Why organizations should embrace decarbonization to drive organizational value

Indian companies covered in the focus sectors of the EU and US carbon regulations are more emissive than their EU and US counterparts.

In brief

• Carbon pricing is identified as one of the most effective strategies for addressing climate change in leading geographies around the world
• The EU and the US are projected to be the highest-risk markets for Indian companies from a carbon taxation perspective
• The cumulative impact on Indian industries from carbon taxation is projected to be US$65 billion to US$95 billion from FY26 to FY35

The escalating global carbon emissions and the pressing need to combat climate change are closely interwoven. With the current CO2 emissions at 36.8 gigatons, the commitments for decarbonization are estimated to bring emissions up 10.6% by 2030, breaching the 40 gigaton cap.  To limit the rise of global temperature to 1.5 degrees Celsius, emissions must be reduced by 45% by 2030 and reach net zero by 2050. Sectors such as power, industry, transport, and buildings are not meeting targets due to the slow implementation of decarbonization policies and inadequate carbon pricing.

Carbon pricing, which involves imposing a price on carbon emissions, is identified as one of the most effective strategies for addressing climate change. There are two primary methods of carbon pricing: carbon taxes and emission trading schemes. Carbon taxation, which internalizes the cost of emissions for companies, is gaining significant momentum globally. In 2022, global revenue from carbon pricing initiatives reached US$95 billion, a 90% increase from 2020. This revenue growth can be attributed to higher carbon prices, broader coverage of carbon pricing instruments, and increased volume of emissions trading system auctions.

The European Union's carbon border adjustment mechanism (CBAM) and the US's FAIR Transition and Competition Act target "hard-to-abate" sectors, including iron and steel, aluminium, refinery products, and chemicals. Since India exports a significant portion of its products to the EU and the US, which are the leading markets for these sectors, Indian companies must adhere to the set regulations by taking decarbonization measures.