilateralism, cooperation and solidarity. This is where India’s partnership with the EU can shine.
  4. India is keen to promote itself as an alternative manufacturing hub and an innovation destination to become the “nerve centre of global supply chains”. This is also the vision of the Atmanirbhar Bharat policy, which aims to merge domestic production and consumption with the global supply chains. In the post COVID-19 world, India-EU economic relations will not be defined just by BTIA negotiations but also on efforts to become part of reliable supply chain networks.
  5. India’s medical diplomacy during the pandemic (distribution of the anti-malarial drug hydroxychloroquine) and the release of vaccines has drawn it plaudits. India’s pharmaceutical manufacturing capabilities coupled with access to European healthcare technologies can provide new avenues for enhancing partnerships and promoting innovation between the partners.
  6. The two sides can explore collaboration between their hospitals and research centres for the exchange of information and best practices on scientific developments and to conduct joint research. The linking of research efforts can help India and the EU leverage their capacities to find innovative solutions for healthcare.

Conclusion

  • Intensified dialogue and deliberations, a realignment of trade policies and emerging prospects of collaboration in the post-pandemic world provide India and the EU an opportunity to transform their economic ties into a robust strategic partnership.

EU & ASEAN

Context

  • The EU has earmarked millions of euros for supporting climate friendly development in Southeast Asia.
  • After the European Union became a “strategic partner” of the Association of the Southeast Asian Nations (ASEAN) bloc in December 2020, both blocs pledged to make climate change policy a key area of cooperation.

Key Takeaways

  • The EU, already the largest provider of development assistance to the ASEAN region, has committed millions of euros to various environmental programs.
  • This includes €5 million ($5.86 million) to the ASEAN Smart Green Cities initiative and another €5 million towards a new means of preventing deforestation, called the Forest Law Enforcement, Governance and Trade in ASEAN.
  • Along with multilateral assistance, the EU also works with individual ASEAN member states on eco-friendly policies like Thailand’s Bio-Circular-Green Economic Model and Singapore’s Green Plan 2030.

Key Concerns

  • Five ASEAN states were among the fifteen countries most affected by climate change between 1999–2018, according to the Climate Risk Index 2020.
  • As a fast-developing region, where economic growth, urbanization and domestic consumption rates are expected to spike in the coming decades, Southeast Asia’s energy demand is projected to grow 60% by 2040.
  • This will contribute to a two-thirds rise in CO2 emissions to almost 2.4 gigatons, according to the Southeast Asia Energy Outlook 2019.
  • Of the numerous environmental problems facing the region, perhaps the most consequential is the continuing uptake of coal for electricity generation.
  • Southeast Asia is one of the few areas of the world where coal usage has increased in the past decade. In 2019, the region consumed around 332 million tons of coal, nearly double the consumption from a decade earlier, according to the International Energy Agency (IEA).
  • Of that, Indonesia accounted for 42% and Vietnam nearly a third. In 2019, the region’s imports of thermal coal rose by 19% compared with the previous year, according to an IEA report.
  • Energy generated from coal doubled in the Philippines between 2011 and 2018, when it accounted for 53% of energy consumption, according to the country’s Department of Energy.
  • Coal is expected to account for more than 50% of Vietnam’s energy supply by 2030, the World Coal Association.
  • Even Laos, which has built hundreds of hydropower dams over the past decade, saw coal-fired energy production rise from almost nothing to 10,000 GWh in 2017.
  • According to a study published in November in the journal of Energy and Climate Change, coal-fired energy will overtake natural gas as the main power source in the ASEAN region by 2030. And by 2040 it could account for almost 50% of the region’s projected CO2 emissions.

EU ignoring coal in Southeast Asia

  • Coal-fired power production is rarely, if ever, mentioned by the EU in its climate policy in Southeast Asia.
  • After the second EU-ASEAN High-Level Dialogue on Environment and Climate Change in November, a post-dialogue statement by the two blocs did not reference coal-fired energy. Neither is coal mentioned in detail in the Blue Book 2020, a 47-page guide that lays out EU-ASEAN partnership.

Clean Energy

  • As part of the forthcoming dialogue on Clean Energy between the EU and ASEAN, we hope to be able to support ASEAN in its energy transition, including all relevant aspects: renewable energy, energy efficiency, grid integration, climate finance and coal phase out.
  • The EU-Vietnam free trade agreement, which came into effect last year, commits Vietnam to making efforts towards renewable energy production but there is no explicit mention of limiting its coal-fired energy consumption.

Big money in dirty energy

  • Indeed, if the EU takes a strong forceful stance on coal consumption in the region, it could spark anger from the main exporters of the commodity, China, India and Australia.
  • Indonesia last year-initiated proceedings at the World Trade Organization against the EU’s phased ban on palm-oil imports. Brussels contends the ban is to protect the environment, but Indonesia, the world’s largest palm oil producer, says it is mere protectionism.
  • Malaysia, the world’s second-largest palm oil producer, has vowed to stand with Jakarta in its battle against the EU.
    • Production and consumption of coal have dropped massively in the EU in recent decades. Hard coal consumption fell from 300 million tons in 1999 to 176 million tons in 2019, roughly half of the Southeast Asian coal consumption rate that year, according to EU data.
    • But Poland and the Czech Republic remain dependent on coal-fired energy production, although the former contributed to almost 95% of the EU’s total hard coal production by 2019. And, according to the International Energy Agency, Southeast Asia and Europe each accounted for around 11% of the world’s thermal coal imports in 2019.

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