Mohanish Verma, Ex IRS
Carbon credit as a concept has evolved in the past two decades for ensuring a cleaner and greener environment and develop a mechanism to disincentivize carbon emissions in an organized manner. The Kyoto protocol and various follow up events have successfully generated an irreversible momentum which even the Trump administration may not be able to circumvent in the medium and long run.
The Carbon Credit Trading Scheme 2022, in India has provided a clear mandate and direction for the economy to move in a new trajectory of growth. It is also an integral part of the ESG goals and non-financial parameters for large corporates and others engaged in economic development. Carbon emissions have to be adequately compensated for mitigating the harmful effects of GHG (Globally harmful gases) like methane, nitrous oxide, hydro-fluorocarbons, per-fluorocarbons, nitrogen trifluoride and others. Opportunity to tap the global markets of over USD 4700 Billion can also not be lost sight of !!!
What are Carbon Credits?
It is a tradeable certificate representing one ton of CO2 reduced or removed from the atmosphere. The concept of carbon credits originated from the Kyoto Protocol, an international treaty adopted in 1997 and enforced in 2005. The protocol aimed to combat climate change by reducing greenhouse gas emissions globally. It introduced the idea of cap-and-trade systems, where countries could trade emissions allowances, thus creating a market for carbon credits1.
This concept of “Carbon Credits” has been accepted and adapted globally and is proving to be a game changer in increasing awareness to actively participate in domestic and global markets.
Tapping the Multi- Billion Global Market of Carbon Credits- The Indian Framework for sustainable growth
There can be multiple categories or sources for generating Carbon Credits and some of the significant presently relate to actions which help in reducing carbon emissions and transforming processes in different activities and sectors of the economy. Some such actions2 are: (1) Renewable Energy Projects which involve the generation of energy from renewable sources such as wind, solar, hydro, and biomass. By replacing fossil fuels, these projects reduce greenhouse gas emissions. (2) Afforestation, reforestation, and improved forest management projects. This will help in carbon sequestration, capturing CO2 from the atmosphere and storing it in trees and soil. (3) Waste Management involving projects that reduce methane emissions from landfills, waste treatment, and recycling programs.(4) Carbon Capture and Storage (CCS) which involves projects involve capturing CO2 emissions from industrial processes and storing them underground to prevent their release into the atmosphere.(5) Improving energy efficiency in industrial processes, buildings, and (6) Transportation through the installation of more efficient machinery, better insulation, or cleaner transportation methods.
The possibilities of generating carbon credits is an evolving area and increasing awareness will open new spheres of activity in coming times. Generation of Blue carbons for example, holds immense potential for carbon credit generation at a global level.
Considering the criticality of carbon credits there is a need to appreciate the importance of establishing mechanisms for certification of carbon credits, its registration mechanisms and also the trading procedures within the country as well as internationally is now an area generating significant curiosity and interest for industries and multiple economic activities.
The Kyoto protocol (1997), various climate conferences and COPs regularly emphasizing the GHG and carbon emission issues have ensured regulatory mechanisms in most regions of the world and compliance markets thus dominate the markets. The Paris Meet 2015, further provided momentum to the issues of carbon emissions and the medium and long-term strategies must be planned by all economies of the world for sustained economic and environmental development.
Carbon Offsetting
Carbon offsets are aimed at reducing emissions internally through better processes and mechanisms, carbon credits are mechanisms which provide monetary incentives for those who generate surplus units to reduce carbon emissions and have to be purchased by others in the markets for regulatory compliances and thus acts as a monetary cost to them.
“Carbon offsetting helps mitigate emissions, carbon credits help prevent them. Whereas carbon offsets are a voluntary act by a company, carbon credits are regulated and distributed by governments, meaning companies must adhere to it3.”
Carbon offsetting projects include renewable energy projects, improving energy efficiency, carbon and methane capture and sequestration, land use and reforestation. Carbon Offsetting by emitting units is not enough to manage our environment. Future of Carbon Credit Trading accordingly has a critical role to play.
