A greener land? Carbon pricing gaining favour in India, firms taking action

The number of Indian companies either pricing or planning to price carbon in their investment decisions is increasing

What do Anand Mahindra, Pope Francis and the World Bank have in common? They all think putting a price on carbon can have transformative impacts. Just a few weeks ago, the Pope issued a clarion call stating carbon pricing is “essential” to stem global warming while supporting penalising polluters and urging climate change deniers to head to science.

Mahindra has been a vocal votary of pricing carbon at important events like Davos, and the World Bank has established a separate division that promotes Carbon Pricing Leadership Coalition.

Indeed, climate change is posing enormous economic and policy problems, pitting different narratives of environment versus development. It is believed that incorporating climate change within development in a manner coherent with national and global constraints is a challenge for governance. Evidence, however, suggests that this is a false dichotomy. A recent IMF paper’s calculations suggest that India would gain external revenues of approximately 0.6 per cent of GDP in 2030, from joining a price floor of $35 per tonne and selling credits internationally. For that to happen, a new carbon trading regime has to come into place.

Many in the Indian corporate world are already aware and taking steps to address the enveloping risk. Carbon price has been long advocated as a means to reduce greenhouse gas emissions that lead to global warming. There is growing concern about the widening gap between carbon budget and mitigation actions and evidence suggests that we might reach the point of no return for climate action as soon as 2035 unless newer technologies and share of renewables are able to abate further GHG emissions. As Lord Nicholas Stern of LSE puts it, “Fossil fuels must be confronted with their real costs, and polluters must pay if markets are to work and emissions are to fall at the rate necessary to deliver the Paris goals.

To deliver the goals of the Paris Agreement (carbon) prices must reach $40-80 per tonne of carbon dioxide by 2020, and $50-100 by 2030. Carbon pricing must be supported by other policies to drive the low-carbon transition”. 

IPCC’s 2018 landmark 1.5-degree report also suggests that putting a price on carbon dioxide emissions would be central for getting global warming under control. The same year Nobel Memorial Prize in Economic Science was awarded to William D Nordhaus “for integrating climate change into long-run macroeconomic analysis” and among other things making a strong case for carbon pricing.

Businesses will play a key role in accelerating the shift to a low-carbon transition. Although carbon price was considered a sensitive item to be included in the Paris agreement, businesses were already applying voluntary carbon prices on themselves called the Internal Carbon Price (ICP). ICP is slowly emerging as a powerful tool to assess and manage carbon-related risks and opportunities that may arise from the transition to a low-carbon economy. The Task Force on Climate-related Financial Disclosures (TCFD), a body established by Mark Carney, Governor of Bank of England, with Koushik Chatterjee, Executive Director and CFO of Tata Steel as a member, has listed ICP as a key metric to assess climate-related risks and opportunities in line with its strategy and risk management process, thus putting it in the radar of all companies who aim to align themselves with the TCFD recommendations.

Current statistics

Since 2013, CDP, a not-for-profit charity, has been asking companies if they use or plan to use an internal price on carbon. In 2018, after aligning completely with the TCFD recommendations, this question has also evolved to track not only the number but also details such as objective, application and impacts of embedding an ICP. The numbers are promising with over 1,300 companies pricing or planning to price carbon in 2018. In India, there has been a 15 per cent increase in uptake of ICP with 46 companies pricing or planning to do so. At least 14 Indian companies are using an ICP and 32 companies anticipate incorporating ICP in the next two years. In fact, the 2018 Indian statistics looked more promising than the global one with increase in more Indian companies who plan to use an ICP over the next two years. This clearly shows a marked increase in awareness.

While globally the financial services sector reported the highest use of ICP, in India, it was the concrete, cement and metals and mining sector which reported the highest adoption of ICP in their CDP response. Notably, almost all reporting cement companies have a relatively ambitious ICP in India. ACC. employed the highest ICP of around $47.33/tonne CO2e, followed by Ambuja US$29/tonne CO2e.

The momentum is present on carbon price and it is only a matter of time before all companies adopt it and use it as a tool to integrate climate calculations into their economic system. A price on carbon in addition with other actionable climate policies within the organisational system is the need of the hour for a well-timed low-carbon transition.

The writers work at CDP India