Introduction
Climate change demands immediate action to reduce greenhouse gas emissions (GHG emissions), a challenge that transcends national boundaries and economic divides. A solution to such a problem is curing the crisis through carbon trading. Carbon trading is a market-based approach offering solutions for reducing greenhouse gas emissions. The genesis of carbon trading can be attributed to the Kyoto Protocol of 1997.1 The trading of carbon has evolved into a significant component of international climate strategies, exemplified by India’s recent Carbon Credit Trading Scheme (CCTS).2 The scheme aims to establish mechanisms in the carbon market for reducing the financial burden of emission reduction by facilitating a market where various entities are allowed to trade carbon credits representing verified emission reductions.
This blog analyses the new carbon trading scheme. It also delves into the carbon market regime in various jurisdictions, while discussing the key features India could have adopted for a comprehensive enforcement suitable for the Indian ecosystem. The blog concludes by highlighting the lacunas that exist in the current scheme.
Carbon trading: Explained
Carbon Credit refers to a permit to emit a pre-specified quantity of CO2 or other greenhouse gas emissions. As per clause (c) of the definition clause of the Carbon Credit Trading Scheme, carbon credit means a value assigned to a reduction or removal or avoidance of greenhouse gas emissions achieved and is equivalent to one ton of carbon dioxide equivalent (tCO2e).3 Put simply, when one metric tonne of CO2 is recycled or removed from the atmosphere, it represents a single carbon credit. When an entity engages in activities that remove or decrease such emissions, it earns carbon credits. These credits can then be traded in the market for valuable consideration. The trading of such credits is therefore called carbon credit trading.
Carbon credit trading in India
India is the third-largest emitter of greenhouse gases globally, emitting a net 3.9 gigatons of carbon dioxide (GtCO2e) and 2.8 tons of per capita emissions (tCO2e) as of 2022.4 The primary factors responsible for emissions in India are coal-fired electricity generation in the power sector, followed by the steel, cement, agriculture and manufacturing sectors. Being a developing economy with the world’s largest population, it is expected that the GHG emissions in India are bound to increase. To thwart the possibility of high carbon emissions, the Carbon Credit Trading Scheme was launched in India in the year 2023.
Carbon Credit Trading Scheme, 2023
The Government of India, by exercising powers conferred by clause (w) of Section 14 of the Energy Conservation Act, 20015 notified the Carbon Credit Trading Scheme in June 2023.6 Clause (w) of Section 14 of the Act empowers the Central Government to “specify the Carbon Credit Trading Scheme”.
Through the introduction of the CCTS, the Government proposes a framework for establishing a voluntary carbon market and outlining the pathway towards cap-and-trade system.7 CCTS is launched to develop a regulated domestic market for credit trading and to reduce carbon emissions. It attempts to create a domestic carbon market where entities and industries are encouraged to reduce their carbon emissions, and such reductions are rewarded with monetary benefits in the form of carbon credits.
Decoding the current regulation
CCTS establishes a platform for the trading of carbon credit. The term “carbon credit” is defined under Section 2 sub-section 1(c) of the said Scheme which signifies a unit of measurement that results in a reduction of emissions below a specific benchmark.8 The activities undertaken to decrease GHG emissions are awarded in the form of carbon credits. These credits can be traded within the country’s industries and entities to control the emission of greenhouse gases.
Authorities responsible for the implementation
Section 3 of the Scheme provides for the establishment of a National Steering Committee for the Indian carbon market which shall be responsible for the governance of the carbon market in India.9 The notable functions which the committee shall recommend to the bureau include:
s(a) formulation and finalisation of procedures;
(b) formulation and finalisation of rules and regulations;
(c) issuing the carbon credit certificates; and
(d) monitoring the functions of the Indian carbon market.
The Bureau of Energy Efficiency (BEE) shall be the administrator of the Indian carbon market. The BEE will discharge the function of identifying sectors and potential for reduction of greenhouse gas emissions and issuing the carbon credits certificate on the recommendation of the Steering Committee.10
The Grid Controller of India shall be the registry for the Indian carbon market and responsible for maintaining the records of all transactions. These records shall be linked with other national or international registries.11
CCTS introduces a compliance mechanism,12 where the registered entities notified under the compliance mechanism are called “obligated entities”.13 The obligated entities must attain greenhouse gas emission intensity levels as specified by the Ministry of Environment, Forest and Climate Change (MoEFCC) by the set targets.
Detailed procedure for compliance mechanism
The Ministry of Environment, Forest and Climate Change shall notify the obligated entities about the GHG emission intensity targets to be achieved for each year of the trajectory period, which refers to three consecutive compliance years.14 These targets shall be revised following the completion of the trajectory period.