Market for Carbon Credits
Carbon Credit Market Growth Factors4 include:
(a) Increasing inclination towards nature-based solution like reforestation.
(b) Emergency to protect biodiversity for balanced climate cycle.
- Governments initiatives to reduce carbon footprints.
- Technological advancement in data analytics and blockchain to achieve traceability and transparency in carbon trading.
- Carbon pricing techniques like cap-and-trade systems fueling the market growth globally.
(f) Companies’ strict regulations to associate with compliance by authorities.
(g) Company’s alliances to develop carbon vanishing programs and raising fund for it.
(h) Multifaceted approach of projects such as preservation of forestry and land use projects to avoid carbon absorption.
(i) The combination of voluntary programs and state level programs aimed at reducing carbon footprints by giant techs.
(j) Recognition of rapidly changing climatic conditions due to the emission of GHG and its further side effects, underscores the importance of carbon credit.
The awareness as well as potential to develop effective mechanisms for carbon offsets as carbon credit generation widely varies across different regions and countries of the world. While industrial, agricultural and other source of carbon emissions continue to disturb the environment, the development of more effective carbon offsetting mechanisms and a more robust markets for carbon credits is the only effective way to ensure a sustainable pattern of economic and ecological progress across the world in coming years.
The global carbon credit market is projected to grow at 15.8% from 2025 to 2035. China leads at 21.3%, followed by India 19.8% and France 16.6%; the United Kingdom 15% and United States 13.4% follow5.
Carbon Trading in India.
Carbon-trading is an administrative approach used to control emission of Carbon dioxide (CO2) by provision of economic incentives. A central authority sets a limit or cap on the amount of carbon that can be emitted6. This essentially implies that every group, company or individual is permitted emissions within set limits. In case of any exceeded limits they have to buy carbon credits from other units to compensate. This calls for a Centrally regulated scheme or mechanism to regulate Carbon emissions and also provide a mechanism for economic development with an eye on carbon emissions.
The Kyoto Protocol in 1997 provided a mechanism to objectively tackle the problems related to GHG emissions and 3 tools were designed namely (i) IET or International Emission Trading (Article 17) (ii) JI or Joint Implementation (Article 6) and (iii) CDM or Clean Development Mechanism (Article 12)7. CER or Certified Emission Reduction and Carbon Credit Schemes are the most objective and creative schemes aimed at both protecting the environment from harmful emissions, acting as a disincentive for polluting activities and alternatively a source for generating revenues which can be used for countering the impact of GHG , through afforestation and other activities like green energy etc.
Apart from the Industrial and Manufacturing sector it will interesting to note that the agriculture sector contribution in carbon emissions has been going up in the past two decades. It increased from around 622 k Gigagrams in 2010 to 648 K Gigagrams in 2018 only from Agricultural sector8.
Indian Characteristics and Trends.
In a net-zero scenario with full international cooperation, India could realize up to $12.5 billion annually in international carbon market revenues by 2030. The cumulative financial flows from sales of carbon credits from 2025 to 2050 could amount to more than $200 billion9….
Source: 6w research report, F- forecasted10
Though India may appear to be relatively low profile with regard to carbon credit generation and regulation the ground level situation is not very disappointing and India is already an active carbon credit trading economy since the turn of the century. There are already large entities like Handia Forest in Madhya Pradesh, Torrent Laboratories, Jindal Steel, Balarampur Chini and others who are earning huge amounts through carbon credit generation for past several years11. As per a study of 2012 India had the (CER) Carbon Emission Reduction was 12.6 % of the global share and Carbon trading had the potential to generate a revenue of (INR) 25,000 to 45,000 crores of revenue around 2015. MCX and NCDX are two platforms already dealing in carbon trading in India and more focused reforms have been introduced by the Carbon Credit Regulation Act 2023. Some interesting facts for consideration are:
(a) Between 2010 and 2022, India issued 278 million carbon credits traded in VCMs, accounting for 17 per cent of the global supply.
