India's Carbon Market

India has introduced the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022, replacing the previous Perform, Achieve, and Trade (PAT) scheme. This initiative aligns with India’s climate goals under the Paris Agreement and aims to establish a structured Indian Carbon Market (ICM).

What is the Carbon Credit Trading Scheme?

• The CCTS is a market-based mechanism designed to regulate and trade carbon credits.
• It seeks to reduce greenhouse gas (GHG) emissions by pricing carbon and facilitating carbon trading.
• Unlike the PAT scheme, which focused on improving energy efficiency, CCTS directly targets emission reduction by monitoring emissions per tonne of GHG equivalent.
• Working Mechanism: The scheme operates through two mechanisms:
  • Compliance Mechanism: Industries in sectors such as aluminium, cement, fertilizers, iron & steel, and petroleum refineries must meet sector-specific GHG reduction targets. Those exceeding targets earn Carbon Credit Certificates (CCC), while those failing must purchase credits to compensate.
  • Offset Mechanism: Entities outside the compliance framework can voluntarily participate and earn carbon credits by adopting cleaner technologies or reducing emissions.
• Initially, the scheme covers energy-intensive industries, which contribute about 16% of India’s total emissions. The power sector, which accounts for 40% of emissions, may be included later.
• Regulatory Oversight: The scheme is overseen by key government bodies such as the Bureau of Energy Efficiency (BEE) and the National Steering Committee for Indian Carbon Market (NSCICM).
• Importance of CCTS in India’s Climate Goals: India aims to cut its emission intensity by 45% by 2030. The CCTS will encourage private sector participation in adopting clean technologies, renewable energy, and carbon capture solutions, driving India toward its net-zero emissions target.

What is Carbon Pricing?

• Carbon pricing is an economic approach that assigns a cost to carbon emissions, ensuring that polluters bear the financial burden of their emissions.
• This strategy incentivizes industries to either reduce emissions, pay for pollution, or invest in cleaner alternatives.
• Globally, carbon pricing covers about 25% of emissions across 89 countries. There are three main approaches:
  • Emissions Trading System (ETS): Allows industries to trade carbon credits. It operates under two models:
    • Cap-and-Trade: A cap is set on emissions, and industries can trade allowances within this limit.
    • Baseline-and-Credit: Industries that cut emissions below a set baseline earn credits, which they can sell to others.
  • Carbon Tax: Instead of setting a cap, a direct tax is imposed on each ton of CO? emitted, encouraging industries to reduce emissions voluntarily.
  • Crediting Mechanism: Projects that reduce GHG emissions generate carbon credits, which can be traded domestically or internationally.

Challenges in Implementing CCTS

• Target Setting and Carbon Pricing: If reduction targets are too lenient, excess carbon credits will lower prices, reducing their impact. If too strict, compliance costs may rise, affecting industries and inflation.
• Compliance and Enforcement Issues: Under the previous PAT scheme, half of the required energy-saving certificates (ESCerts) remained unpurchased due to weak enforcement. CCTS may face similar challenges.
• Delays in Credit Issuance: The slow issuance of ESCerts since 2021 undermined market confidence. Similar delays in CCTS could discourage investment.
• Transparency Concerns: A lack of publicly available data on industry emissions and compliance can weaken market trust.

How Can India Strengthen CCTS?

• Adopt International Best Practices: India can learn from the European Union’s ETS and implement gradual emission caps, ensure price stability, and strengthen compliance.
• Improve Monitoring and Reporting: A robust Monitoring, Reporting, and Verification (MRV) system can enhance credibility and prevent double counting of carbon credits.
• Develop a Strong Trading Platform: A digital registry for tracking carbon credits can improve transparency and prevent fraud. Aligning the system with global markets will ensure smooth trade and avoid restrictions like the EU’s Carbon Border Adjustment Mechanism (CBAM).
• Encourage Industry Participation: Incentives such as tax benefits for early adopters and support for investments in green technology will drive industry engagement.