Here’s why crucial aspects of India’s carbon market need clarity

Economies globally recognize the urgency of limiting carbon emissions to fight climate change

Economies globally have recognized the urgency of limiting carbon emissions to fight climate change. Putting a price on carbon emissions by developing a trading system (carbon market) to buy and sell carbon credits is one way to limit emissions. The Ministry of Power’s (MoP) recent Carbon Credit Trading Scheme (CCTS) 2023 aims at creating a domestic market for tracking and trading carbon credits. The policy is a step in the right direction for setting up India’s compliance and voluntary carbon markets. Still, several questions remain unanswered on whether it operationalizes the market.   

The concept of carbon credit in India

The concept of carbon credit is not new in India. The domestic carbon compliance market has existed for a long time in the form of Perform, Achieve and Trade (PAT) for tradable energy certificates (ESCerts) by designated consumers in industrial units from energy-intensive sectors such as aluminium, cement, chlor-alkali, fertiliser, iron & steel, paper & pulp, railways, thermal power and textile. The Renewable Purchase Obligation (RPO) for renewable energy certificates (RECs) by generators producing electricity from clean sources like solar, wind, biomass, small hydro and municipal solid waste is another form of carbon compliance. Further, the Energy Conservation Act 2001 also discusses issuing carbon credit certificates to registered entities. 

The Carbon Credit Trading Scheme (CCTS)

The CCTS will now encompass the existing trading mechanism by transitioning from tonnes of oil equivalent (ESCerts) to carbon certificates expressed in tonnes of carbon dioxide (CO2) equivalent.  

The CCTS notification lays the framework and structure of the domestic carbon market. It constitutes a National Steering Committee comprising representatives from key ministries to govern the domestic carbon market. This committee will give recommendations to the Bureau of Energy Efficiency (BEE) for establishing emissions targets and trajectories for obligated entities under the compliance mechanism and lay guidelines for issuing and trading carbon credit certificates outside India. 

Essentially, BEE will become an administrator and develop procedures and eligibility criteria for accrediting carbon verification agencies. The Grid Controller of India will handle the meta registry for obligated and non-obligated entities under the compliance and voluntary carbon markets, respectively. Meanwhile, the Central Electricity Regulatory Commission (CERC) will regulate the trading of certificates. 

Comments on the draft CCTS

The Institute for Energy Economics and Financial Analysis (IEEFA) provided a series of comments in response to the draft CCTS released by the MoP in March 2023. The MoP adopted some of the suggestions, including setting up a meta registry that will be compatible with international registries, the inclusion of the non-power sector, a pathway for setting targets for emission reduction, and inclusion of PAT and REC. But, the notification falls short of clarifying the operationalization aspects, including eligible consumers, price discovery, voluntary market mechanisms, and linking the domestic carbon market with the international markets to attract finance and technology. 

Timeline for operationalizing the market 

The notification does not provide a timeline for operationalizing the carbon market, including which section of the market is likely to start first. It defines obligated entities as those notified under the compliance mechanism and non-obligated entities as those that can purchase carbon credit certificates voluntarily. This definition and stakeholder consultations held by the BEE suggest that obligated entities are those that the existing PAT scheme covers. The current cycle for PAT continues until 2025. It is unclear whether the CCTS mandates all or some of these entities to transfer to the carbon credit market. As such, it will be useful to understand the timeline. Some newspaper reports discuss starting the voluntary carbon market right away. This requires clarity on the sectors and a timeline for targets and processes. 

Limited specification on the sectors eligible to participate in the domestic carbon market 

The notification states that the MoP will notify greenhouse gas (GHG) emissions intensity targets to the Ministry of Environment, Forest, and Climate Change (MoEFCC), based on recommendations from BEE. Obligated entities will have to achieve these targets along with any other targets, such as non-fossil energy consumption or specific energy consumption, as per the MoP’s notifications. But there is no clarity on the eligibility of the sectors and industries under this scheme. The eleven sectors identified by the National Carbon Market include petroleum refineries, cement, steel, chlor-alkali, aluminium, thermal power plants, and fertilizers. Will the list expand to add more sectors? If yes, then the question is how will these additional sectors be identified.  

Aligning with the existing domestic market 

The Green Credit Programme (GCP) announced by MoEFCC aims to incentivize environmentally conscious practices via trading green credits. This will be a purely voluntary market covering eight sectors, primarily affecting rural areas. The sectors focus on increasing tree cover, promoting water conservation, adopting natural and regenerative agricultural practices, improving soil health and the nutritional value of food, managing waste effectively, and reducing air pollution.  

These activities under GCP may generate green credits and carbon credits from the same activity under the carbon market. If this is so, how are the two different? What would be the potential use of green credits if they also generate carbon credits that could be sold in the domestic market? How will the two markets intersect or overlap? 

Linkages with international carbon markets 

India has been participating in the sale of carbon credits through the Clean Development Mechanism (CDM) route and private sector-driven voluntary carbon market. Between 2010 and 2022, India issued 278 million credits in the voluntary carbon market, accounting for 17 per cent of global supply, according to the Greenhouse Gas Emissions Special report by S&P Global Commodity Insights. With the domestic carbon market now in place, it is unclear whether the global carbon credit certificates will run parallel to the domestic ones.  

In addition, is there a need to regulate (if yes, how?) carbon credits exported for trade in the international voluntary carbon market? Such decisions will impact India’s strategy to welcome foreign direct investment in decarbonization activities. 

Getting the pricing right for carbon credits 

The effectiveness of the carbon market will depend on the accuracy of carbon price discovery. If the buying price is too high, it will deter participation, especially from micro, small, and medium enterprises (MSMEs). If the selling price is too low, there will be no incentive for real emissions reduction. 

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 13: Climate Action
• SDG 17: Partnerships for the Goals

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 7.2: Increase substantially the share of renewable energy in the global energy mix.
• SDG 9.4: Upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes.
• SDG 13.2: Integrate climate change measures into national policies, strategies, and planning.
• SDG 17.16: Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology, and financial resources.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the following indicators can be used to measure progress towards the identified targets:

• Percentage of renewable energy in the total energy mix
• Investment in sustainable infrastructure and clean technologies
• Number of policies and strategies that integrate climate change measures
• Number of partnerships formed for sustainable development

Table: SDGs, Targets, and Indicators

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Source: businesstoday.in

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