(b) India’s revenue from voluntary carbon credits is projected to reach USD 20–40 billion by 2030 (Singh and Ghosh 2023; India’s national carbon market to seek links with international registries. S&P Global Commodity Insights).
(c) The Carbon Credit Trading Scheme has been notified by the Government of India in 2023. This has certainly streamlined the emphasis on proper regulation and role of multiple agencies like BEE, CERC, Ministry of Environment and at the same time left the operational issues like institutional capacities and coordination as well as interactions with local and international frameworks still unresolved12.
(d) According to some industry estimates, the Indian carbon credit market could be worth over $10 billion USD by 2030, with 20–25% year-on-year growth through the rest of the decade. In 2025 alone, more than 250 million carbon credits are expected to be traded domestically13. Another estimate14 expects the carbon credit market in India to reach a projected revenue of US$ 49,448.6 million by 2030. A compound annual growth rate of 44.4% is expected of India carbon credit market from 2024 to 2030.
(e) Companies like Tata Steel, Mahindra, Infosys, and Reliance Industries have pledged aggressive Net Zero targets. In order to meet these, they are actively investing in carbon credit purchases and carbon offset projects, thereby fueling market activity15.
Carbon Credit Verification and Certification globally
Carbon credit verification is a rigorous process that involves various steps to ensure the legitimacy of the credits. The verification process typically starts with the project developers who implement carbon reduction activities and generate the credits. They need to provide evidence of the carbon reduction, such as monitoring data, project reports, and other relevant documentation16.
Verra, Gold standard, Sbti (Science based target initiative) and IC VCB (Integrity Council for Voluntary Carbon Markets) are setting guideline for verification of carbon credits at a global level.
The importance of authentication, verification and audit of Carbon credits is a very critical area which has to be strengthened and provided credibility in the Indian context. It is essential for establishing domestic and international credibility. The Carbon Credit Trading Scheme 2022, in India has laid the foundation for a strong Carbon Trading mechanism but calls for follow up implementation in a time bound manner to quickly reap benefits both domestically and also global trading and markets.
Presently the certification of carbon credits and trading mechanisms are in the process of being established and awareness about their potential is limited. While many individual organizations and entities have been working diligently on the subject, the latent potential in the country remains largely untapped. The Indian Carbon Market (ICM) Registry, under the Bureau of Energy Efficiency (BEE) with trading expected to begin for both compliance and voluntary markets by 2026. CERC, BEE, Ministry of Environment and Grid Controller of India Limited are the mandated agencies to facilitate the Carbon credit certification and trading in India and globally.
Importance of Blue Carbons- Indian and global context.
Blue Carbon Credits relate to maritime and ocean related carbon absorbing afforestation and activities and are considered more precious and result in second order multiplier effects. Blue carbon credits are created by the growth and conservation of carbon-absorbing plants, such as mangrove forests and their associated marine habitat. They have potential for having a multiplier effect on generation of carbon credits and also have immense potential in India.
Blue Carbon refers to the carbon stored in coastal ecosystems like mangroves, seagrasses, and salt marshes. Mangroves Store 10x more carbon than terrestrial forests (Source: Kauffman et al, 2018)17. Mangrove forests and healthy Ocean and marine ecosystems are integral to ensuring a vibrant global economic and ecological environment. Changing Wealth of Nations report calculated that mangrove ecosystems protect more than 6 million people from flooding annually and prevent losses of $24 billion in productive assets18.
This is an important area with immense potential for countries like India with long coastlines as well as water bodies with maritime potential. ESG also has to be linked with such new areas of economic activity which is not only enhancing ecological surroundings but will add to revenue and profits of all entities who can engage in these activities.
Profitability, Revenue generation and future of Carbon credits
The importance of a sustainable development and growth model has been realized by most countries in the world. While environmental protection remains the mainstay of discussions and engagements in most economies, carbon emissions and countering the same through various activities to earn carbon credits has also become a source of generating revenue for entities and economies across the globe.
