On the verge of reality

India is poised to pioneer its Carbon Market transformation! The rapidly increasing global warming around the globe has become a cause of concern for every economy today. The Paris Agreement on Climate Change and the Kyoto Protocol serve as the major guiding lights for institutions and other bodies working towards climate change, former being a landmark document.

The Paris Agreement states that the global temperature should be increased to well below 2 degrees Celsius, while taking best efforts to keep it under 1.5 degrees Celsius. The major cause of global warming is the ever-increasing Greenhouse gas (hereafter referred to as GHG) emissions. The United Nations Framework on Climate Change (UNFCC) believes that the GHG emissions should be at their peak latest by 2025 and then should decline by 43 per cent by the year 2030.

The Kyoto Protocol lays the foundation of Clean Development Mechanism (CDM). It is a mechanism that allows a nation having an emission-reduction target to carry out an emission-reduction project in a developing country. This mechanism benefitted many developing nations like India, Brazil, and China around the year 1997. The CDM mechanism allowed projects to earn Certified Emissions Reduction (CER), where again 1 CER was equivalent to 1 tonne of Carbon Dioxide. These CERs were also tradeable in the market.

Another way by which the countries can be encouraged to reduce their greenhouse gas emissions is by charging a price on their carbon emissions and incentivising them for reductions in the emissions, thus, by treating carbon as a commodity. This is where the concept of carbon markets comes into picture. A carbon market is a tool or any market that helps to put a price on carbon, by enabling trade to be done as a carbon credit or as a carbon offset. Thus, a carbon credit acts as a trading unit for a carbon market.

Currency of carbon market: the carbon credit

A carbon credit is a general term that represents a tradeable permit or certificate representing a right to emit 1 metric tonne of carbon. Governments of many countries setup allowances allowing the industrial entities coming under their jurisdiction to emit a certain amount of carbon, which is usually based on the country’s emission targets. The entities that have emitted lesser amount of carbon than permitted may sell their surplus or extra allowances as credits, which can be purchased by entities proposing to emit or actually emitting more carbon than allowed.

These markets don’t just exist in theory, but have practical implications too, especially for emerging nations like India, that have two-fold objectives of meeting reduction in emissions and of ensuring sustainable economic growth. As of December 2023, the total number of CDM projects in India stood at 1,703, reported Mongabay.

Global penetration

There are majorly two kinds of carbon markets – compliance and voluntary.

Compliance carbon markets, as the name suggests, are primarily government-regulated carbon markets where the government sets a cap on the total greenhouse gas emissions allowed in a country across a certain period of time. This cap is divided into various number of allowances and distributed among the entities (mostly through auction process). If any entity crosses its allowed carbon limits, it has to buy the required additional allowances from another entity that has surplus of them. Such a system leads to the establishment of an Emission Trading System (ETS), that works on a ‘cap-and-trade’ principle. The price of a carbon credit in an ETS depends on the demand and supply factors.

Voluntary carbon markets, true to their name, are the ones which act as a platform for institutions, organisations and even individuals to do their part in helping to reduce emissions. They do so mostly as a part of their CSR strategies. The carbon credits in such markets are acquired with the help of brokers or project developers. The credits are required to be verified by an independent, third-party institution like Gold Standard Foundation and Verra. The voluntary market was worth USD 2 billion in the year 2021. Many experts have claimed that the voluntary market can lie anywhere between USD 10 billion and USD 40 billion by the year 2030.

Voluntary markets usually pave way for offset (project-based) approach. In this mechanism, the reduction in emission is measured against a baseline scenario which is estimated assuming that there will be higher emissions if this project would not materialise. These reduced emissions serve as coupons or ‘offsets’ for buyers to make emissions elsewhere. In this case, the units are credited to the buyers post-verification and proper certification.

The most prominent ETS exists in the EU. EU ETS begun in the year 2005 and is the oldest ETS in force. It was established under the ‘European Green Deal’ and uses auctioning to distribute emissions among the covered entities. The system is now operating in its fourth phase (2021-2030). From 2024, emissions from maritime transport are also included in the EU ETS. Other sectors already covered under the EU ETS include power, industry, and domestic aviation.

The California cap-and-trade programme is the second-most prominent ETS that began operations in the year 2012. It covers emissions from sectors like power, transport, industrial and real-estate. Auction and free allocation methods are used to distribute allowances among the entities. The funds that are raised from the auction is used to fund initiatives that cut emissions and improve the environment, public health, and economy—particularly in underprivileged areas.

The Indian story

The Power Ministry, Government of India (GoI) and the Bureau of Energy Efficiency (BEE) notified in June, 2023, the establishment of Carbon Credit Trading Scheme (CCTS) and the setting up of Indian Carbon Market under the ambit of Energy Conservation Act, 2001.

The scheme is currently in force and aims to set emission reduction targets under various selected sectors which are yet to be named by the Ministry of Power. The Ministry of Power will list the obligated entities (those that will be required to register for the scheme) and shall also fix emission intensity targets which will then be handed over to the Ministry of Environment, Forest and Climate Change. The Ministry of Power will be guided by the recommendations of the Bureau of Energy Efficiency (BEE) in discharging its duties, which will act as the administrator of the scheme. The BEE will also be the carbon-credit issuing authority and will also discharge the duty of accrediting verifying agencies. Moreover, the Central Electricity Regulatory Authority (CERC) will be acting as a regulator to maintain oversight on the trading of the credits. A meta-register of all obligated entities and of all the trading transactions will be maintained by the Grid Controller of India (GCI). To regulate all this, a national steering committee (NSC) consisting of the secretaries and the joint secretaries of ministry of power and ministry of environment, and other expert members from CERC and GCI will be formed to assist the BEE and overlook the entire mechanism of the scheme. India’s carbon market will also function in two forms – compulsory and voluntary.

Another important notification is related to the setting up of Carbon Trade eXchange (CTX) India, a partnership of CTX, world’s first voluntary carbon exchange, with SASA ENVIRO, which is an Indian environmental and agricultural solutions provider based in Chennai. This will enable Indian brokers, corporates and institutions to have a handy access to various multiple projects listed on CTX worldwide having millions of carbon credits.

In the last few years, India also witnessed the implementation of Perform, Achieve, and Trade (PAT) Scheme which was established under the National Mission for Enhanced Energy Efficiency (NMEEE). The aim of the scheme is to enhance industrial efficiency and it enabled the trade of energy-saving certificates. The years 2008 and 2009 witnessed the formation of Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL). These are institutes facilitating trading of power offering trading and transmission clearance simultaneously. Additionally, PXIL has announced in March, 2024 that it intends to introduce its carbon-credit trading platform by the second quarter of the upcoming financial year (FY25), as the platform’s technology is currently being developed. It is anticipated that each of the nation's three power exchanges—Indian Energy Exchange Ltd., Power Exchange India Ltd., and Hindustan Power Exchange Ltd.—will create a distinct platform for trading carbon credits.

Thus, it can be said that carbon market is soon going to be a reality for India.

Yukta Anand is Research Scholar, Indian Institute of Foreign Trade, Delhi; and Asheesh Pandey is Professor (Finance), Indian Institute of Foreign Trade, Delhi. Views expressed are personal