India currently contributes about 7 per cent to global greenhouse gas emissions. Its total emissions stand near 3.26 gigatons of CO2-equivalent annually. Corporations, especially in power, cement, steel, logistics, and manufacturing, generate around 30-35 per cent of these emissions. This equals over 1.07 gigatons yearly. Applying the OECD’s carbon price benchmark of $60 per tonne suggests a potential carbon tax revenue of ₹5.3 lakh crore from Indian corporates. This figure exceeds half of India’s total corporate tax collection for the financial year 2023–24.
Carbon Tax Potential and Global Trends
Carbon taxation is gaining urgency worldwide. The European Union’s Carbon Border Adjustment Mechanism (CBAM), effective from January 2026, imposes duties on carbon-intensive exports like steel and cement. Indian firms face risks of penalties unless they show credible decarbonisation. CBAM sets a precedent – countries must price carbon domestically or face export barriers. Germany supports sovereign carbon taxes to boost cleaner production and fiscal resilience. This global shift encourages India to develop fair and aligned carbon-pricing models.
About Emission Scopes
Emissions are categorised into Scope 1, Scope 2, and Scope 3. Scope 1 includes direct emissions from company operations. Scope 2 covers indirect emissions from purchased electricity and energy. Scope 3 is the most complex, covering all other indirect emissions across the value chain. This includes suppliers, distributors, customers, and employee commuting. Scope 3 often accounts for over 70 per cent of a company’s total emissions. Ignoring Scope 3 risks exclusion from sustainable supply chains and green finance.
Internal Carbon Pricing as a Strategic Tool
Internal Carbon Pricing (ICP) helps companies manage emissions across all scopes. It assigns a shadow price to carbon, influencing investment, procurement, and project decisions. More advanced ICP models impose internal fees on business units, funding sustainability projects. Danone’s example shows how ICP can reshape financial reporting and executive incentives. By integrating carbon costs, Danone improved its carbon-adjusted earnings per share while reducing emissions. ICP embeds sustainability into corporate governance.
India’s Regulatory Framework and Reporting
India’s Securities and Exchange Board of India (SEBI) mandates Business Responsibility and Sustainability Reporting (BRSR) for the top 1000 listed companies. However, current reporting is often narrative and lacks financial integration. ICP can bridge environmental, social, and governance (ESG) metrics with finance. It enables firms to quantify carbon liabilities, benchmark progress, and signal decarbonisation plans. This alignment meets growing investor demands for measurable and financially material sustainability data.
Implications for Indian Corporates
Integrating ICP offers Indian firms competitive advantages. These include cost optimisation, access to green capital, and better terms from customers and financiers. Focusing on Scope 3 emissions is crucial for supply chain resilience. Carbon pricing is no longer just a policy issue but a core business and financial strategy. Companies that delay risk reputational damage and financial loss. ICP strengthens enterprise value in a carbon-costed economy.
Questions for UPSC:
- Critically discuss the role of carbon pricing in achieving sustainable economic growth in developing countries.
- Analyse the impact of the European Union’s Carbon Border Adjustment Mechanism on global trade and Indian exports.
- Examine the significance of Scope 3 emissions in corporate environmental responsibility and how companies can manage them effectively.
- Estimate the challenges and opportunities for Indian corporations in integrating internal carbon pricing with financial reporting and investor expectations.
