India, with momentum in its favour, is leveraging every instrument available to pursue a low-carbon path. The latest one being the establishment of carbon credit markets, as per the Energy Conservation (Amendment) Bill, 2022, which the Lok Sabha passed on August 8.
But what exactly is a carbon credit market, and how does it operate?
Emission reduced and removed from the environment are converted into tradable assets through a carbon market, wherein one carbon credit is equal to one tonne of carbon dioxide, or other greenhouse gases (GHGs). Carbon credits are certificates that represent volume of GHGs that have not been emitted or removed from atmosphere.
With this mechanism, any industrial unit that reduces emissions beyond a set target can receive carbon credits. Simultaneously, the entities that are unable to meet the targets, can buy carbon credits to make up for the non-compliance.
While India has taken a decisive step towards development of domestic carbon market, it has its task cut out: provide necessary market support mechanism to drive demand, create synergies across different policy measures, learn from existing global challenges, and think through its decisions.
Global challenges in carbon markets that India must be mindful of
McKinsey estimates that global demand for carbon credits annually could go up to 1.5 to 2.0 gigatons of carbon dioxide (GtCO2) by 2030. The market size in 2030 could be between $5 billion and $30 billion. Apart from this, there is further potential for annual supply of carbon credits to the tune of 8 to 12 GtCO2 per year. Where will these carbon credits come from? They will come from “avoided nature loss (including deforestation); nature-based sequestration (like reforestation); avoidance or reduction of emissions (like methane from landfills); and technology-based removal of CO2 from the atmosphere,” according to experts.
Mobilising potential supply of carbon credits and bringing them to market is where the challenge lies. The projects that need to be implemented to ensure nature-based carbon sequestration often fail to get funding due to the fact that time lag between initial investment and sale of carbon credits is long. On top of that, getting high-quality carbon credits is difficult because quality verification methodologies vary across countries. Moreover, co-benefits of carbon credits (biodiversity protection, healthy ecosystem, etc.) are often not well defined. When it comes to selling carbon credits, suppliers don’t always get a competitive price.
India must be mindful of these challenges while developing a large-scale carbon market. It must have robust verification methodologies and a transparent mechanism for disclosing market demand, which will give suppliers more confidence in their project plans and encourage investors to provide with financing.
What do experts say?
India’s carbon market is in its nascent stage, yet lot of hopes are riding on it. Building an effective carbon market—be it voluntary or mandatory (compliance)–will require concerted effort from different stakeholders and a lot of policy-level introspection. Experts have been harping on some of the fundamental priorities that India must set, which include having a national policy for formation of national carbon market, legitimising the National Carbon Registry (a platform for tracking, managing, and trading emissions), and linking it with the International Carbon Registry so that India can partake in international emissions trading and bring foreign investments.
Besides these, there are specific aspects of emissions trading that need careful consideration. According to Amit Garg, Professor, Indian Institute of Management, Ahmedabad, it is important for India to have a clear understanding of the scope and coverage of carbon markets. Similarly, it needs to define carbon commodity (gases) to be traded and sectors and entities to be covered.
India must also decide who all will be allowed to do emissions trading. They could be individual entities, business conglomerates and industry associations. It needs to remove barriers for firms to participate in carbon trading market. In consultation with the industry, the government should take crucial decisions on fixing carbon prices, putting limits on trading volumes, and addressing carbon price volatility. Experts are also advocating for a robust monitoring, reporting and verification (MRV) system for every unit of carbon saved.
Corporations warming up to the idea of emissions trading
While India needs to chart its future course, decisively and thoughtfully, the present looks good. Carbon trading is picking up. Several emissions trading schemes (ETS) have been launched in Ahmedabad, Ludhiana, Surat, and major industrial hubs. In fact, an initial analysis reveals that industries that participated in ETS piloted in Surat in September 2019 witnessed a reduction in their particulate matter pollution by 24 per cent.
Indian companies have already been participating in global carbon market through one of three modes—carbon neutrality, RE 100 (achieving 100% renewable electricity), and SBT (Science-based Targets). As of July 2022, a total of 92 Indian companies committed to SBT. More importantly, 41 companies have their targets approved from SBTi (Science-Based Targets initiative Incubator)—an initiative that helps companies assess their carbon emissions inventory, develop ambitious targets, and fulfil them.
Eight companies from India’s high-emitting cement and steel sectors have joined the SBTi. They have either committed to or set science-based targets. If media reports are to be believed, there has been a 56% rise in number of companies committing to SBTi since December 2021. With an increasing number of corporations setting ambitious targets like SBTs, their role is crucial in realising the potential of a national carbon market.
As carbon credits continue to emerge as a key instrument in meeting climate commitments, targeted emission reduction projects that help in generating carbon credits are also expected to grow. This parallel growth will hopefully lead to an effective and structured reduction of emission from the atmosphere and lead India to the net-zero path.
A communications professional with 15+ years of cumulative experience in journalism and communications, envisioning and creating digital content, and designing and spearheading communication strategy for both nonprofits and corporations. Subhojit holds a Master’s Degree in English, with an inclination for anything literary! He has 15+ years of experience in journalism and communications, designing and spearheading communication strategy for both nonprofits and corporations. He is fond of traveling, reviewing books and plays, and watching parallel films.
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