Indian Carbon Market to create Vibrant Carbon financing platform for the Industries

 Indian Carbon Market to create Vibrant Carbon financing platform for the Industries 

Carbon Credit evolved in the Kyoto protocol in 1997 where Carbon was deemed to be traded commodity and this was reiterated during Paris Agreement in 2015. Now globally carbon is traded to get carbon credits which overall help in reducing carbon emissions worldwide. Carbon Emission reductions and removals are converted into tradable assets through a carbon market. This implies that an industrial unit that surpasses the emission criteria is eligible to receive credits. Additionally, it would allow struggling units( or more carbon emitting Units)  to purchase credits and demonstrate compliance.

In simpler terms, a carbon market will create incentives to reduce emissions or improve energy efficiency. This is to meet the Net zero commitment by India  in the climate summit. The renewed focus towards controlling GHG emissions and moving towards carbon neutrality, with specific milestone/targets, is expected to encourage increased private sector participation in combating climate change. These commitments would drive demand for voluntary carbon credits in India.

To drive down fossil fuel use, India is now eyeing a carbon market. The policy discussion papers has been published on the procedures to issue a carbon credits to entities such as businesses or other institutions that choose to register under the scheme.

India’s Lok Sabha passed the Energy Conservation (Amendment) Bill (ECA Bill), in August 2022. The Amendments are expected to facilitate the achievement of more ambitious climate change targets and ensure a faster transition to a low-carbon economy. The Energy Conservation Act, 2001 had powered the first phase of India’s shift to a more energy-efficient future. Over the years, the energy intensity (energy consumed per unit of GDP) of India’s economy has declined consistently. However, as India embarks on more ambitious climate action pledged under the Paris Agreement, there is a need to widen the scope of Act to include instruments that will aid the achievements of these ambitious goals. One of the proposed amendment is to establish Indian carbon market(ICM) to facilitate trade in carbon credits, carbon credit trading scheme or a national carbon market (NCM). Such a carbon market could potentially be a significant new policy instrument for low-carbon development, with wider implications for the economy and society.

Bureau of Energy Efficiency Ministry of Power has prepared and published the draft policy discussion papers on the the Indian Carbon Market (ICM) in October 2022. This  is envisioned to serve as a vibrant carbon financing platform to mobilize finance and technology towards decarbonisation of the economy, helping achieve India’s 2030 National determined contributions(NDC) target – specifically the emission intensity target, future NDCs expressed in Carbon equivalents( CO2e) terms, and the 2070 Net Zero target. The creation of a unified ICM can be an important catalyst and  help to create eligible carbon credits, increase the liquidity of credit trading, and thus lay the foundations for a good price discovery mechanism for carbon in India. Private sector climate action can acquire momentum from robust market mechanisms that embrace scale, incentives, partnerships, and innovation. We believe a key role will be played by carbon markets in the drive for decarbonisation, incentivising emission reductions in the short-term and Net Zero transitions in the long-term. Already, according to the International Climate Action Partnership’s (ICAP) Status Report 2022 on Emissions Trading Worldwide, jurisdictions making up 55% of global GDP are using emissions trading, 17% of global greenhouse gas emissions are covered by an emission trading system (ETS), and eight countries, 19 provinces and states, and six cities are implementing carbon markets.

India has already put in place implicit prices on carbon emissions. The current regime of indirect taxes imposes high tax incidence on petroleum fuels. The GST compensation cess, which replaced the pre-GST era clean energy cess, levies a tax on coal. Moreover, the market-based Perform, Achieve and Trade (PAT) scheme works to enhance energy efficiency and thus indirectly reduce carbon emissions from energy consumption in energy-intensive industries, as does ethanol blending in petrol. 

In the absence of a carbon price, economic agents do not factor in the social cost of their emissions. Setting a price for carbon emissions has been conceded as an optimal strategy to internalize these costs. Carbon pricing is often done explicitly through specific carbon taxes and carbon markets, and implicitly through indirect taxes, subsidies, etc. In addition, it is widely accepted that a portfolio-based approach with non- pricing policy measures can positively incentivize a gradual shift to low-carbon and green alternatives. Regulatory instruments like setting standards for products, technologies, performance reporting requirements, etc, encourage polluters to consider their emission levels as they try to meet regulatory requirements. Policy support for the funding of R&D for low-carbon technology and support for testing of prototypes boost innovation and its diffusion.

