Key Insights
➢ Uptake in the use of ICP; 40 companies disclose their carbon price in FY in their annual reports or CDP survey as compared to 29 in FY22.
➢ Usage of carbon pricing in company strategies may be conservative or enterprising irrespective of easy-to-abate or hard-to-abate business type.
➢ For the sample of 40, emission intensive companies have a weak negative correlation between carbon productivity and size of operations.
➢ In less intensive sectors, a strong positive correlation between carbon productivity and size of operations implies presence of economies of scale.
Types of Internal Carbon Price
Internal Carbon Pricing (ICP) is a mechanism used by companies, organizations, or governments to incorporate the cost of carbon emissions into their decision-making processes. It is a way of internalizing the external costs associated with greenhouse gas emissions and can play a significant role in incentivizing emissions reduction.
The three common methods of implementing ICP are:
- Shadow Price:
By attaching a hypothetical price to each tonne of carbon, businesses can evaluate the potential costs and benefits of investing in low-carbon technologies, renewable energy sources, or other emission reduction measures. Using a shadow price can help companies assess the financial implications of their emissions and evaluate the economic feasibility of transitioning to cleaner technologies or implementing energy-efficient practices.
- Implicit Price:
Many Indian corporates have set emission reduction targets as part of their sustainability initiatives. Calculating the per unit cost incurred for emissions abatement enables these companies to assess the cost-effectiveness of various emission reduction measures. This estimation helps the company prioritize investments and allocate resources effectively to achieve its emission reduction targets.
- Internal Fee:
It is a monetary value placed on each tonne of carbon. Implementing an internal fee on carbon emissions can generate a dedicated revenue or investment stream to fund emission reduction projects or other climate change-related initiatives.
Uptake in usage of ICP by India Inc. 1000: carbon prices independent of nature of business
In FY23, around 40 companies have disclosed their ICP through their annual reports or CDP files as compared to a figure of 29 in FY22. These companies have reported using ICP for driving low-carbon investment, energy-efficient projects, to identify and seize low carbon opportunities, manage stakeholder expectations and to stress test investments.
The ICP figures within the consumer discretionary sector exhibit a substantial range, starting as low as 2.5 USD to 157 USD which is also the maximum across the sample.
Materials, an emission intensive industry, is implementing ICP proactively with 12 out of the 40 belonging to this sector. Ambuja Cement Limited, Shree Cement Limited and UltraTech Cement Limited all had been using ICP in their investment decisions since 2014, 2018 and 2019 respectively. Wipro, an IT sector company, increased their ICP from 50.1 USD in FY22 to 108.9 USD in FY23. In the real estate sector, two companies provide data on their Internal Carbon Pricing (ICP), while in the energy sector, there are no disclosures regarding ICP.
This suggests that usage of carbon pricing in company strategies may be conservative or enterprising irrespective of easy-to-abate or hard-to-abate business type.
More than half of the companies in the sample use shadow pricing to calculate their cost of emissions covering scope 1 and scope 2. Around 11 companies cover Scope 1, 2 and 3 in their ICP evaluations.
Carbon productivity for companies disclosing ICP: Less intensive sectors capitalizing on economies of scale unlike the hard to abate sector.
Carbon Productivity is assessed for companies that have disclosed ICP in FY23. It is calculated by dividing the total revenue in FY23 by the Scope 1 and Scope 2 emissions for the same period. Expressed in Million INR per metric ton of CO2 equivalent (tCO2e), this metric indicates the revenue generated from each unit of emissions. Higher carbon productivity reflects greater revenue generation relative to emissions output, suggesting a more efficient utilization of resources and a lower carbon intensity.
Carbon productivity is compared with revenue as proxy for size of operations and the correlation between them was observed to be -0.05 in hard to abate sectors.
Intuitively, in emission intensive businesses like steel and cement, revenue generation hasn’t yet decoupled from emission levels as seen from weak but negative relationship between carbon productivity and revenue.
Conversely, in sectors with lower emission intensity, such as technology or services, there is a more positive relationship between carbon productivity and revenue. The observed correlation coefficient of 0.65 suggests that companies in less intensive sectors have been able to capitalize on economies of scale to simultaneously increase revenue and reduce carbon emissions.
This above analysis underscores the importance of sector-specific approaches and tailored strategies to address the relationship between revenue generation and carbon emissions across different industries. This further strengthens the case for the use of Internal Carbon Prices to assess and budget investments in achieving their sustainability initiatives.
The information on ICP of various companies has been captured primarily through their annual reports and their response to CDP survey. The information on Scope 1 and Scope 2 emissions has been captured from BRSR disclosures. To access dataset for top 1000 companies, connect on iccad@ckinetics.com or visit the Corporate Data | ICCAD page.