Importers And Manufacturers Have To Improve Carbon Footprint To Match With EU – EQ Mag Pro

This webinar was held by EQ Magazine Pro on 18th April 2022, powered by EnKing International. In this webinar, Mr Siddhant Gupta, General Manager, Sales, EKI Energy Services Limited shared his insights on ‘Implications of CBAM on India’.

Talking about EnKing, Siddhant Gupta said that EnKing is one of the world’s largest carbon credit developers. It is in the business of sustainability, carbon asset management, ESG compliance and all the activities related to these core values, for more than 13 years and has a market cap of nearly 1 billion U.S. dollars. It had reached the Unicorn mark a couple of months ago. Also, it is the only listed company in this domain in the world and is currently one of the largest developers of carbon credit and prominent traders of the same commodity.

Talking about the carbon footprint, he said, “The sustainability projects, carbon credits trading and development depends on the very basic unit of carbon credits. Most simply and easily, a carbon credit is one ton of carbon dioxide sequestered or avoided. All the greenhouse gases lead to global warming and one of the most prominent greenhouse gases is carbon dioxide. That’s why the unit of carbon credit is commensurate with one ton of carbon dioxide, though we have the other greenhouse gases as well. For example, Methane is also a greenhouse gas that has 24 times more potential to cause global warming as compared to carbon dioxide but the most abundantly and widely found gas is carbon dioxide. Post-Kyoto Protocol in 1987, with the establishment of CDM and other applications, the major focus was on reducing the carbon dioxide that is emitted into the atmosphere. A lot of countries post Kyoto Protocol, placed their contributions in terms of reduction of carbon dioxide emissions even though post-1990 the emissions had grown quite significantly.

A lot of countries could afford to go ahead with the reduction of carbon emissions but developing countries couldn’t go ahead without going for any additional investments that might have come from other developed countries. The European Union was one of the first four runners in this particular project where they had set up an emission trading system back in 2005. It consisted of 31 countries, 27 countries of the European Union and the four were the United Kingdom, Norway, Iceland and Liechtenstein.

The United Kingdom has disagreed in 2021 to ratify with compliance but it still holds this carbon credit and carbon trading business in very high regard because to create a sustainable world and to ensure sustainable growth this is the way to go ahead. So when EUETS was set, they had kept forth an objective of getting into net-zero standards by 2050 and pledged to reduce the entire greenhouse gases emissions by 55% by 2030. The European Union’s emission trading system works on the principle of cap and trade. It usually covers the broader industry areas like energy generation, heavy industry, and commercial aviation. Now the EUETS had started in 2005, has led to the generation of very worthy results in the past, for example, they had reduced their emissions by 9% just in 2019 and they’re trying to increase the cap by 2.2% as of 2021, which is faster than one they had envisioned back in 2005.”

He talked about the criticism which has been faced by the cap and trade system. He said, “Any industry which is emitting carbon which is more than the norm set by the government can go and buy these carbon credits from any company which is carbon positive. This is how usually a cap and trade system works. Since the timelines are limited and the targets are very stringent all the countries are trying to increase their NDCs which eventually leads to the tightening of these gaps. A major criticism of this cap and trade system was that it used to tax only the producers which were in their specific geography so suppose if EUETS was trying to reduce their carbon footprint, they could only tax the producers which were there in their geography.

This would eventually give the local producers a disadvantage because they would have to invest heavily to ensure that they get processes and systems which are not very carbon-heavy. There was a criticism which was called carbon leakage. If a steel producer is allowed to emit only 10 tonnes of carbon dioxide for a tonne of steel and suppose they are trying to import steel from a developing country, such a cap and trade system or ETS is still not set up then it would be much cheaper because they don’t have to follow stringent mechanism for carbon avoidance which otherwise have to be followed in the European Union.

This was leading to leakage of carbon because the goods which were produced from carbon-intensive techniques were being imported and they got a preference in the market because they were cheaper than locally manufactured goods. This was creating an imbalance, so the European Union council passed on a degree which is known as the cross-border adjustment mechanism. It was passed in July 2021 and started on 1st January 2026. The European Union has already started preparations where the importers will have to comply with the norm and also have to make provisions for the record-keeping of embedded emissions.

So, any importer who is importing any goods of any kind will have to keep a track of the process by which the entire production is happening for those particular goods, along with the carbon footprint for that particular product and have to benchmark it against the available caps in the geography of operations. If the carbon footprint is larger then they’ll have to pay tax, if they are at par then there’s no issue with that and if they beat it then they get carbon credits because they are sourcing from operations that are less carbon-intensive as compared to the locally available caps.”

Siddhant mentioned the next goal of the European Union. He said, “Fit for 55 is the next goal of the European Union, that has been kept for the current phase of EUETS, from 2021 to 2030. In this, the union will be aiming to reduce greenhouse gas emissions by 55%. So, whatever the carbon footprint is added during the logistic services will also be added to the entire carbon footprint of the production process. The capping and actual footprint will be compared at that particular level and then the taxes will be levelled. India is currently exporting close to three million metric tonnes of steel EU. This will not only affect specific sectors like steel or iron but also other regulated sectors use heavy machinery.”

He gave a few solutions to the problem, he said, “A few points that can be followed by manufacturers and importers must follow smart compliance within the companies. In developing countries, they should try to identify any gaps in the manufacturing process, try to fill them up, plug them in and improve their overall carbon footprint to match the caps that have been put up in the European Union. Also, the imports should be done in the most efficient way of the landing cost rather than the production cost. Imports can also improve process efficiency. The importers and manufacturers can get aligned to reshape the production footprint.

So, they might want to alter the procurement patterns from around the globe and within the EU to ensure that the most efficient industries along with most efficient supply chains are kept in business. And, in the long term if the survival of the industries is to be ensured the importers and manufacturers will have to get in line with the regulations and try to increase efficiency and reduce the carbon footprint.”