Gearing Up for Change: Challenges Faced by Indian Private Sector as they take on Carbon Pricing
To meet the ambitious goal of holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels as set by the Paris Agreement, a transformative shift to a low carbon economy is essential. Putting a price on carbon pollution is one of the most potent and efficient strategies governments and corporates can use to manage carbon risk, reduce carbon emissions, and combat climate change. Over the past few years, there has been a groundswell of support for carbon pricing - not only by governments, but increasingly by the private sector. As of 2017, almost 1400 companies worldwide are embedding an internal carbon price into their business strategies, up from 140 in 2014.
Building on this theme, Carbon Pricing Leadership Coalition (CPLC) and its partners, World Resources Institute (WRI), CDP, and International Finance Corporation (IFC) joined forces with The Energy and Resources Institute (TERI) to convene a private sector roundtable in the margins of the first International Research Conference on Carbon Pricing on February 14-15, 2019 in New Delhi, India. The roundtable brought together about 25 participants from diverse sectors, including cement, oil and gas, power, agricultural, steel, renewables, industrial, manufacturing, aerospace and defense, real estate, information technology, automotive sectors, among others. A key objective of the roundtable was to get a better understanding of the support that the Indian private sector needs in implementing internal carbon pricing and use this input to inform CPLC’s strategy on supporting the uptake of carbon pricing by businesses in India.
Several drivers exist that mobilize a business to implement a carbon price. Tata Steel, for example, is interested in addressing long-term carbon pricing while maintaining competitiveness. Ambuja Cement has one of the highest carbon prices in India at $30 per ton of carbon dioxide. For this large cement manufacturer in a high emitting sector, climate change posed a material emerging risk in the medium- to long-term. To manage the risk of potential impacts on its operations, Ambuja Cement developed a roadmap for reducing carbon dioxide emissions by 40% by 2030. The company has undertaken an approach to internalize the externalities using a triple bottom-line approach with a focus on increased energy efficiency and use of waste heat recovery. Mahindra and Mahindra on the other hand applies a carbon fee that creates a pool of funds which is then reinvested in energy efficiency and clean energy options.
The discussion among the participants led to three main takeaways:
The “How” of carbon pricing is a concern. A recent report by CDP found that 37 companies in India are in the process of adopting an internal carbon price (13 already using one and 24 companies anticipate implementing one in the next two years) as compared to only 31 companies in 2017. And these Indian corporates are no longer asking “why” carbon pricing should be implemented, but “how”. There are several large companies that have taken on a leadership role in implementing carbon pricing. Dalmia Bharat Cement, for instance, has been an early mover on carbon pricing with leadership from the executive management level enabling carbon considerations to be incorporated in decision making at the operational level. However, there are several other companies that are still in the early stages of applying a carbon price. While there is a willingness to undertake carbon pricing within these companies, the process to do so remains unclear to many. These companies expressed an interest in learning from the early movers and leaders, who have already undertaken carbon pricing, and indicated that a knowledge sharing platform between them would be extremely helpful. In this context, several questions were raised: the readiness of their business to implement carbon pricing, the impact a carbon price can have when mandatory regulation is implemented, designing the internal carbon price in a manner such that it creates a positive feedback loop and drives increased ambition, and the ways in which businesses can contribute to the design of an anticipated mandatory market. CPLC, with its focus on knowledge sharing and convening public-private sector dialogue, is well positioned to assist the Indian private sector in this regard.
Certainty from robust policy and regulatory frameworks is critical. While India does not have an explicit carbon price, its Perform, Achieve, and Trade (PAT) Scheme and the Renewable Purchase Obligations (RPOs) have placed an implicit price on carbon. The Indian government is now examining the feasibility of piloting market mechanisms for the waste sector and for micro, small, and medium enterprises (MSMEs) through the Partnership for Market Readiness (PMR). Companies need strong, clear policy signals that can provide investment certainty over longer periods of time. The decline in the demand for Clean Development Mechanism (CDM) credits has left the Indian private sector nervous about engaging in these markets (India was the second largest supplier of CDM credits).
Innovative approaches can help drive decarbonization. As companies embark on decarbonization pathways, through carbon pricing and other tools, innovative approaches and new business models will be needed. Rather than tackling emissions at the project level, a sector-level understanding will enable companies to better assess its impacts on businesses and the risks and opportunities that a low-carbon economy presents. CPLC’s recent report on the “Construction Industry Value Chain” does just this. By providing insights on the actions taken by the construction industry – how they are mitigating climate risk and finding low-carbon innovative solutions – the report reveals common concerns within the value chain. Similar efforts, that shed light on other highly emitting sectors, like steel, or oil and gas, which specifically takes the Indian context into account, would help drive further action among Indian businesses.
India has been a leader in climate change with an ambitious national climate plan. Its private sector has been at the front and center of the clean energy revolution and is now gearing up for the next stage of implementation. With the goal of accelerating carbon pricing around the world, CPLC will channel the innovation and entrepreneurship of the Indian private sector, to better support its partners in India and in turn, address climate change and sustainable development.