India’s Carbon Market (Boost from COP29 Agreement)

India’s plan to set up a national carbon market received a significant boost at the 29th Conference of the Parties (COP29) in Baku, Azerbaijan. At this climate conference, the United Nations Framework Convention on Climate Change (UNFCCC) ratified key rules for a global carbon trading mechanism under the Paris Agreement.

Key-Takeaways from COP29

• Ratification of Article 6.4 Rules
  • The COP29conference saw a consensus on rules for projects to qualify for carbon credits under Article 6.4 of the Paris Agreement.
  • Article 6 enables countries to meet their Nationally Determined Contributions (NDCs)—the climate targets each country sets to reduce emissions—through market-based mechanisms, such as carbon credits.
  • The approval of these rules ensures that carbon creditscan now be issued, traded, and used under the UNFCCC framework to offset emissions and support national climate commitment.
• Global Carbon Market and Integrity
  • The ratified rules are designed to ensure that the international carbon market operates with integrity—meaning the emission reductions achieved are real, additional, verified, and measurable.
  • This aims to increase demand for carbon credits, facilitating climate action and investment in emission-reduction projects, especially in developing countries.
• India’s Delayed Carbon Market Launch
  • India had faced delays in setting up its own carbon market due to the non-finalisation of rules under Article 6. Indian officials have projected that India’s carbon marketcould begin operations by late 2025 or 2026, three years after the government authorized the Bureau of Energy Efficiency (BEE) to create the necessary mechanisms.
  • India has been keen on using Article 6-compliant markets to channel investments in emission-reduction projects, leveraging cost-effective mitigation strategies.
• Article 6: Key Framework for Global Carbon Markets
  • Article 6of the Paris Agreement allows countries to achieve their emission reduction targets through international cooperation, using market-based mechanisms.
  • Article 6.4, approved at COP29, establishes a carbon crediting mechanismwhere emission reductions can be traded internationally.
  • These credits will be used by countries to meet their climate goals under the Paris Agreement, while also allowing companies to comply with their national regulations.

What is Carbon Market?

• Carbon markets, also known as emissions trading mechanisms, are trading systems in which carbon creditsare sold and bought.
• It is a mechanism that internalises the cost of greenhouse gas (GHG) emissionsin goods and services.
• Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.
• There are broadly two types of carbon markets:
  • Compliance marketsare created as a result of any national, regional and/or international policy or regulatory requirement.
  • Voluntary carbon markets (national and international) refer to the issuance, buying and selling of carbon credits, on a voluntary basis.
• Compliance Procedure: In August 2024, the Bureau of Energy Efficiency (BEE),responsible for implementing CCTS, released the scheme’s compliance procedures. However, specific emission targets are still to be announced.
• Purpose of a Carbon Market in India
• The goal is to move towards a more efficient use of energy, switching from fossil fuels to renewable energy as power generation increases.
• Nationally Determined Contributions (NDCs):This scheme is part of India's commitment under the Paris Agreement to reduce emissions intensity by 45% from 2005 levels by 2030.
• Net-Zero Target:India has also pledged to become a net-zero emitter by 2070.
• India is the world’s third-largest carbon emitter, contributing 3%to the global greenhouse gas emissions in 2021.

Current State of Carbon Markets in India

• Globally, there are over 28 emission trading systemsin existence, and plans are in place for more than 21 additional national and sub-national emission trading markets. Meanwhile, India is actively developing a framework for its domestic carbon market.
• India currently operates two market-based emission reduction schemes: the Perform, Achieve and Trade (PAT) scheme and the Renewable Energy Certificates (REC) system.
  • PAT schemetargets energy-intensive industries such as aluminium, cement, chlor-alkali, fertiliser, iron and steel, paper and pulp, railways, thermal power and textil Under this scheme, the government sets energy reduction goals, known as specific energy consumption (SEC), for companies in particular sectors. If a company uses less energy per unit of production than the established targets, it can earn certificates (ESCerts) as a reward for saving energy. The earned ESCerts can be traded on Power Exchanges and purchased by other units participating in the PAT scheme to fulfill their compliance needs.
  • REC systemoperates under the Renewable Purchase Obligation (RPO), which mandates electricity generators to produce a certain percentage of their total power from renewable sources like solar and wind, etc. These certificatescan be traded and are intended to promote the use of renewable energy sources.

Carbon Credit Market and India's Role

• India is expected to benefit from carbon markets by attracting climate finance, especially in sectors like energy, industry, and clean technology.
• India is hoping to reduce emissionswhile promoting economic growth through the trade of carbon credits in the international market.
• As per the UN Climate Change, the climate finance needs of 98 nationsare estimated at $500 billion annually, with Article 6 potentially providing $250 billion of that amount, mainly through cross-border cooperation and investments.