India Inc should prepare for a national carbon market
April 21, 2023
The recently passed Energy Conservation (Amendment) Bill, 2022, lays the foundation for India’s national carbon market. Currently, the Bureau of Energy Efficiency (BEE) is developing a framework to roll out Perform Achieve and Trade (PAT) and Renewable Energy Certificates (REC) schemes into such a market, while creating avenues for voluntary participation. According to the BEE’s proposal, “designated consumers" under PAT will transition from energy-efficiency to emission-reduction targets from 2024. This implies that businesses will have more options to meet their mandated targets beyond energy efficiency. A market can provide regulated entities with clear price signals that would help them plan carbon-lowering investments and make better decisions. The BEE’s proposal to include additional sectors in a voluntary offset market could further reduce the overall cost of compliance by potentially including cost-effective reduction options. Meanwhile, carbon pricing regulations are being implemented in jurisdictions like the US and EU. The EU’s carbon border adjustment mechanism (CBAM) will impose import duties on emission-intensive industries at the EU’s ETS carbon price. This could impact India’s iron and steel and aluminium industries, which along with other base metals and minerals, accounted for 10.4% of exports in 2020. What does this mean for Indian businesses and how can they prepare for a domestic and global carbon-pricing regime?
Drawing on the experience of carbon trading systems around the world as well as a WRI carbon-market simulation that focused on 20 plus leading Indian businesses, here are four preparatory steps that companies could take:
One, measure emissions: The first step for businesses would be to set up a greenhouse gas inventory. Firms must be able to measure their emissions and understand their emission profile (i.e., trends of what’s emitted by various fuels, processes and other operations and how they relate to production). This will require internal data collection systems to monitor and report emissions based on globally recognized standards, such as the GHG Protocol Corporate Standard, and get them verified by an independent third party. This can help meet regulatory requirements on data reporting and also inform strategy.
Two, assess reduction options: For any business, emission-reduction opportunities depend on the company’s activities, sector- specific processes, technology options and emission intensity of activities. To meet reduction targets in a cost-effective manner and make appropriate trading decisions, businesses would benefit from evaluating the various options available to them in different parts of their operations and estimating the cost associated with them (per tonne of CO2 reduction). This will allow informed decisions on ways to meet targets at the least possible cost—via internal reduction, buying credits in the carbon market, or a combination of both.
Three, use an internal carbon price: This is a tool that companies can use to make better investment decisions or create an internal fund for implementing emission reductions. Such a price can help businesses align their investment decisions with national or international carbon markets or taxes. An internal carbon price reflects a company’s climate risks and abatement costs, and can help them make buying and selling decisions in a carbon market by comparing this cost against the market price. This would let businesses effectively leverage the market to meet their emission-reduction targets efficiently.
Four, build capacity across departments: Businesses participating in a carbon market need to implement process and technology interventions to meet compliance targets through internal reductions. They must also make decisions on carbon trading participation by buying or selling emission-reduction units outside the company to meet their own targets, or monetizing internal reductions that exceed their targets. As such decisions have operational and financial implications, carbon market participation will require the involvement of not only companies’ sustainability personnel, but also of financial and operational departments. They must strive to reduce emissions through internal strategies across all relevant departments, and use the data to formulate broader compliance strategies.
Five, participate in pilots and simulations: Carbon markets enable regulated entities to reduce emissions at the lowest possible cost. To obtain optimal gains from a carbon market, businesses must develop good trading strategies. This would include making informed bids based on their internal marginal cost of abatement, expected reduction by the end of the compliance period, expectations on current and future market-price trends and other relevant factors. Given the novelty of such a market for carbon trading in India, simulations and pilots with dummy trading exercises could provide businesses with a risk-free environment to build capacity on carbon trading, learn trading strategies and understand various complexities. Indian industry is estimated to account for about a quarter of India’s total annual greenhouse gas emissions (including fuel-use and process emissions). Indian companies must prepare for the upcoming domestic carbon market to reduce their regulatory business risks in global markets, stay competitive in the years ahead, and play an important role in meeting India’s climate commitments.
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