Making India Inc. Net-Zero

Indian manufacturers need to accelerate their decarbonisation plans. Two recent international developments are significant in this regard. First, asset managers and banks with over USD 130 trillion in global assets joined the Glasgow Financial Alliance for Net-Zero during COP26. Members of this alliance can influence their portfolio companies, including Indian players, to decarbonise. Second, away from COP26, US and EU negotiators reached a trade deal for steel and aluminium, which establishes tariffs based on the carbon footprint of the manufacturing process. Coupled with the EU’s Carbon Border Adjustment Mechanism, the deal reflects the West’s increasing adoption of carbon tariffs. With the US and the EU accounting for 27 per cent of India’s iron, steel, and aluminium exports, and 32 per cent of India’s overall exports¹, the imposition of carbon tariffs carries significant implications for Indian manufacturers.

Back home, Indian regulators and companies have been preparing to scale up corporate decarbonisation. In October 2021, the Ministry of Power (MoP) proposed renewable purchase obligations (RPOs) for Indian industrial units, which account for 41 per cent of India’s power consumption². Simultaneously, Indian companies are increasingly committing to emissions reduction themselves, with eight of India’s top ten companies by market capitalisation setting net-zero targets between 2030 and 2050³. With the prime minister giving concrete form to India’s climate ambitions through the 2070 net-zero goal, regulators must actively push organisations to reduce their carbon footprints. Three initiatives can create a long-term framework to decarbonise Indian industry.

First, the Ministry of Environment, Forests and Climate Change (MoEFCC) must introduce sectoral emissions caps and an emissions trading system (ETS) for Indian companies. The scheme should initially cover the following energy-intensive industries – power production, metals, cement, and refineries. These sectors make up 55 per cent of India’s emissions⁴ and typically feature large-scale companies or manufacturing units, making execution of the ETS impactful while remaining manageable. Other sectors should be mandated to track emissions to prepare the ground for future inclusion in the scheme. A study by CEEW found that industrial energy intensity must fall by 54 per cent between 2015 and 2050 to achieve India’s 2070 net-zero goal. Through emission caps, MoEFCC can realise the required emission cuts by progressively lowering caps annually in line with the 2070 net-zero goal⁵.

Apart from incentivising energy efficiency and renewable energy, an ETS would also set a price on carbon. For example, in India’s coal-dominated power sector, an ETS can make highly efficient plants financially competitive with older plants. Such a shift can contribute significantly towards a calibrated retirement of ageing coal capacity. Indian regulators can learn from schemes like the Western Climate Initiative (covering California and Quebec), which imposes carbon price ceilings to avoid increased prices for end consumers. It is important to note that MoEFCC’s enforcement of monitoring, reporting, and auditing rules will be central to the success of an ETS.

Second, the Ministry of Power (MoP) must provide companies with the necessary support to increase their renewable energy consumption. The recent Draft Electricity (Promoting renewable energy through Green Energy Open Access) Rules, 2021 are a welcome step in this direction. However, MoP must work closely with states and build consensus around the rules’ provisions to achieve the desired impact. Simultaneously, MoP should explore market-based mechanisms for corporate procurement of renewables such as virtual power purchase agreements (VPPAs). Current regulations for VPPAs are unclear and have dissuaded global tech players from entering the Indian market. Well-designed VPPA rules can help add grid-connected renewable capacity while preserving existing customers for state utilities.

Third, MoEFCC must take up an active role in regulating voluntary carbon offset markets in India. Renewable energy certificates (REC) are examples of carbon offsets already traded in India, although they are specific to power consumption and are typically purchased by obligated entities. Simultaneously, corporate players keen to establish their green credentials voluntarily purchase carbon offsets to achieve carbon neutrality. However, investigations reported in 2020 and 2021 have found that offset projects can overstate their impacts on the environment^{6, 7, 8}. Further, most carbon offsets sold today only avoid existing or new emissions. While such projects can drive funding for vulnerable communities and regions, they may not contribute towards net-zero ambitions. With negotiators at COP26 agreeing on a basic framework for international carbon markets, trading in offsets is likely to ramp up significantly in the coming years. MoEFCC must set strict disclosure and eligibility standards for offset projects to ensure that claims of carbon neutrality deliver actual benefits in line with India’s climate goals.

Indian companies must ready themselves for a future that prioritises low-carbon products. Globally, the measures listed above can position India as a leader in enforcing holistic industrial decarbonisation policies and can provide a template for other developing countries. Domestically, they will provide long-term regulatory clarity for Indian companies and incentivise the industry to lead India’s journey towards net-zero by 2070.