India's Carbon Market Holds Promise For Sustainable Environment: CMAI Secretary General Rohit Kumar

In a conversation with The Secretariat, Carbon Markets Association Of India (CMAI) Secretary General Rohit Kumar spelled out India's efforts to establish a carbon market, global concerns and underlined how India can move forward. 

Acknowledging the time taken to utilise the carbon market route to reduce emissions in India, Kumar noted that given India's vast size, launching a voluntary carbon market takes longer than in other countries.

"Stakeholders in this sector are working together to create a robust mechanism for the voluntary carbon market," he pointed out, adding the market system could be a strategic step forward. 

"Setting up the infrastructure for Carbon Credits Certificates trading, including crediting methodologies, trading platforms, and verification processes, is crucial for both compliance and voluntary markets. A stable foundation benefits both types of participants," said Kumar.

The top executive also underlined the need for stakeholder consultation. "Gathering feedback on credit pricing, project eligibility, and overall market design is important... to ensure a fair and transparent system which benefits everyone," he added.

In all, the Secretary General of the Carbon Market Association said the CCTS (Carbon Credit Trading Scheme) offset mechanism, with both compliance and voluntary components, holds promise for India's decarbonisation efforts and would align India with international markets. 

What Does It Mean For The Future

Kumar said the establishment of the CCTS has several positive outcomes, emission reduction being among the first. He said experts estimate CCTS can reduce 10-15 per cent of India's industrial emissions by 2030. 

"By putting a price on carbon, the CCTS incentivises industries to reduce emissions. This could lead to a significant decrease in India's overall carbon footprint, helping it achieve its net-zero goals," he said. 

The room for growth of green technologies is another positive outcome, Kumar said. He said the demand for carbon credits could drive innovation and investment in finding climate action solutions. 

Not only this, CCTS could also lead to channelling more foreign investment, he said. "This could bring in fresh capital and expertise to support India's clean energy transition," said Kumar.

The development and management of new green technologies and carbon offset projects are also expected to create new job opportunities. 

Carbon trading would also replace the old command and control regime which runs emission reduction targets and can be a more efficient approach since it would be based on the market.  

However, Kumar noted, "The most critical parameter to gauge market efficiency is that at the national level, the carbon credit price should reflect the social cost of carbon."

The social cost of carbon (SCC) is an estimate of the cost of the damage caused by an additional unit of carbon emission. 

Commoditisation Of Carbon Credits

Kumar said when carbon credits are treated at par with commodities which can be bought or sold, the focus turns solely to price and traceability, with less emphasis on the specific project or activity that generated the credit. Even in the Paris Agreement's Article 6.4, co-benefits are the focus, he said.

Kumar said some benefits of commoditisation make the market more accessible and attractive to a wide range of participants. However, the drawbacks could result in standardised products that reduce complexity but may lead to a loss of specifications. 

Further, he noted commoditisation can lead to a lack of transparency about the environmental benefits of specific credits. Lower-quality projects with questionable emission reduction could go unnoticed under high-impact projects, making it hard for buyers to differentiate.

"Companies might prioritise buying the cheapest credits available, regardless of their environmental impact. This could lead to a race to the bottom, with less investment in high-quality projects with co-benefits like community development, lower level of specific information offered on the credits or projects," he explained.

Commoditisation streamlines the aspect of quality consideration of buyers in the carbon market. Buyers are increasingly prioritising the quality of credits they purchase, which impacts market dynamics, he said. 

How India May Be Impacted 

Increased liquidity and easier trading make commoditisation welcome in the voluntary market and attract more participants, he said. That said, there are still some challenges. 

"India needs to be cautious about its downsides. Developing robust regulations and verification processes can help ensure environmental integrity and prevent greenwashing," said Kumar. 

Kumar said Indian market participants may face challenges related to pricing, quality assessment, and liquidity due to commoditised carbon credits.

"India may need to adapt to standardised products while mitigating risks associated with reduced project visibility and pricing uncertainties," he added.

To overcome challenges to transparency that can undermine the environmental integrity of the CCTS, Kumar said India should prioritise strong transparency principles. Clear, detailed information with robust verification and making transaction data accessible to the public are some measures suggested. 

Kumar also pointed out that the framework established by the Voluntary Carbon Markets Integrity Initiative (VCMI) could be used to assess claims. Companies' claims on carbon offsetting activities are assessed under a tiered system.

"Transparency in India's CCTS may pose initial challenges, but the long-term benefits greatly outweigh these obstacles."

He, however, highlighted that implementing strong Monitoring, Reporting, and Verification (MRV) systems can be expensive for smaller projects, potentially limiting participation initially.

Another challenge highlighted by Kumar is players gaming the system. "Knowing the evaluation criteria might tempt some to manipulate data, which makes strong governance and independent verification all the more important to prevent this," he added.

Though he acknowledged the potential setbacks of transparency, he emphasised that the benefits far outweigh them.

Benefits Of Transparency Outweigh Challenges

Kumar said that transparency allows for a more accurate assessment of project quality and emission reduction benefits, as well as fostering trust among project developers, buyers, and investors. 

He said it aids in fair price discovery for credits, ensuring they are valued - based on actual impact and discouraging overpricing of low-quality credits. 

"Risk assessment methodologies could be used by investors and project developers where clear data on project activities and verification results would aid investors to make informed decisions and develop better risk mitigation strategies," said Rohit Kumar. 

Kumar said transparency will reduce price volatility. In all, Kumar noted, "Transparency is the cornerstone of a successful carbon market... In the long run, transparency will build trust, attract investment, and ensure the environmental integrity of India's CCTS".

Greenwashing And Pricing Of Carbon Credits

Kumar also warned: "If carbon credits are too cheap, companies may not find it advantageous to invest in reducing their emissions. They might simply choose to buy credits to offset their pollution, potentially leading to slower progress towards actual emission reduction goals."

The top executive said cheap carbon credits leave room for greenwashing. "Low-cost credits could incentivise companies to focus solely on offsetting their emissions, neglecting internal efforts to reduce their carbon footprint. This could be perceived as "greenwashing'." 

He also pointed out that if the cost of carbon credits doesn't reflect the true cost of emissions, there might be less incentive to invest in cleaner technologies and renewable energy sources. 

On the other hand, if carbon credits are too costly, it could lead to resistance from the industry and hinder overall market participation, he added.

Also noting the unequal impact on industries, Kumar said industries that are inherently difficult to decarbonise will be hit more. They would need additional support mechanisms to ensure a just transition.

Striking A Balance On The Pricing Of Carbon Credits 

Kumar pushed for balanced pricing of carbon credits. "The ideal carbon credit price should incentivise emission reductions for businesses without causing market collapse," said Kumar.

The price should also reflect the true social cost of carbon emissions, accounting for the environmental and economic damages caused by climate change. It should be set at a level that encourages investment in new technologies but doesn't force businesses to adopt unviable technologies.  

Kumar noted how the CCTS aligns with India's 2070 net-zero vision and emission reduction goals. "The need of the hour is market development. We should strive to strengthen India's voluntary carbon market funding, as in the compliance market, the credits have to be retired in 2 years," added the CMAI Secretary General.