India is at a crucial juncture in its climate strategy as it aims to become the world’s third-largest economy by 2030 while addressing its significant greenhouse gas (GHG) emissions. In 2016, India endorsed the Paris Agreement, aiming to restrict global warming to less than 2 °C by 2100. However, India emerged as the third-largest emitter of GHG after China and the US. India’s per-capita emissions are relatively low at 1.8 tonnes of carbon dioxide (CO2), compared to the global average of 4.4 tonnes which highlights the need for a balanced approach to growth and environmental responsibility. In response, India has committed to 45 per cent reduction in GHG emission by 2030 and achieving carbon neutrality by 2070 under the Panchamrit Pledge, aligning with the Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) framework. Key initiatives include Mission LiFE and the Green Credit Program, promoting sustainable practices. A major advancement is the unveiling of Carbon Credit Trading Scheme (CCTS), evolving from existing mechanisms like the Perform, Achieve and Trade (PAT) scheme and Renewable Energy Certificates (REC) system.
India, a growing hub for energy transition investments, has expanded its renewable energy capacity significantly and is advancing its green hydrogen initiatives.
About Carbon Market
Worldwide, carbon pricing instruments play a crucial role in combating climate change. These instruments fall into two primary categories: compliance and voluntary mechanisms. Compliance mechanisms, like emissions trading systems (ETS), are government-regulated and enforce emission limits, allowing entities to buy and sell emission allowances to meet their obligations. In contrast, voluntary mechanisms, often managed by independent organisations, enable entities to voluntarily compensate for their emissions by investing in carbon credits from projects that reduce or eliminate GHG emissions. The international carbon credit market is anchored by established systems like the European Union Emissions Trading System (EU ETS), which has been operational since 2005 and is currently in its fourth phase. The EU ETS employs a ‘cap and trade’ approach, capping GHG emissions and allowing companies to buy and sell carbon credits within this limit. As of April 2024, the EU ETS has significantly contributed to reducing emissions by 47 per cent from 2005 levels. Other countries, including Canada, China, and Japan also have carbon markets in place.
Carbon markets are crucial for tackling climate change as they provide a financial mechanism to incentivise GHG reductions. With global emissions still rising and the need for deep cuts to limit warming to 2 °C, carbon markets offer a way to channel investments into emission reduction projects. They help bridge the significant financing gap, particularly for developing countries, which require up to US$ 6 trillion by 2030 to meet their climate goals. By pricing carbon emissions, these markets drive investments in clean technologies and sustainable practices, making it economically advantageous for businesses to reduce their carbon footprint and supporting the broader effort to mitigate climate change.
Despite these advancements, the carbon market faces challenges with the credibility of carbon credits. A substantial proportion, over 90 per cent, of credits verified by leading agencies like Verra have been deemed ineffective, with 94 per cent of credits from rainforest projects failing to deliver real climate benefits. This issue of ‘phantom credits’ undermines the effectiveness of carbon markets and highlights the need for improved verification and transparency.
Carbon Markets in India
India has extensive experience with carbon market instruments, including both mandatory (compliance) and voluntary (offset) programmes. Indian companies have successfully implemented schemes like PAT and renewable energy certificates (RECs), as well as clean development mechanism (CDM). In fact, India has registered the second-largest number of CDM projects worldwide. Since 2015, till June 2024, Indian industries have reduced CO2 emissions by over 106 million tonnes under the PAT scheme.
Compliance measures ensured companies to take required actions, while voluntary programmes encouraged extra efforts and rewarded them for doing more. Both compliance and voluntary initiatives have driven entities to take action, reward them with credits or certificates for their additional efforts. Given this existing expertise and capacity, India is well-equipped to establish a comprehensive domestic carbon market framework, building on its familiarity with market-based mechanisms. Overall, India’s carbon market landscape is evolving, with ongoing efforts to develop a robust domestic framework for carbon trading.
India’s Carbon Credit Trading Scheme
In order to achieve India’s ambitious climate goals, a comprehensive national framework for the Indian Carbon Market (ICM) is being developed, through a secure electronic platform for a reliable national carbon credit. The CCTS builds upon existing market mechanisms like the PAT scheme and the REC system. This framework would support and incentivise various entities, assigning a value to their voluntary efforts to reduce GHG and transition the Indian economy towards decarbonisation. It aims to attract investment and technology in emerging sectors such as green hydrogen, sustainable aviation fuel, and offshore mind energy.
The CCTS was introduced as part of the Energy Conservation (Amendment) Act 2022. This draft outlined the mechanism for carbon credit trading and aims to integrate carbon pricing into India’s climate strategy. This scheme is designed to reduce GHG emissions by facilitating the trading of carbon credit certificates.
