Carbon credits and India’s carbon market

We hear a lot about Carbon Credits but often don’t know how it works. The permits that allow the owner of a factory or business to emit a specific amount of carbon dioxide or other greenhouse gases are known as carbon credits, commonly referred to as carbon offsets. One credit allows for the emission of one tonne of carbon dioxide or another greenhouse gas equivalent.

Carbon was recognised as a tradable good when the Kyoto Protocol was signed in 1997. This was reaffirmed in the Paris Agreement of 2015. Nowadays, carbon is traded internationally in exchange for carbon credits. The carbon trade certificate encourages businesses and nations to spend on environmental-friendly initiatives and activities that benefit nature, such as reforestation, in order to get the right to emit more carbon dioxide than what is allowed by law.

In plain English, higher emission companies earn the right to emit by developing green assets elsewhere in the world to offset their emissions. This has encouraged the growth of renewable projects all over the world. To help India achieve its Nationally Determined Contribution (NDC) goals, the Indian government is trying to create a market for carbon credits. India has updated its NDC goals recently to reflect reducing emissions by 45%, generating 50% of power from renewable energy sources and reaching net zero emissions by 2070.

Focus on internal trade

In the past, India has made investments in producing carbon credits and exporting them to international enterprises. Between 2010 and June 2022, India issued 35.94 million carbon credits or nearly 17% of all voluntary carbon market credits issued globally. The market for carbon credits increased by 164% globally in 2021. It is anticipated to reach $100 billion by 2030.

However, the government now intends to forbid its exports, guarantee the expansion of a local domestic market for carbon credits, and increase its internal trade. India has a high potential for producing high-quality, increased carbon credits through initiatives with substantial socio-economic shared benefits.

India’s carbon reduction promises under the Paris Agreement require it to reduce all internal emissions, and therefore carbon credits produced here shouldn’t be exported. Against this backdrop, there is talk of establishing a national carbon market which might have an effect on price discovery and carbon credit demand.

Sectors in India that export goods to highly regulated markets and have a commercial incentive in reducing their emissions may be the first to participate in such a market. It will help in climate mitigation and put India on track to achieving its net-zero goals.

Carbon markets are expected to limit the expansion of fossil-fuel generation capacity while providing new opportunities for businesses involved in creating, selling, and consulting carbon credits. Carbon credits are designed to support economic activity while keeping the nation’s carbon reduction targets in perspective.

According to Vaibhav Chaturvedi, a Fellow at the Council on Energy, Environment and Water (CEEW), reducing emissions at the least cost, through the principles of trade, is important. “From offsets’ perspective, the Article 6-driven markets could be useful for India for delivering international climate finance,” he says. Under Article 6 of the Paris Climate Agreement, a country is able to transfer carbon credits gained through the reduction of greenhouse gas (GHG) emissions in order to assist other countries in meeting their climate targets.

The voluntary carbon market is a decentralised market where private parties voluntarily exchange certified reductions of GHGs from the atmosphere for carbon credits. Sectors that play a key role in reducing emissions, such as waste management, transportation, renewable energy, energy efficiency, afforestation and reforestation should benefit from the consequences of reducing climate change. A market for carbon credits, which is supported by sensible legislation and policies, will aid in the creation of possibilities that are appropriate for the next decade.

Legislative push

Energy Conservation (Amendment) Bill, 2022, outlining the general parameters of a voluntary trading system for carbon credits, was tabled in Lok Sabha on July 29, 2022. The previous bill (Energy Conservation Act, 2001) was amended to include energy efficiency and the ability for the government to facilitate internal carbon trading schemes. In December 2022, the amendment bill will be introduced to the Rajya Sabha, the Upper House of Parliament. If approved, it will be enacted as a law by Parliament.

The Union government or any approved agency is given the authority to issue “carbon credit certificates” for the reduction of carbon emissions to registered enterprises under Section 14 of the bill. The market can then be used to sell these credits.

According to T V Ramachandra, Coordinator, Center for Ecological Sciences at Bengaluru’s IISc, the options left for global climate decision-makers are to expedite the operationalisation of efficient carbon sequestration and simultaneously push for GHG emission reduction. This entails incentivising carbon sequestration and emission reduction endeavours. The carbon credit initiative, through measurable and verifiable emission reduction mechanisms, would ensure maintaining ecological integrity with lowered carbon emissions.

“However, this approach would be meaningful only when we incentivise carbon sequestration endeavours along with emission reduction targets,” says Ramachandra.

India’s goal of becoming carbon-neutral by 2070 is pertinent to the government’s campaign for a national carbon market. For the public, companies, and policymakers, specific standards and rules regarding this and carbon credit certificates still need to be specified.