How Indian companies are moving quickly on carbon pricing

This blog post originally appeared on ET Energyworld.

In Davos, Switzerland last month, the World Economic Forum recognized climate change as among the top existential risks facing businesses over the next decade. Businesses have already taken note as more than 1,300 companies that together generate $7 trillion in revenue have adopted or are planning to adopt a market solution to the climate problem.

One of them is a leading Indian textile manufacturer. Its managers noticed in 2013 that electric bills were varying by up to 25% across its manufacturing units. The company had committed to its shareholders that it would improve its energy performance and it wanted to explore an unusual technique: internal carbon pricing.

Carbon pricing is a tool that allows companies to account for climate change and its economic impacts while making their financial decisions. It does so by attaching a value, or price, per unit of greenhouse gas emissions, thereby pushing the company towards low-carbon innovation in its operations and along its value chain. In doing so, it allows businesses to safeguard against climate change risk.

The company mentioned above adopted a shadow, or hypothetical, carbon price per unit of greenhouse gas emissions. The price nudged decisions in the company toward investments in renewable energy and energy efficiency. Over the next two years, it implemented 30 new energy efficiency projects and reduced greenhouse gas emissions of its operations by 12 percent.

Carbon pricing is on the front edge of the world’s multi-pronged attempt to combat climate change. The Indian government is working closely with the World Bank and other partners to explore a domestic carbon market targeted, for now, at the waste sector and micro, small and medium enterprises. As much as 15 percent of the world’s carbon emissions are already covered by some kind of carbon price. Businesses, parsing the tea leaves for future regulatory action, are already taking action by setting up their own internal carbon pricing. More than 1,300 companies globally and 40 in India have priced or are planning to price carbon. Combined, their revenue exceeds $7 trillion.

Prompted by the interest, we surveyed 30 companies in India in sectors ranging from cement and manufacturing to financial services and aviation about their attitudes to carbon pricing. We found that 60 percent of the companies are interested in pricing carbon and a quarter were already doing it. But many managers said that implementing a carbon price seems complicated, and there is little guidance available on how to adopt such a scheme and arrive at a fair price or cap. They worried that their business would become less competitive in a challenging marketplace. They also expressed uncertainty about national climate policies and the alignment of a carbon price with those policies.

This blog post originally appeared on ET Energyworld.

Still, a handful of companies were early movers. Since 2015, we have worked closely with five companies – in the textiles, cement, oil and gas, IT & Technology and manufacturing sectors -- as they implemented carbon pricing schemes. Based on our experience,WRIIndia has designed a practical guide for businesses looking for market solutions to the climate problem.

The early mover companies had various motivations. The company operating in the cement sector wanted to lessen its risk exposure to a clean environment tax. It set up an internal carbon tax of $11 per metric ton of carbon dioxide (tCO2). The oil company wanted to manage climate-related risks and drive technological innovation, and it set up a shadow price of $15 per tCO2. The technology company wanted to become carbon neutral by 2018. It also plans to use 100 percent renewable power and cut its per capita electricity needs by 50% below 2007 levels by 2018. A carbon price of $10.50 per tCO2is one of a slew of measures the company has adopted to achieve its green goals.

Finally, the manufacturing firm would like to reduce the carbon dioxide emissions intensity of its output by 25% below 2016 levels by 2019. It estimated an implicit carbon price for the company’s existing green investments and introduced a shadow price of $10 per tCO2.

The process of setting up a carbon price can be divided into three phases. In the foundational phase, a company assesses how much carbon it is emitting through greenhouse gas inventories. In the next phase, the company sets its ‘green’ vision and identifies an ideal carbon pricing strategy to achieve it. Several pricing approaches are possible including shadow prices, taxes or fees, cap-and-trade and implicit carbon pricing. Finally, in the roll out phase, the company operationalizes its scheme and sets in place a system to track its effectiveness.

Carbon pricing can help Indian businesses achieve their climate goals and contribute to India’s climate commitments under the Paris Agreement. It also gives businesses a way to prepare for low-carbon policies and regulations and reduce climate risk exposure. Finally, by sending internal price signals, it offers opportunities for businesses to become more efficient and innovative. Carbon pricing is a win for business and for the environment.