# How does a lender apply an NGFS carbon price to an MSME borrower?

Canonical: https://senseible.earth/answers/ngfs-carbon-price-msme-loan-stress-test

Multiply the borrower's annual Scope 1 and 2 emissions in tonnes by the scenario's carbon price for a given year, adjust for how much of the cost the borrower can pass on, and subtract the result from EBITDA. Then recompute the debt service coverage ratio and compare it with your covenant.

## Inputs the test needs

- Borrower emissions: Scope 1 from fuel bills and Scope 2 from electricity bills, in tonnes a year, with the factors stated. Estimates from sector averages are a fallback and should be flagged.
- A price path: the carbon price for the chosen NGFS scenario and region, taken from the latest NGFS phase (Phase V was published in November 2024). Note the currency and price year of the dataset and convert to rupees.
- Financials: EBITDA, annual debt service, and the DSCR covenant in the sanction letter.
- A pass-through assumption: the share of the carbon cost the borrower can recover through prices, by sector and customer power.

## The calculation, step by step

1. Gross cost = tonnes CO2 x scenario carbon price for the test year.
2. Net cost = gross cost x (1 minus pass-through share).
3. Stressed EBITDA = EBITDA minus net cost.
4. Stressed DSCR = stressed EBITDA / annual debt service.
5. Flag the loan if stressed DSCR falls below the covenant or below your internal floor, and record the scenario, year and assumptions.

## Choices that change the answer

- Scenario: an orderly or disorderly transition scenario gives the steep price paths; a current policies scenario gives low prices and is better for physical risk.
- Scope 2: a carbon price on power usually reaches the borrower through tariffs, not as a direct charge. Treat it as a cost pass-through from the discom, and test it separately.
- Exporters: a borrower selling steel, aluminium, cement or fertiliser to the EU already faces CBAM costs from 2026; test that alongside the NGFS price rather than adding both to the same tonnes.
- Attribution: the stress test uses the borrower's full emissions because the borrower bears the full cost. PCAF attribution, which uses your share of the borrower's debt and equity, is for reporting financed emissions, not for this test.

## What the RBI expects

In February 2023 the RBI said it would issue guidance to regulated entities on climate scenario analysis and stress testing, and in February 2024 it published a draft disclosure framework on climate-related financial risks. Check the notifications page on rbi.org.in for whether a stress testing guidance note has been issued and whether it is still a draft before you fix your method, and keep each borrower's inputs on file so the test can be rerun.

## Worked example: a forging unit (hypothetical price and financials)

- Scope 2: 10,00,000 kWh x 0.710 kg CO2 per kWh = 710 t CO2
- Scope 1: 1,50,000 L diesel x 2.68 kg CO2 per L = 402 t CO2
- Total: 710 + 402 = 1,112 t CO2
- Hypothetical carbon price for 2030, not an NGFS figure: ₹8,000 per tonne; gross cost 1,112 x 8,000 = ₹88,96,000
- No pass-through, hypothetical EBITDA ₹4 crore and debt service ₹2.5 crore: EBITDA falls to ₹3.11 crore and DSCR from 1.60 to 1.24
- 50% pass-through: net cost ₹44,48,000; EBITDA ₹3.56 crore; DSCR 1.42

The price, EBITDA and debt service are hypothetical, chosen to show the mechanics. Use the price for your chosen scenario, region and year from the current NGFS dataset.

## What Senseible does here

Senseible gives the borrower's Scope 1 and 2 from fuel invoices and electricity bills, with the factor and source document behind each line, which is the emissions input a stress test needs. Its climate risk page also shows the cost of those emissions at a price you enter. It does not hold NGFS price paths or run portfolio stress tests.

- [Which NGFS scenario should I use?](https://senseible.earth/answers/which-ngfs-scenario-should-i-use)
- [Carbon pricing impact calculator](https://senseible.earth/calculators/carbon-pricing-impact)
- [Climate risk assessment](https://senseible.earth/climate-risk)
- [CBAM exposure in a bank stress test](https://senseible.earth/answers/cbam-exposure-in-bank-stress-test)

Sources: [RBI statements and draft disclosure framework on climate-related financial risks (February 2024), rbi.org.in](https://www.rbi.org.in), [PCAF Global GHG Accounting and Reporting Standard for the Financial Industry](https://carbonaccountingfinancials.com)

Last reviewed 2026-10-16. NGFS Climate Scenarios Phase V (November 2024) is the price path source; ngfs.net is not yet on the approved source list. Check rbi.org.in for any climate scenario analysis and stress testing guidance issued after this review, and ngfs.net for a newer phase.