Podcast transcript: How can carbon prices help abate emissions?

08 min | 08 June 2022

Rajnish: As a part of World Environment Week, we at EY have organized a series of events. 

Today, we have Mr. Anindya Chowdhury, Country Manager for Energy Transitions at Shell, with us, and we have a podcast around carbon pricing.

Rajnish: Anindya, welcome to the podcast, and thanks for coming over.

Anindya: Thanks, Rajnish, and greetings to you and your listeners on World Environment Week. I'm delighted to share my thoughts on the subject. But I would like to place a key caveat that this should not be construed as the views of Shell. Thank you.

Rajnish: My first question to you, Anindya. How do you think a carbon price can help abate emissions?

Anindya: That's a great question, Rajnish. There is a short answer and a slightly more evolved answer. Let me attempt both. The short answer is that greenhouse gas emissions and carbon emissions have an externality. The cost is borne by society and not necessarily by the emitter. Carbon pricing strives to place a cost on the emitter, thereby putting the cost where the burden is. But if you dig up a little deeper, the whole carbon pricing policy intervention is a clear nudge that governments can give various players across the economy on what they need to do. There are various aspects that we should explore in this context. 

First is the competitive disadvantage of the first movers. There are companies right now contemplating climate action. But they find that such action involves costs which brings them a competitive disadvantage vis-a-vis their competitors. Therefore, they think twice before implementing major programs. 

A carbon pricing across a sector will ensure that all players have the same level playing field and start taking the same steps; ideally, this moves into an economy-wide coverage. I think it's very important to make sure that the early movers don't get disadvantaged. Secondly, there is a policy outlook signalling that is very important. Companies right now are struggling to see what carbon pricing, or any compliance framework will look like in the coming years and decades. If the government can clearly indicate the carbon pricing methodology they will adopt and how it will progressively change over time, then companies will be in a position to make the right technology choices backing green technology and make investments that are well tested against such a carbon pricing regime. 

Another aspect we need to talk about is resource mobilization. Carbon pricing, of course, also yields resources for the government, whether it's a carbon tax or a market-based mechanism like the ETS. The government can direct some of this to support new technologies, green technologies that are not proven. For example, if it wants to support offshore wind or biofuels but also use it to address the needs of just transition. There will be sections of society that will be burdened by the higher cost of the energy transition, and some of this will be available for that. 

Another aspect we should also consider when talking about carbon pricing is various countries are adopting carbon pricing, whether it is tax or emissions traded systems. To make sure that there are no carbon leakages, these countries are likely to impose a border adjustment mechanism as Europe is considering. If Indian companies have to operate or export into these markets, they'll have to demonstrate carbon pricing domestically. So that's very important for Indian companies to achieve as the country has a huge trade with Europe, for example of 36 or $37 billion, and the part of that will be impacted by this. The other advantage of integrating into global markets is that Indian players will have access to much deeper and wider markets for carbon offsets, for example, they are on the buy-side or sell-side.

Rajnish: Anindya, I agree with you. I think carbon prices are the talk of the day. Now the big question is, should India go for a carbon tax, or should it go for an emission-based or a market-based trading mechanism?

What do you think are the pros and cons of the two? You referred to that while answering the earlier question.

Anindya: Yes, indeed. These are the two popular models which various countries have experimented with over the last several years. The advantage is that India can certainly benefit from the experiences of these countries and get rich learnings out of it. Carbon tax, in terms of implementation, is perhaps much less complex. Though politically less acceptable because it will be transparently seen to be adding to cost to the customers or taxpayers, as the case may be. Also, it needs to sit within the existing taxation framework and jurisdictional sensitivities, and EY has already presented an analysis of how this can be done. As for emissions trading, there is a possibility that the existing market-based mechanisms for energy efficiency, the PAT scheme, eCerts, and renewable energy, which is the RPO and RECs, could be brought under a carbon framework that could be expanded to a functional emissions trading scheme. However, the complexities of market design that address the needs for progressive decarbonization without causing market failure must be carefully considered.

Rajnish: I agree with you, Anindya. Carbon taxes are easier, and as you gave, there are pros and cons to each approach. Now, given that we have a blank piece of paper in India at this point in time, what would be your advice to our clients on how they should think about this and go ahead?

Anindya: Indeed, that's a very important question to consider for companies at this point in time as various regulatory changes are likely to happen in the coming future. Well, one can never be certain when a compliance framework for carbon will emerge in India. But we have seen a compliance framework in energy efficiency and renewable energy that was successfully implemented. We are also hearing of an RPO type framework for green hydrogen. Progressive Indian companies are already beginning their decarbonization journeys by implementing internal carbon pricing. CDP's annual report mentions that 31 companies already have an internal common price, or companies are signing up to the Science Based Targets initiative (SBTi) or making commitments under RE100, EP100, and EV100. But to ensure a sustainable future and a social license to operate, companies will need to transparently share their plans to adhere to carbon budgets available to achieve the climate action goals agreed upon by the international community. Such companies will withstand any shocks that could credibly arise from external carbon pricing, whether through taxes or market-based mechanisms.

Rajnish: Thanks, Anindya. I think, based on what you are saying, companies need to at least start measuring their emissions because the taxes or the trading scheme will come based on their current emission, footprint, and how they can reduce them.

Thank you very much, Anindya, for coming over and your insightful comments. I hope you have a good day. Thanks again. Thank you very much.

Anindya: Thanks for having me.