The move to establish an Indian carbon market(ICM) —an explicit pricing mechanism—is therefore the natural next step.

A carbon market creates an incentive for more sectors and individual corporations to transition [to low-carbon fuels and operations]. Companies that find it hard to decarbonise their operations for lack of capital can still meet their climate goals by buying carbon credits on the market. Micro, small and medium enterprises (MSMEs) are one example. MSMEs account for around 45% of India’s manufacturing output and 40% of its exports. While their largely informal nature makes it difficult to estimate their carbon footprint, a 2016 inventory found the sector is responsible for roughly 6% of India’s total emissions.

There are several companies in India who are very willing to invest in [emissions reductions for] carbon trading, but they are not getting good prices on the international market, so the ICM is  an indigenous carbon market. The discussion paper mentioned the the major polluting sectors, such as power, steel, cement and other heavy industries in initial phase , and over time may include smaller industries too. Without this, decarbonising India’s heavy industries – and reaching net zero by 2070 will be impossible, 

The plan is to devise specific technological solutions for each carbon intensive sector targeted by the carbon market. Then "industries can cash in on the market itself”

India has had favourable experiences with market mechanisms. Over a decade earlier, the Clean Development Mechanism (CDM) under the Kyoto Protocol offered a primary carbon market for Indian participants, and later, tax on coal production, the coal cess, the energy efficiency trading scheme Perform-Achieve-Trade and the Renewable Energy Certificate scheme have served as surrogate carbon markets.

With more than 1,000 projects registered under the UN Clean Development Mechanism, India is currently one of the world’s biggest exporters of carbon credits. However, a lack of robust monitoring has sometimes led to credits being generated by projects of little environmental value

It is proposed that under the Indian Carbon Market – there will be two mechanisms – carbon credit trading mechanism for the obligated sectors i.e., the extended PAT scheme based on carbon emissions targets instead of energy targets, and a project-based offset scheme for non-obligated and non-energy sectors. 

As India already has a market-based mechanism in the form of PAT and REC, the obligated sectors covered under the PAT and REC schemes would continue to remain obligatory under the ICM as well. The ICM would also allow participation from other sectors (currently not covered under PAT and REC) for the trading of offsets. 

However some of the observations in the Indian carbon market policy discussion papers are 

• Is this Indian Carbon market force emissions reduction at the expenses of India’s economic growth objectives? The Emissions trading schemes (ETS) global have typically started with the limited coverage of sectors and built up over multiple phases of operation in order to learn and build from experience, this approach has resulted in limited initial emissions impacts and kept the environmental benefits of such a scheme marginal. Broader coverage upfront, on the other hand, would impose regulatory costs (regulatory shocks for firms and administrative burdens on authorities), as well as economic costs (higher transaction costs on smaller firms). It may, for instance, force medium and small firms out of business, with production shifting to big industrial houses, which will have implications for market structure and jobs. 
• One opportunity for MSMEs is the promise of earnings from carbon trading, which in turn is dependent on the relative profitability of and access to investments. Simultaneously, governments can allocate part of the potential earnings from an ICM to support ‘greening’ of MSMEs. In the absence of a clear path to manage these uncertainties and adequate support for a transition, a market-centric approach may adversely affect the MSMEs and related livelihoods. Moreover, enforcing compliance for MSMEs will add to the regulatory burden. How an ICM interacts with the MSME sector requires careful additional consideration.Will an ICM promote green industrialisation without harming the MSME sector?
• Domestic experiences with market mechanisms, like Perform, Achieve and Trade (PAT), Renewable Energy Certificate (REC), and other pilots carry important lessons. Despite controlled regulatory settings, a common challenge across these experiences has been poor compliance, causing oversupply and low demand, in turn leading to a market collapse. While designing an ICM, India will not only have to find ways to integrate existing schemes into a common and internationally verifiable metric, but also have to plan institutional structure, capacity, and oversight to manage a more complex trading system and seek greater coordination across departments and jurisdictions. While a market approach holds a promise of regulatory ease in the long-term, will it come at a cost of significant regulatory burden and investments upfront ?