As the pace of innovation such as renewable energy and carbon border taxes accelerates, the world will see the redeployment of the global manufacturing chain.

The fourth (and conclusive) report in this series looks at the cost of accelerating decarbonization in a hard-hit economy. Read the first, second and third stories here, here and here. 

For a long time, developing economies have resisted reducing emissions.

However, this will change. Not only is the introduction of a carbon border tax coming soon, global finance is also worried about getting into the plight of stranded assets, and is rapidly adopting ESG (Environmental, Social and Corporate Governance) principles.

The consequences are staggering. Developed countries (and global finance) bypass national governments and force value chains to decarbonize.

As our second report shows, even before supporting policies (such as carbon offsets and emissions markets) emerged, companies were forced to adopt expensive technologies such as carbon capture.

Prime Minister Narendra Modi's statement at COP26 added to the pressure. By 2030, he announced in Glasgow that India will meet 50% of its energy needs through renewable energy; and the country's emission intensity will drop 46-48% from 2005 levels.

Decarbonization is coming. Therefore, the first two reports in this series focused on the prospects for India's energy transition. Our first report asked whether India can become a supplier (if not technology, fuel). Our second report looks at the decarbonization capacity of the local value chain.

Our third report looks at the regulatory framework required for carbon capture technology to function.

Also read: How a carbon tax can lead to a cost-effective climate change mitigation strategy in India

Talking about the energy transition, coal appeared immediately.

Many researchers around the world are working on a "just transition"-to support economies that rely on fossil fuels. In India, "just transition" is often cited in the context of coal. As its usage declines, the income of coal-producing areas will decline; coal-related industries will face bankruptcy and unemployment.

However, with accelerated decarbonization, India is about to see a greater impact.

Units based on the fossil fuel economy will obviously be under pressure, such as India’s auto industry. As the world shifts to electric vehicles, companies that make internal combustion engines will be in trouble. As the electric vehicle exchange between Tata Motors and TPG Rise Climate and ADQ (Abu Dhabi Development Holdings) has shown, large companies may survive, but small companies will be in trouble. Judging from the current situation, electric vehicles require fewer parts than internal combustion engines. Companies in this type of supply chain will be hit.

Even industries without obsolescence risks will suffer losses. Take the steel industry in India as an example. In order to maintain access to the export market, large companies are trying to decarbonize. As the second story in our series shows, Tata Steel is considering the capture of hydrogen and carbon. However, smaller companies are short of funds and cannot reinvent themselves.

However, these two changes are just the tip of the well-known iceberg. Energy costs are the main determinant of where the value chain is. Now, as the pace of innovation such as renewable energy and carbon border taxes accelerates, the world will see the redeployment of the global manufacturing chain. "So far, the West has outsourced most of its manufacturing to developing countries," said economist Jayati Ghosh. “Most of its emissions come from consumption. In contrast, most of the global South’s emissions come from manufacturing, not consumption.” Now, she said, “We will have to see which of these value chains remain in the third place. The world, which returned."

These issues will even touch industries such as textiles. It will have to choose between renewable energy — the price of which is rising in India — and the payment of a carbon border tax. "It's like ISO," Ghosh said. "It also covers the company's input suppliers. That is, it is almost impossible to comply with the informal economy in many of these sectors."

Read also: Six advantages of a unified carbon tax

The Great Dislocation Strikes

At the best time, doing business in India is not easy.

First, our policymaking is unstable. When it comes to coal, thermal power producers find themselves unable to compete with companies that arbitrarily allocate their own coal lump—and run into losses. Then, after the Supreme Court lifted the allocation of these blocks, the few favored people also suffered losses.

In terms of natural gas, cheap domestic natural gas was suddenly withdrawn from fertilizers and provided to city gas distributors. The latter later discovered that their prices were capped. In the solar field, the rooftop sector has been knocked down by DISCOMs, and they do not want the most profitable customers to build their own solar installations. The rest of the market—the ground installation of solar panels—has also been hit. Between the country’s promotion of “Made in India”, basic tariffs on solar imports, and an increase in goods and services tax rates, solar equipment and tariffs will also increase costs. This will also push up the price of hydrogen in India.

This is not all. Some states, such as Tamil Nadu and Andhra Pradesh, have violated power procurement contracts. "Contracts are not sanctified," said Sandeep Hasurkar, author of "Never Ending," which details the collapse of IL&FS.

The country is now adding technical risks to this melee. In order to maintain access to export markets and financing opportunities, companies must decarbonize. To make matters worse, despite being under pressure, they must still decarbonize. Between the de-monetization (2016), the poor introduction of the goods and services tax (2017), the cash crunch (2018), the first COVID-19 lockdown (2020) and the second (2021), Most companies are struggling.

The result is that large companies may make changes-but small companies will struggle.

Rohit Chandra, an assistant professor at IIT Delhi Public College, said: “As domestic loans to industry have collapsed due to the NPA crisis and its legacy in the past five years, access to foreign capital has become crucial for companies seeking rapid growth.” policy. "Unfortunately, foreign capital usually flows to a small number of Indian companies and regions." He said that ESG regulations may exacerbate this inequality.

The exhaustion of industrial credit by banks has led to the steady de-industrialization of #Indianeconomy. According to data from the Asian Development Bank, the industry’s share of India’s #GDP has dropped from 31% in the 2013/21 fiscal year to a multi-decade low of 26% in the 2020/21 fiscal year. pic.twitter.com/GjWvuiLLtN

-Krishna Kant (@KantKrishna30) October 20, 2021

What will happen next? Only a few companies can sell in the decarbonized market. Will the rest of the companies compete in the Indian domestic market? In this sense, the world will split into two markets-one is green, the other is not? Or will the country see further consolidation of the economic strength of a few people? In this case, what about the rest?

What does all this mean for the economy itself?

Ghosh said that India is “on the brink of a financial crisis. We are very fragile and vulnerable now. I don’t know if this will push us to the edge.”

This article was originally published by CarbonCopy. Read the original text here.