1. Background
The Bureau of Energy Efficiency (BEE) has recently released a draft paper outlining the policy framework for the Indian Carbon Market. This pivotal document reflects the nation’s commitment to sustainable practices and outlines strategic measures for mitigating carbon emissions.
India, since its commitment to the Paris Agreement (PA), has consistently pursued climate action, evident in its ambitious Nationally Determined Contributions (NDC). The NDCs, established in 2015, focus on reducing Greenhouse Gas (GHG) Emissions Intensity of GDP by 33-35% by 2030, increasing non-fossil fuel-based energy capacity, and creating a carbon sink through afforestation. Building on COP26 commitments, India updated its NDC to include a 45% reduction in GDP emissions intensity and 50% non-fossil fuel-based energy capacity by 2030. In tandem, the government introduced a domestic carbon market to mobilize mitigation opportunities and attract private and public entities.
The proposed Indian Carbon Market (ICM) is envisioned as a competitive mechanism, aligning with India’s NDC targets. It aims to minimize mitigation costs through a market for carbon credits, involving obligated entities. The ICM, distinct from the international market under PA Article 6, focuses on domestic compliance. While domestic credits may be used in the voluntary market, international trading necessitates adherence to global standards. The policy outlines the Designated National Authority’s(DNA’s) role in approving Article 6 or Clean Development Mechanism credits for compliance and allows voluntary market transactions. Sectors like Renewable Energy and Industrial Energy Efficiency may be reserved for the ICM, with flexibility for international trade, ensuring environmental integrity and avoiding double counting. The ICM’s evolution will align with international rules, subject to DNA approval.
2. Leveraging Global Trends and Domestic Initiatives for Carbon Market
The Kyoto Protocol in 2005 catalyzed the rise of national and global carbon markets, exemplified by the EU-ETS. Although initially limited to developed nations, it demonstrated the potential for financing climate actions. Presently, there are 32 operational emissions trading schemes globally, generating $84 billion in revenue in 2021. India, without an explicit carbon market, employs instruments like PAT and REC, akin to carbon markets, to regulate energy consumption. Leveraging international experiences, especially through the CDM, India aims to cultivate its domestic carbon market, aligning with global trends for climate financing.
3. Initiatives already made by India for akin to Carbon Market:
i. Clean Development Mechanism
The Clean Development Mechanism (CDM), was the largest global carbon market instrument, created by the Kyoto Protocol, aimed to facilitate sustainable development in developing countries while helping developed nations meet emission reduction obligations. India, a significant participant, generated the second-largest number of Certified Emission Reductions (CERs). CERs were produced through various projects, primarily driven by the private sector, focusing on renewable energy, energy efficiency, industrial gases, and more. However, the CDM market crashed in 2012 due to EU preferences for Least Developed Countries, causing a drastic drop in CER prices. Despite this, the period 2008-2012 showcased the private sector’s potential for climate mitigation.
Recent trends indicate a resurgence in the international carbon market since 2020, with voluntary corporate buying increasing and prices rising to US$6 – US$12 per credit in Q1 2022. India’s CDM experience underscores its industrial capabilities in carbon mitigation, emphasizing the need for a robust national carbon market to support ambitious domestic climate actions across sectors. The potential for Indian entities to export carbon credits under Article 6 of the Paris Agreement holds promise for attracting private sector interest and financing emerging technologies and nature-based solutions.
ii. Perform Achieve and Trade (PAT)
The Perform Achieve and Trade (PAT) Scheme is aimed at reducing the energy intensity of large energy-consuming entities. Designated consumers (DCs) are assigned mandatory energy intensity targets over a specified period. If a DC surpasses its target, it earns tradable Energy Saving Certificates (ESCerts). Conversely, if it falls short, it must buy ESCerts. These certificates are awarded based on verified energy savings by accredited energy auditors.
Targets are set for Specific Energy Consumption (SEC) for DCs, considering factors like product mix, capacity utilization, and fuel quality. The approach is applied across sectors, fostering energy efficiency. The scheme established robust monitoring and verification systems through Accredited Energy Auditors.
While successful, PAT faced challenges like oversupply of ESCerts, periodic trading, and limited fungibility. Despite weaknesses, PAT mitigated greenhouse gas emissions, contributing to India’s climate goals.
iii. Renewable Energy Certificate (REC)
The Renewable Energy Certificate (REC) Scheme was created to support the Renewable Energy Purchase Obligations (RPOs) of certain entities like electricity distribution companies (DISCOMs) and large captive generation plants. These entities had set targets for using renewable energy, either solar or non-solar, depending on the state’s renewable energy potential. If they couldn’t meet these targets, they had the option to buy RECs from renewable energy generators in any state.
However, the REC scheme faced challenges. DISCOMs, often facing financial difficulties, didn’t purchase enough RECs despite being obligated to do so. The RECs were seen as an added cost without clear benefits. Other issues included modest purchase obligations, frequent resets due to falling renewable energy costs, and barriers to the smooth functioning of the market. Despite these challenges, the REC scheme aimed to encourage widespread renewable energy use and facilitate the exchange of RECs between states.
Lessons for Integrated Carbon Market Development from Experience:
- Keep a Close Eye on Things:
Use a strong system to watch and make sure everyone follows the rules in the market. This helps to make sure that the environment stays healthy and avoids any confusion about counting carbon credits.
- Balance Supply and Demand:
Make sure there is a good balance between how much people want carbon credits and how many are available. This involves setting strict goals, making sure they are followed, allowing trading at any time, and keeping track of credits over time.
- Learn from Others:
Look at how similar markets, like the stock market, work. This helps in making sure people are not cheating and that there are fair rules. The goal is to create a market for carbon credits where the price is fair and matches how much people want and have.
- Keep it Simple and Unified:
Instead of having many different types of carbon credits, it’s better to keep it simple with just one kind. This makes it easier to understand and makes it comparable to how other countries do it.
- Watch and Balance:
The people in charge need to always check how much people want and how much is available. If there is not enough demand, they might need to set new goals and bring in new areas to make sure there is enough demand.
- Good Record Keeping for ETS:
For a successful Emission Trading System (ETS), there should be a clear record-keeping system. This system should be easy to use online so that everyone can access it easily and see what’s happening.
In next article we will learn Lessons for Integrated Carbon Market Development from International Carbon Market.
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