What do Mahindra & Mahindra, Infosys Limited, Ambuja, Tata Chemicals and Essar Oil have in common? The answer is that all these companies have implemented internal carbon pricing (ICP) in some form or the other.

Mahindra & Mahindra has adopted an ICP of $10 per tonne of carbon emitted. Infosys has ICP of $10.5 per tonne of CO2 equivalent emitted. Ambuja’s True Value project, initiated in 2013, is considering ICP and the company is in the process of aligning with LafargeHolcim’s approach. In 2016, the implicit ICP was $29.41 per tonne of CO2 equivalent. Essar Oil has set $15 per tonne of CO2 equivalent as its carbon price for the Vadinar facility, a 20-million metric tonnes per annum (MMTPA) facility. Tata Chemicals uses an ICP of $20 per tonne of CO2 equivalent in its group company, Tata Chemicals Europe, for assessing its investment cases.

ICP adoption

Ascribing a monetary cost or value to emissions through carbon pricing helps companies hedge carbon-related risk and encourage innovations for the transition to a low-carbon economy. While external or explicit carbon pricing is mandated by a national or sub-national government in the form of a carbon tax, emission trading scheme, etc., ICP is applied voluntarily by an organisation to itself.

ICP can also be a shadow price considering a hypothetical cost of carbon to each tonne of CO2 equivalent. It is a tool to help reveal hidden risks and opportunities across companies’ operations and supply chain and to support strategic decision-making related to future capital investments.

The Government of India has been implementing several policies to address climate change and reduce greenhouse gas (GHG) emissions. Policies related to implementation of the coal cess, market mechanisms including perform achieve and trade (PAT), renewable energy certificates (REC) and a regulatory regime of renewable purchase obligation (RPO) have arguably led to an indirect carbon pricing. The cost implications of these policies can be attributed either to GHG emissions (in the case of coal cess and PAT) or GHG emission reductions (in the case of REC and RPO obligations).

Coal cess is currently at ₹400 ($5) per tonne; the Central Electricity Regulatory Commission has set the REC floor price at ₹1,000 ($13); and the price of energy saving certificates (ESCert) ranged from ₹200 to ₹1,200 ($2.6-16) during transactions organised in 2017. All these costs can have different implications for GHG emissions.

Role of ICP

Carbon pricing can help in developing strategies for companies to benefit from or align with the emission-reduction related policy mixes that exist in the country. Carbon pricing provides a common metric (that is, dollar per tonne of CO2 equivalent) for comparison between options, and enables the assessment of the level of co-benefits to help in better decision-making. For instance, ₹1 million invested in renewables may offer more emission reduction co-benefits compared to energy efficiency, depending on the measures being implemented.

Further, climate change risks including physical risks, pricing risks, reputational risks, and regulatory risks, are mostly not considered by companies or are hard to determine. ICP offers a solution for allocating resources or assigning value to climate risks. For example, in addition to the carbon price due to policy mix in the country, companies can add a premium or an additional value they would like to associate to other risks like physical risks and reputational risk. This indirectly enables companies to assess resources that can be allocated to address different climate risks that may not be easy to quantify.

Therefore, ICP not only has the potential for enhancing private sector contribution to emission reduction goals of the country, but also offers additional strategic and decision-making related benefits.

Companies interested in achieving carbon neutrality can benefit immensely from ICP, as it can help determine the resources required and available for achieving the goal through their own emission reduction actions and/or by supporting carbon offsetting voluntary projects. Offsetting of emissions through purchase of voluntary carbon credits generated by voluntary carbon projects can lead to emission reductions, contributing to enhanced climate action in the country.

Policy action

Consumers, globally as well as in India, will most likely prefer companies that contribute to climate action. Therefore, companies adopting ICP will be better prepared to assess and address the climate risks while benefitting from the opportunities offered by climate action. ICP can also lead to more companies adopting carbon neutrality goals, involving reduction of emissions internally as well as financing of voluntary carbon market projects to offset emissions that are not achievable through internal action.

Indian firms are slowly but steadily adopting ICP and other voluntary actions to mitigate the risks of climate change. However, this trend for adoption of ICP is much slower than in other parts of the world. A policy signal from the Indian government can increase uptake of ICP as companies would like to prepare for regulatory changes in carbon constrained scenario. This was evident in 2017 in countries like China, Mexico and South Africa. For example, ICP adoption in Chinese companies doubled in response to China’s plan of rolling out the world’s largest emission trading scheme.

Clear voluntary and regulatory climate change mitigation frameworks in India can give an impetus to the adoption of ICP. However, additional capacity building and awareness creation efforts are required to achieve the transformational impact that ICP in the corporate sector can have in contributing to climate action in India.

The writers are Technical Advisors, Climate Change, GIZ-India. Views are personal