The potential for carbon credits trading and revenue generation in India is huge provided the markets get organized and get credibility in the global market. Many corporates and entities like Suzlon Energy, Renuka Sugars, Tata Power Vantara, Handia Forest (MP), Balrampur Chini, Jindal Vijaynagar Steel and others are actively engaged and many already have surplus carbon credits in their systems19. However there has to be more focus to organize the markets in India, for which a strong initiative has already been taken by the Government of India by modifying and bringing new legislation, Carbon Credit Trading Scheme, 2022, by identifying agencies like Bureau of Energy Efficiency, Ministry of Environment and others. The Carbon Capture, Usage and Storage (CCUS) report has also been released by the Government. Further a Centralized Body is also to be established in the form of Carbon Capture Finance Corporation. Niti Aayog is addressing the issue in an active mode and significant steps to establish a system for supporting and promoting Carbon Credit generation and regulation is being set up20.
“ India’s government announced the establishment of two National Centres of Excellence in Carbon Capture and Utilization in 2022 (NCoE-CCU) (Ministry of Science and Technology & Government of India, 2022). The government will support their development through the Department of Science of Technology at the Indian Institute of Technology Bombay in Mumbai and Jawaharlal Nehru
Centre for Advanced Scientific Research in Bengaluru. These two institutions will focus on research, development, and as centres for collaboration and other initiatives related to carbon capture and utilization.”
The initiatives of the government in India have provided some momentum to this sector, but the ground level implementation and coordination to get concrete outcomes can only be realized with specifically designed mechanisms for ensuring
(a) Identification and certification of Carbon Credit Units with global recognition.
(b) Establishing Carbon Credit Trading Exchanges. MCX and NCDX have initiated the process in 2008, but upgradation may be called for.
(c) Coordination with global exchanges and developing credibility of Indian markets.
(d) Sensitizing Industries and other sectors to generate, use and store carbon credits in a standardized format to streamline market processes and mechanisms.
(e) Take concrete steps to boost areas of Blue-carbon credits relating to maritime zones in particular, due to a large coastline in India.
(f) Better coordination between various Institutions like Ministry of Environment, Bureau of Energy Efficiency and other specialized bodies which are in the process of creation to facilitate the sector.
Way ahead
The issues of environment and ecological balance have to be carefully considered by emerging economies like India, both because it will ensure healthy and sustainable economic mechanisms as well as also provide additional sources of revenue generation in the global markets. While there appears to be carbon credits available in surplus by many entities in India even at present and certainly much more in the coming years, unless immediate action to channelize and organize the resource is not initiated through a proactive role of all stakeholders, the economy and every sector only stands to lose with every passing day.
More active legislation including tax incentives and regulations to establish organizations and Institutions to match global standards can certainly help in providing more impetus to this sector. Coordination between the State Governments and Central Governments as well as Industrial & Scientific Organizations and International Bodies is another focus area. India is a huge country with multiple complex issues co existing simultaneously. The global carbon credit market size was estimated at USD 479.41 billion in 2023 and is projected to reach USD 4,734.35 billion by 2030, growing at a CAGR of 39.4% from 2024 to 203021.
India must target much beyond a 40 billion USD market by 2030, which is estimated currently, if systems can fall in place quickly. Environment, sustainability and revenue generation by tapping into the multi- billion dollar carbon credit market at a global level, by 2030, must receive priority.
(The Author is an Ex- Principal Chief Commissioner of Income Tax, IRS. He was also a Visiting Researcher at Georgetown University, Washington DC and has multiple publications on Public Policy, Public Finance and Economic and ESG issues. The views are personal.)
Reference
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7 Gorain et al.; AJAEES, 39(2): 40-49, 2021; Article no .AJAEES.66243
8 Ibid.
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(The author is an Ex- Principal Chief Commissioner of Income Tax, IRS. He was also a Visiting Researcher at Georgetown University, Washington DC and has various publications on taxation and public policy issues. The views are personal.)
