Carbon Market in India: What it is and What Lies Ahead

As major cities in the country grapple with ever-increasing Air Quality Indices (AQIs), constructs of ‘climate change’, ‘climate financing’ and ‘decarbonisation’ permeate deeper into our everyday existence and can no longer remain in the peripheries for sustainable and responsible business practices. The recently concluded COP-29 (29th Conference of Parties of the United Nations Framework Convention on Climate Change) has very aptly put the pin on the widening gap between the need and available resources for climate financing and carbon markets are being explored globally as a means to reduce this gap.

What is a Carbon Market and What are Compliance and Voluntary Mechanisms in such a Market?

A carbon market, simply put, provides a platform for trading carbon credits, which are essentially permit for CO2 emissions to be traded between organizations. When a government limits the amount of CO2 that can be released into the environment by industries (thereby setting a cap), it can issue certificates of carbon credits that would allow holders thereof to release only permissible amounts of CO2 into the environment (thereby reducing and capping the overall emission levels). By trading these certificates in a secondary market, a high emitter of CO2 (for instance, a manufacturing factory) can offset its emissions and bring them within permissible limits by purchasing carbon credit certificates from a low emitter of CO2 (for instance a renewable energy company).

Clause 2(c) of the (Indian) Carbon Credit Trading Scheme, 2023 (CCTS) defines carbon credit as “a value assigned to a reduction or removal or avoidance of greenhouse gas emissions achieved and is equivalent to one ton of carbon dioxide equivalent (tCO2e).” A carbon credit certificate can be issued in India by the Central Government, or any agency authorised by it – currently, the Bureau of Energy Efficiency, based on the recommendation of the National Steering Committee for Indian carbon market and subsequent approval of the Central Government. These certificates can be issued to a registered entity (i.e., an entity registered under the CCTS) that complies with the requirements of the CCTS. 

Globally, any carbon market can operate in 2 ways, viz.: (i) via compliance mechanism, which is a government-driven mandatory mechanism following the ‘cap-and-trade’ model – typically Emission Trading Systems such as the Perform Achieve Trade Scheme or the PAT Scheme and Renewable Energy Certificates trading system in India; and (ii) via voluntary or offset mechanism, which is more of a self-regulatory mechanism that involves voluntary avoidance of CO2 emissions by entities, by focusing on means such as agriculture, reforestation and afforestation, energy efficiency such as electric vehicle manufacturing companies, renewable energy companies, et. al. Under the CCTS, these two categories are recognised as obligated entities (i.e. registered entities notified under the compliance mechanism of the CCTS) and non-obligated entities (i.e. registered entities that can purchase carbon credit certificates on a voluntary basis).  

Complexities Around a Carbon Market in the Indian Context

An efficient carbon market in India may have to deal with a plethora of interconnected aspects, from navigating bureaucratic coordination to ensuring robust compliance mechanisms.

Interplay of Bureaucracies

Currently, under the CCTS, the National Steering Committee for Indian carbon market is responsible for governing and having direct oversight on the functioning of the Indian carbon market, the Bureau of Energy Efficiency is responsible for the administration of the market, the Grid Controller of India operates as the registry for the Indian carbon market, and the Central Electricity Regulatory Commission is responsible for regulating the trading activities in the market. A smooth running of the market would require these government bodies to work in close tandem with each other, in order to avoid potential delays and defaults in knowledge-sharing. Technological interventions such as the usage of blockchain for transparent certification and registration, online carbon credit portal for receiving and sorting applications, approvals, and annual reporting requirements, and artificial intelligence for undertaking compliance checks to detect anomalies in reported data could provide effective solutions in this regard.

Ensuring Implementation

 Right now, the CCTS, read with the Energy Conservation Act, 2001, does not provide for any penalty for non-compliance for defaults such as fraudulent accreditation, breaching the targeted reduction levels, trading in certificates by power exchanges outside the permissible norms established by the Central Electricity Regulatory Commission. The only relevant provision in this regard seems to be Clause 11(7) of the CCTS which provides that “the obligated entities who did not achieve their targeted reduction in greenhouse gases emission intensity shall meet shortfall by purchasing carbon credits certificates from Indian carbon market”. There is a lot that remains to be legislated upon in this regard and it remains to be seen how the legislative scenario evolves around these issues in the coming years.

Navigating Pricing Complexities