Why India Wants To Set Up Its Own Carbon Trading Market — BQ Explains

How Is The Price Of Carbon Fixed?

Countries and companies alike have different ways of setting a price for carbon. These are usually achieved by either putting a carbon tax, or through a market-based approach like an emissions trading system.

While India has no explicit carbon pricing, it does that in the form of levies. The central government’s fuel excise taxes and coal cess are two such examples.

According to the Organisation for Economic Co-operation and Development, these implicit carbon prices in India have nearly tripled since 2018.

This way of pricing carbon, however, results in individuals and households bearing the brunt as cost increases due to levies are usually passed on to the end consumer.

But pricing is extremely varied across the globe. According to the World Bank’s Carbon Pricing Dashboard, as of April 2022, the price of carbon ranges from as low as $0.5 per tonne of CO2 to as high as $137 per tonne.

What’s the right price? There are several estimates. The International Monetary Fund says a floor price of $25-75 per tonne of CO2 is needed. That’s much higher than the global weighted average cost of carbon credits in 2021 at around $3.

In India, several companies set their own internal carbon pricing to help them incorporate the impact of emissions in their financials.

The Carbon Disclosure Project said that 85 companies, as of 2021, were either already pricing carbon or were planning to do so in the next two years.

Mahindra & Mahindra Ltd. was the first to adopt an internal price of $10 per tonne. Other prominent companies that do so include ACC Ltd., Ambuja Cements Ltd., JSW Group, Infosys Ltd., Essar Oil Ltd., Tata Chemicals Ltd., Tata Steel Ltd., Tata Motors Ltd., Shree Cement Ltd., Godrej Industries Ltd., and Wipro Ltd., among others.