The obligated entities must comply with the GHG emission targets set for each compliance year. An obligated entity, which successfully reduces the GHG emissions beyond the prescribed target shall be entitled to carbon credit certificates (CCCs). Conversely, if an entity fails to meet the target GHG emission intensity will be required to surrender CCCs. The entity can surrender the banked CCCs or it can purchase allowances through trading exchange.15
For each sector, the BEE will set up a sectoral GHG emission intensity trajectory, in consultation with the Technical Committee. This trajectory will determine the respective sector’s potential reductions. The emission intensity targets cover emissions as— direct GHG emissions, direct process emissions and indirect GHG emissions which shall be calculated by the technical committee.
Carbon markets in various jurisdictions
China launched the trading scheme in 2017 with a phased approach to implementation. Initially, China’s Emissions Trading Scheme (ETS) covered only the power sector. By targeting the power sector, with a plan to gradually expand to others, China was able to concentrate resources and regulatory efforts on a sector with significant emissions, ensuring more manageable and effective implementation.
Unlike China, India’s proposed ETS includes 13 sectors to cover a wider ambit. It is probable that simultaneously addressing multiple sectors with different characteristics and functioning could complicate the initial implementation process.
India could have benefited if it followed China’s phased approach by initially targeting high-emission sectors such as energy and coal before targeting others.
With over a decade of operation, the European Union’s Emission Trading System (EU ETS) has developed a robust market framework and mechanisms to manage the supply and price stability of carbon credit. By utilising the experience of the long-standing and well-established system of EU ETS (since 2005), India could have started with high-emitting sectors and gradually expanded to other sectors. India could have similarly developed a framework that addressed sector-specific needs and challenges, as utilised by the EU.
Conclusion and the way forward
The introduction of the Carbon Credit Trading Scheme is a significant step towards achieving the target of carbon neutrality by 2070. This ambitious target cannot be achieved without developing a robust framework for addressing the emissions and creating a comprehensive offset mechanism. The gradual transition from a voluntary mechanism to a compliance mechanism, as envisaged under the scheme will help in mitigating the emissions from high carbon-emitting sectors.
While the scheme is appreciated for proposing an effective approach to net carbon emissions reduction, the Government must address several challenges that require its attention to make the scheme not just cost-effective, but also comprehensive.
The current carbon trading scheme proposes to create a “voluntary” carbon trading market.16 The already existing carbon market in India is voluntary and is administered by the private sector. Proposing another voluntary market, which is led by the Government, could drive confusion. The term needs clarification in the sense that it is voluntary but administered by the Government or the pre-existing system of trading will be implemented as it is.
EU ETS provides for linking the carbon trading system with other compatible nations.17 Taking cues from the EU ETS, linking the international emissions trading system with the current system in India, a cap-and-trade system is required to be implemented which puts an absolute cap on emissions. Taking leverage of international emissions trading is necessary as it would allow in reducing the cost of cutting emissions. It will also increase the market liquidity as well as facilitate in harmonising and stabilising the carbon prices across jurisdictions.
The scheme could prove to be a potential opportunity for India to attract investments and technology in emerging sectors where a transition to more carbon-friendly approaches to production is necessary.
†4th year student, BA LLB (Hons.), Dharmashastra National Law University, Jabalpur.
††4th year student, BA LLB (Hons.), Dharmashastra National Law University, Jabalpur. Author can be reached at <sourabh096-21@mpdnlu.ac.in>.
1. Kyoto Protocol to the United Nations Framework Convention on Climate Change.
2. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023.
3. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 2(c).
4. Ian Tiseo, Largest Contributors to Greenhouse Gas Emissions Worldwide 2023, by Country (www.statista.com).
5. Energy Conservation Act, 2001, S. 14(w).
6. Energy Conservation (Amendment) Act, 2022, S. 14(w).
7. India Establishes Framework for Voluntary Carbon Market and Outlines Pathway towards Cap-and-Trade System, International Carbon Action Partnership (icapcarbonaction.com).
8. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 2(1)(c).
9. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 3.
10. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 4.
11. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 6.
12. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 11.
13. Ministry of Power, Noti. No. S.O. 2825(E) dated 28-6-2023, S. 2(l).
14. Detailed Procedure for Compliance Mechanism under CCTS (beeindia.gov.in).
15. Carbon Markets — How are Emission Allowances and Carbon Credits Markets Regulated? (iberdrola.com).
16. Nishtha Singh and Vaibhav Chaturvedi, Understanding Carbon Markets — Prospects for India and Stakeholder Perspectives (www.ceew.in).
17. International Carbon Market, European Union, https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/international-carbon-market_en.