In 2023, India launched the CCTS, designed to integrate both compliance and voluntary carbon markets. The compliance segment is set to start in 2025–26, while the voluntary market’s timeline is yet to be determined. The scheme allows obligated entities to buy or sell carbon credit certificates (CCCs) based on their emission reductions, with businesses also able to trade CCCs to offset their emissions. Sectors struggling with reduction targets may use energy saving certificates (ESCerts) and RECs as offsets.
In 2024, India made a significant revision to its CCTS by opening it up to non-obligated entities, allowing both companies and individuals to voluntarily participate in the carbon credits market. The revised CCTS aims to effectively price emissions through CCC trading and broaden the scope of the voluntary carbon market, providing a new avenue for addressing emissions and promoting environmental responsibility. However, key decisions on international market participation and the scheme’s design, including international linkages, are yet to be anticipated.
The Bureau of Energy Efficiency (BEE) and the National Steering Committee for Indian Carbon Market (NSCICM) will oversee the monitoring, reporting, and verification (MRV) processes. They will also manage accreditation of carbon verification agencies and ensure compliance with quality standards, while the Central Electricity Regulatory Commission (CERC) will regulate the trading of carbon credit certificates.
The Indian carbon market framework consists of two main components:
- A compliance mechanism, which targets emissions from energy and industrial sectors, ensuring mandatory reductions.
- An offset mechanism, encouraging voluntary actions from entities not covered by compliance, rewarding them for GHG reductions.
The Indian Carbon Market (ICM) is a key element of India's climate strategy, designed to reduce GHG emissions through a structured carbon credit trading system. This market-based approach establishes a national framework for trading CCCs, pricing GHG emissions to incentivise reductions and support India’s climate objectives. The ICM includes both a compliance-based trading system and a voluntary mechanism, broadening its reach to encourage GHG reductions across various sectors. It will develop methodologies for estimating carbon emissions reductions, and set up processes for validation, registration, verification, and issuance of credits. A comprehensive governance structure will be established, and capacity building will support entities in carbon market operations. The ICM aims to attract investment in emerging sectors like green hydrogen and sustainable aviation fuel, promoting a transition to a low-carbon economy. Aligning with global carbon pricing trends, the ICM positions India as a significant player in the carbon market, contributing to its nationally determined contributions (NDCs) goal of reducing GDP emissions intensity by 45 per cent by 2030, compared to 2005 levels.
Significance of the Scheme
- Together, these mechanisms offer a holistic approach to decarbonise India’s economy, addressing both mandatory and voluntary emissions reductions. Obligated entities will have pacific emission reduction targets for GHG emission intensity. They can earn or purchase CCCs based on their performance relative to these targets to offset their emissions, offering flexibility and promoting sustainability.
- The 2024 update in the scheme introduces a new offset system, allowing companies and individuals to register their sustainability projects and earn tradable CCCs. Each credit equals to one tonne of carbon dioxide equivalent (tCO2e) reduced. The goal is to create a fair market price for emissions through CCC trading, growing the voluntary carbon market and encouraging more eco-friendly practices. This presents both a challenge and an opportunity as carbon credits could become a new revenue stream and align Indian businesses with the growing global carbon trading market.
- With 75 carbon pricing mechanisms currently in operation globally, covering around 24 per cent of global emissions, India’s CCTS aligns with the global shift towards carbon pricing. The introduction of new carbon pricing tools is expected to expand this coverage to nearly 30 per cent.
- Some sectors struggling to meet emission reduction targets, especially those with difficult-to-reduce emissions, are considering trading ESCerts and RECs as offsets. India has become a favourable destination for energy transition investments after hosting the G20 Summit. The country made significant progress in renewable energy, adding 17 GW of capacity, with 13.8 GW from non-fossil sources. Renewable energy is driving the growth in India’s electricity supply capacity. Additionally, India has increased funding for green hydrogen development and is preparing for its domestic carbon market launch.
- India’s CCTS represents a significant step in advancing its climate goals while driving economic growth. By creating a robust carbon market and maintaining high standards for carbon credits, the CCTS will support India’s transition to a low-carbon economy and contribute to global climate mitigation efforts.
Carbon credit A carbon credit represents one metric tonne of CO2 emissions that could be bought, sold, or traded. Companies under cap-and-trade programme receive a set number of credits, which they could use to meet their emissions limits. If they emit less than their allowance, they could sell or trade the excess credits. When credits are sold, the buyer essentially purchases the right to emit the equivalent amount of GHG. Carbon credits are created when actual emissions reductions occur, often from unseen actions like reduced air travel or energy-efficient practices, making them tradable assets. For instance, a farmer plants a tree that absorbs one tonne of CO2 from the air. The farmer could then sell the resulting carbon credit to a steel company, which could use it to offset its own emissions. This means the steel company could subtract one tonne of CO2 from its total emissions, effectively reducing its ‘net emissions’. The credit represents the actual reduction in GHG achieved by the tree’s growth, allowing the steel company to balance out its own emissions.
