India's Carbon Market: Baby Steps, But Can Corporates Aid Climate Action?

The announcement came during the Budget speech when the Centre expressly put out its position. 

Finance Minister Nirmala Sitharaman said the government is chalking out the roadmap for ‘hard to abate’ industries with regard to curbing emissions via the carbon market.  

She said new regulations will see through the transition of the hard-to-abate industries to the carbon market. While this is indeed a welcome measure to achieve Net Zero, it has some caveats that are worrisome. 

Will the Indian carbon market be enough to curb emissions? Perhaps, and only if corporates put their money and cash in on this opportunity. 

To put the issue into perspective, the carbon equivalent emitted from Industrial Processes and Product Use has been estimated to be 2.63 lakh gigagrams according to the 2019 data available on India's climate and energy dashboard. 

India introduced the Carbon Credit Trading Scheme (CCTS) in June 2023 to meet its Nationally Determined Contributions in line with the Paris Agreement.  

India’s Carbon Credit Scheme

The CCTS builds on the PAT scheme, which aims to reduce energy consumption for energy-intensive industries.  

The Carbon Credit Scheme offers a similar incentive mechanism for industries to curb carbon emissions like PAT, which rewards industries with incentives for reducing energy consumption.

Under CCTS, carbon credits, certificates issued usually for 1 ton of carbon emitted, can be bought by a company to balance out emissions if it exceeds emission targets. 

If a company is successful in reducing emissions well over the target, it first needs to get it validated to generate credits, which it can then sell to another company which is exceeding its emissions target and caps. 

This system, thereby, establishes an incentive for companies and entities included in the carbon market. The buying and selling or trade of carbon credits is seen as a big tool to finance climate action initiatives uniformly. 

The scheme has two prongs, one is the voluntary carbon market, and the other is the compliance market for carbon credit.  

A Peek Into The Voluntary Carbon Market

In the Voluntary Carbon Market, there is no externally imposed limit on carbon emissions on the companies. However, owing to the growing awareness and accountability of reaching Net Zero, these entities can choose to purchase carbon credits from project developers or brokers. 

Corporates and organisations that choose to participate in the voluntary carbon market will be able to lower their emissions, which will help them achieve net zero emissions and even make their products carbon neutral. 

Carbon credits in the voluntary carbon market are of two types, removal and avoidance, which can be purchased by these entities.

Removal credits are generated from projects that offset or balance existing emissions by removing CO2 from the atmosphere using nature-based or technology-based solutions, whereas avoidance credits come from projects that prevent CO2 from being emitted into the atmosphere.

There are discrepancies in the Voluntary Carbon Market. One glaring issue is that it is governed by private carbon standards, which leaves a question mark on regulations and transparency. 

Shushant Vasisth, a consultant who has worked in the field of carbon market development, noted, “A significant challenge in carbon project development lies in the rigorous validation and registration processes. While projects often appear viable on paper, practical implementation frequently reveals discrepancies.”

“This can lead to inflated emission offset claims without corresponding real-world reductions. Such instances highlight the critical need for robust digital and transparent monitoring systems," he added.

To put this into perspective, if a company buys carbon credits from a project to offset its emissions but the underlying project fails to achieve the expected emission reductions, it could be perceived as greenwashing – a misleading claim of environmental benefit.

Vasisth also emphasises the validation process as a potential area of improvement. "The fact that project developers fund the validation process can create a conflict of interest, impacting transparency," he said.

While the voluntary carbon market opens a lot of doors to bringing climate financing and climate action, it has its fair share of shortcomings as seen worldwide. 

A case in point is Zimbabwe's Kariba Forest Protection Project, where the overestimation of carbon offsetting was brought to light.

These are some India will have to keep in mind as it goes big on using a carbon credit scheme to pool financial resources for climate action and mitigation.

The Compliance Carbon Market And What It Entails

The other prong of the carbon market is the Compliance Carbon Market. A detailed compliance mechanism under CCTS was released recently.

The procedure says the Ministry of Power will specify the obligated entities that will be required to participate in the purchase and selling of carbon credits. 

A National Steering Committee for Indian Carbon Market (NSC-ICM) will be responsible for the governance, oversight, and functioning of the ICM. 

The emission targets against each obligated entity will be recommended by the Ministry of Power after consulting with the NSC-ICM.

Targets will be established using a baseline-and-trade model, which is based on the total emissions produced in a given year. Any emissions below this threshold will be considered a reduction.

For entities that lower their carbon emissions from the baseline year, carbon credits will be generated, which can be sold to another entity. 

Since the CCTS builds on and subsumes the PAT scheme, it is important to examine how the PAT scheme has fared and its shortcomings, which could be repeated in the Compliance Carbon Market as well.  

Sankalp Suman, a climate change expert, pointed out that the PAT and the CCTS are market-based mechanisms and hinge on demand for there to be incentives. 

“However, if we look at the PAT scheme, the targets are so low that no one was buying ECerts and floor pricing had to be introduced in this so-called market-based scheme,” added Suman.

“In the CCTS, while there are so many provisions about monitoring and defining the targets on the compliance front, the question is if the targets are low, it will lead to a surplus of carbon credits. On the flip side, the demand will not be that high,” he added

Suman further pointed out that the lack of demand for carbon credits could also lead to price volatility. If carbon credits end up getting purchased at a cheap rate, there is no such incentive and doesn’t help in climate action. 

“We need to ensure an adequate demand creation is in place and it is an important learning to look into,” he added.

A Bureau Of Energy Efficiency report noted how the PAT scheme witnessed an excess supply of ESCerts in the market.

Experts' apprehension can’t be written off since a similar predicament was seen in China in the first year of its emissions trading scheme. In China, the pricing of carbon was low and the trading volumes were also subdued.

The report further noted how a sustained surplus supply and limited demand leads to lower ESCerts trading prices, potentially deterring investments in energy-efficient technologies by designated consumers.

Suman highlighted another issue within the compliance market which, by only prioritising emission reduction, leaves little space for obligated entities to look past sustainable energy projects. 

“The compliance mechanism is very restricted and not open to the voluntary carbon market so the obligated entities don’t have the mandate to purchase credits from most nature or agri or marine-based solutions, which can’t just be measured in terms of carbon but also by the impact they have on the entire ecosystem, the 17 SDGs and local indigenous communities. These projects are only limited to getting the funding from the voluntary carbon markets and have no space in the CCTS which will be the mandatory market for Indian industries and driver of most climate finance,” Sankalp noted.

“Therefore, in the compliance carbon market, the funding will just go from one industry to another and won’t reach the farmers and the forest,” he added

Some experts warn that greenwashing can be a very obvious offshoot of the establishment of the Indian Carbon Market. Companies may continue to play Robin Hood with exaggerated claims via advertising and marketing but doing precious little otherwise. 

However, companies marketing their saviour complex or greenwashing their product can’t be the only takeaway from this scheme, India needs to achieve more from this.

The CCTS and its mechanism may have several chinks in its armour. But, Vasisth remains optimistic,  "It's essential to recognise that a system is first established and then it evolves over time," he noted. 

Vasisth believes that to foster improvement, a foundation must be established, which is essentially the CCTS framework establishment. “The framework will evolve over time with feedback and amendments,” he added.