Pathways for Indian Carbon Market

As India prepares to roll out its own national compliance-based carbon market, Centre for Science and Environment (CSE) has prepared a clear roadmap to help it along. India’s finance minister Nirmala Sitharaman had announced in the Budget of 2024-25 that a plan and appropriate regulations will be put in place for the transition of hard-to-abate sectors from a Perform, Achieve and Trade (PAT) mode to an Indian Carbon Market (ICM) mode.

India has pledged to meet its Nationally Determined Contribution (NDC) targets by 2030, and aims for net-zero emissions by 2070, in line with the United Nations Framework Convention on Climate Change (UNFCCC) guidelines. To meet these ambitious goals, the country has set out on a pathway to develop and launch its own national compliance-based carbon market.

Carbon trading, also known as carbon emissions trading, is the use of a marketplace to buy and sell credits that allow companies or other parties to emit a certain amount of carbon dioxide. 2 The trade has led to using carbon accounting to measure the impact made by companies, individuals, and governments.

Formation of the Indian Carbon Market (ICM) had been announced under the Energy Conservation (Amendment) Act of 2022. More recently, The Carbon Credit and Trading Scheme (CCTS) was notified in July 2023, with an aim to reduce GHG emissions.

CSE director general Sunita Narain says: “The upcoming Indian Carbon Market scheme should kick start with a large coverage of the country’s emissions. A single nation-wide carbon market scheme for carbon-intensive sectors should be brought in to ensure effective implementation and avoid any complexity. For this scheme to be effective, it also needs to ensure a high carbon price, data integrity and transparency.”

Some challenges for

proposed scheme

Low price of carbon credit and low market liquidity: Therefore, the upcoming CCTS scheme in India needs to carefully look into generating market activity throughout the year at a good carbon price, which then eventually pushes emitters to accelerate decarbonisation pathways instead of buying credits to fulfill compliance.

Unambitious target setting: As CCTS is modeled after the PAT scheme, it must avoid past mistakes by setting ambitious targets for individual entities and sectors, considering best practices and going beyond existing policy and company targets to ensure the market drives genuine progress rather than mere compliance.

No revenue generation: Currently, the scheme does not have a clause for revenue generation. ETS schemes around the world have a way of generating revenue through auctioning allowances which are then allotted to modernisation, supporting of new entrants and small business, affected communities, and for financing decarbonisation.

Absence of a market stability mechanism, non-imposition of penalties, and exclusion of thermal power plants are other issues.

What then is the

way forward?

Reduce complexity and have a single nation-wide scheme for carbon-intensive sectors: It is essential to free the carbon-intensive sectors from the PAT scheme at the earliest, so that CCTS is the only nation-wide scheme for these sectors for moving towards a single goal.

Ensure a stable, high carbon price: To do this, it is essential for the upcoming carbon market to set ambitious targets, establish market stability mechanisms, set up a high floor price and implement sizable penalties effectively. Voluntary credits should be limited to less than 5 per cent and should be of high integrity.

Ensure data quality and improved transparency: To avoid data fraud as seen in the Chinese ETS, India must consider introducing heavy penalties and rigorous monitoring cycles for the obligated entities -- China has done it in its 2024 regulation. It is also essential to build the capacity of carbon verifiers, involve multiple agencies in this job, and increase their numbers to ensure smooth data collection and MRV. It is essential to share reporting data in the public domain, which would then shield the data from manipulation.

Introduce revenue generation to support MSMEs: The current Indian carbon market model lacks revenue generation mechanisms -- it is crucial to devise methods to generate revenue from the scheme, which could fund MSMEs. A system (technological and financial) needs to be developed to support the MSME sector under CCTS to create a level playing field for them.

Consider inclusion of thermal power sector: To address the significant contribution of the power sector to greenhouse gas emissions and to ensure effective progress towards India’s NDC targets, it is imperative to include the power sector in the carbon market scheme. The sector’s continuation under the PAT scheme might not be enough for the future needs of decarbonisation. (CSE)