Guest Article: Indian Carbon Market - A New Era for Emission Reductions and Sustainable Growth
- Saswat Satpathy
- Oct 30, 2024
- 4 min read
Guest writer and Deloitte decarbonization specialist Saswat Satpathy explains how India can leverage the potential of carbon markets to achieve its climate goals - and unleash new financing opportunities.
The concept of national and global carbon markets gained momentum when the Kyoto Protocol came into effect in 2005, and the first large regional greenhouse gas (GHG) emissions trading scheme, the European Union Emissions Trading System (EU-ETS), was launched. The concept remained largely limited to the developed countries, but it did build an understanding of the potential of carbon markets to finance climate actions. Currently, according to the World Bank’s latest State and Trends of Carbon Pricing report, there are 32 ETSs operational globally and global carbon pricing revenue touched US$ 84 billion in 2021. This indicates a growing opportunity, which India too should leverage for supporting the achievement of its climate goals, through direct financing of climate initiatives, as well as potential international collaboration and financing opportunities under Article 6 of the Paris Agreement.
While India does not have an explicit carbon market, it has instruments that closely resemble carbon markets, in the form of Perform, Achieve, and Trade (PAT) and Renewable Energy Certificates (REC). These are two major market-based approaches in play in India to regulate energy consumption and transition to cleaner energy, facilitated by the Ministry of Power (MoP). India also has vast experience in the international carbon trading platform, the Clean Development Mechanism (CDM).
The need for an Indian Carbon Market
The PAT scheme was largely successful and met most of its targets in the completed cycles. However, the scheme suffered from an oversupply of ESCerts. Due to excess supply and no take up in the market, the cost of ESCerts reduced in subsequent trading. Building a national carbon market would bring in greater price efficiency, increase the liquidity of carbon assets and thus lay the foundations for discovery of a more stable and relevant price of carbon. Also, a single market at the national level, as opposed to having multiple market instruments, would have the added advantage of reducing transaction costs significantly by enhancing capacity development, spurring technological and process improvements, strengthening, and streamlining the accounting and verification procedures.
Building the Indian Carbon Market: Developments over the last 3 years
The process for setting up the Indian Carbon Market began in 2021 and over time, several developments have occurred, which are presented below:
Milestone | Details |
March 2021 | In early 2021, BEE came out with an RfP for Development of Blueprint for the Design of a Voluntary Energy Efficiency Market in India, which set the ball rolling for development of India’s Carbon Market (ICM) |
October 2021 | A draft blueprint was released for stakeholder consultations by BEE, which proposed three phases towards the adoption of a Cap-and-Trade System. |
July 2022 | The Energy Conservation Act, 2001, was amended with the Energy Conservation (Amendment) Act, 2022 which empowered BEE to formulate the Carbon Credit Trading Scheme – and in essence giving birth to the Indian Carbon Market |
October 2022 | BEE released a policy paper on the Indian Carbon Market which included market design elements, governance structure and timeframe for market operations |
June 2023 | Gazette Notification for Carbon Credit Trading Scheme (CCTS) |
October 2023 | BEE organizes 4 national level workshops (New Delhi, Bengaluru, Mumbai, Kolkata) on the draft Accreditation Procedure and Eligibility Criteria for Accredited Carbon Verification Agency and draft procedure for Compliance Mechanism under CCTS |
December 2023 | Offset Mechanism (Voluntary Market) notified under CCTS |
June 2024 | Regional Stakeholder Consultation Workshops (Bengaluru, Vizag, Mumbai, New Delhi) on the Offset Mechanism under the Indian Carbon Market |
July 2024 | BEE releases Detailed Procedure for Compliance Mechanism under CCTS |
On 23rd July 2024, BEE released the Detailed Procedure for Compliance Mechanism under the CCTS, which had the following key features:
Target would be in tonnes of carbon dioxide equivalent (tCO2e) per unit of equivalent product or output. The GHG emission intensity targets shall be notified for the trajectory period (e.g., three years) and the annual targets shall be specified for each compliance year to be complied with by the respective obligated entity.
The obligated entity, for the purpose of achieving the compliance with the GHG emission intensity targets of the trajectory period (three years), shall prepare the long-term action plan (at least five years) for greenhouse gas emissions reduction.
Sectors included in detailed rules: Cement, Iron & Steel, Pulp & Paper, Petrochemicals. more sectors will be included as per approval of the Central Government.
Greenhouse gases included in present version: Carbon Dioxide (CO2), PFCs. Other gas may be added in subsequent version.
Banking of Carbon Credit Certificates: On completion of the compliance year, the remaining Carbon Credit Certificates (CCC) from that year may be banked for use in subsequent compliance years. CCC can be sold in Indian Carbon Market only.
The GHG emission intensity trajectory for the sector will be developed based on India’s NDC commitments, available technology and associated cost of their implementation, potential for energy efficiency, fuel switch, use of non-fossil fuel energy/feedstock and decarbonization in the sector.
The provision of issuance for credits to non-obligated entities not defined in present scheme, this may be included in subsequent amendment, and it may follow UNFCCC requirements to ensure the credits issued under ICM are tradable under both article 6.2 and 6.4.
Way forward
While significant steps have been taken for the creation of the Indian Carbon Market, there are aspects that will need to be looked at, once the market is up and running:
Various design features for Market Stability Mechanisms (MSMs) need to be considered for incorporating into the market operations.
Setting ambitious emission targets (across sectors and individual units) to ensure a high carbon price.
Strict enforcement of penalties, which will result in higher compliance.
Improving transparency and ensuring data quality in emission intensity measurement
India’s bold carbon market reforms, alongside the global shift toward carbon pricing, represent essential strides on our path to a sustainable future. Tackling these challenges directly and upholding the integrity and quality of carbon credits can establish a resilient market that not only mitigates climate change but also fuels economic growth and fosters innovation.
Saswat Satpathy is a Manager within the Sustainability Practice at Deloitte India and actively engages in a wide range of assignments that span both the private and public sectors. His work primarily focuses on market assessment and scalability of low carbon technologies, formulation and implementation of decarbonization strategies, understanding carbon market mechanisms with a specialization in cooperation under Article 6 of the Paris Agreement and identifying opportunities for innovative climate finance instruments in mitigation and adaptation projects.