Carbon offset Carbon offsets and credits both reduce CO2 in the atmosphere; however, offsets come from specific projects with clear plans and boundaries. These projects often happen outside of an organisation’s direct control and are not required by regulations. Examples include wind farms, reducing truck emissions, and tree planting. Because CO2 affects the global climate, both credits and offsets have the same benefit in reducing emissions and fighting climate change.
Current Market Mechanisms in India
The PAT scheme targets energy-intensive industries including aluminium, cement, chlor-alkali, fertiliser, iron and steel, paper and pulp, railways, thermal power, and textiles. The scheme sets energy reduction goals for these industries, known as specific energy consumption (SEC) targets. Companies that exceed their targets earn ESCerts. These certificates can be traded in power exchanges. Companies that do not meet their targets can purchase ESCerts to comply with regulations. Issues include lenient targets, excess availability of ESCerts, increased non-compliance, and delays in compliance cycles.
The REC system encourages electricity generators to produce power from renewable sources, such as solar and wind. Under the Renewable Purchase Obligation (RPO), generators are required to produce a specified percentage of their total power from renewable sources. The REC system issues certificates for renewable energy produced, which can be traded to meet the RPO requirements.
India is in the process of establishing a comprehensive carbon market through CCTS and voluntary carbon market.
Voluntary carbon market India’s existing carbon market is predominantly voluntary. Indian projects or entities participate in international crediting programmes, where they receive certification and credits for their emission reduction efforts. These credits are often bought by international buyers, providing a revenue stream for Indian projects and contributing to global carbon offsetting.
India’s Carbon Market: Challenges
Establishing a carbon credit market could effectively incentivise reducing net carbon emissions and make it more cost-effective. However, the government would face significant challenges in structuring and governing this market. The primary challenge would be ensuring effective monitoring and oversight of carbon credits. Due to the widespread and often remote location of carbon credit projects, relying on project developers or third-party verification agencies could be problematic.
There is a crucial role of integrity measures in closing the emissions reduction gap and achieving climate goals. Despite the success of global carbon pricing mechanisms, which had raised US$ 100 billion in 2022 and covered 23 per cent of global GHG emissions, the current government pledges are projected to result in a temperature rise between 2.1 °C and 2.8 °C. Carbon markets have the potential to bridge this gap and support a 1.5 °C trajectory; however, they require enhanced integrity measures and international cooperation.
Another critical issue would be ensuring additionality, which means verifying that carbon credits are issued for emissions reductions or avoidance that would not have occurred otherwise. This could be difficult to determine in practice. For instance, if switching from coal to solar power is already commercially viable in India, companies need to decide on whether they should receive carbon credits for doing so, or should they make the switch regardless of financial reasons. Addressing these challenges is crucial for the integrity and effectiveness of the carbon credit market.
Way Forward
India’s energy transition strategy would focus on various aspects of the power and renewables market. The country aims to advance its clean energy transition, although coal is expected to remain a dominant source, accounting for 73.2 per cent of generation in 2024. Electricity demand has been projected to grow in line with the GDP growth, driven by local activity due to elections, and the El Nino impact.
Improving domestic fuel supply, particularly coal and gas, remains a top priority. India is expected to surpass one billion metric tonnes of domestic coal production in 2024, and new gas pricing reforms would boost domestic gas production. Additionally, the country would be shifting its focus towards creating local demand for green hydrogen and ammonia, with new schemes to aggregate demand from public sector units and large consumers.
Renewables would continue to play a crucial role in India’s climate policy, with the highest renewable capacity addition expected in 2024 (>20 GW). Falling module costs and a tender backlog would drive record capacity addition, while hybrid renewable tenders and stand-alone storage tenders would gain prominence.
Based on the experiences of other countries and India’s unique context, it is expected that there would be several hypotheses about the upcoming carbon credit trading scheme:
- The scheme would likely be implemented in phases, beginning with the power sector.
- Following the power sector, hard-to-abate industries with high market concentration, such as steel and cement, would likely be next in line.
- Agricultural emissions may not be subject to an emission cap for an extended period, if ever, due to the sector’s unique characteristics and challenges.
- Within each industry, emission caps would initially be set at generous levels and would gradually decrease over time in order to allow for a smooth transition.
- Special allocations would likely be made for small and medium-sized enterprises (SMEs) to support their participation in the scheme.
Conclusion
To conclude, as global carbon pricing mechanisms expand, India’s move towards a regulated carbon market will position it as a significant player, enhancing its role in international carbon markets and supporting its climate goals. Overall, India’s revised CCTS marks a significant step forward in the global decarbonisation effort. Combined with the strong growth in the global carbon trading market, this development underscores a promising trajectory towards reducing GHG emissions transition to low-carbon economy and contribution to global climate mitigation efforts.
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