What is Indian Carbon Trading System? From Emissions to Profits

Indian Carbon Trading System

The Indian government is currently working on establishing an Indian carbon trading system.

India plans to establish its own carbon trading system in addition to implementing measures that encourage high-emission industries to transition towards decarbonization. This initiative aims to mitigate the impact of the Carbon Border Adjustment Mechanism (CBAM) that will be enforced by the European Union starting from October 1st of this year.

This article will explore the key features and potential impacts of this carbon trading system in India.

Indian Carbon Trading System Overview

Introduction

The Indian Carbon Market aims to accelerate India’s transition to a low carbon economy and mobilize climate finance. Carbon markets have emerged as key policy mechanisms globally for reducing greenhouse gas (GHG) emissions cost-effectively. These markets set a limit on total emissions, allowing entities to trade emissions permits or credits based on their performance against the limit.

The European Union Emissions Trading System (EU ETS) is the largest carbon market, covering sectors like power, industry, and aviation. Other major markets include Korea Emissions Trading Scheme and California-Quebec market.

India has made ambitious climate commitments under the Paris Agreement and needs to develop carbon pricing mechanisms like emissions trading systems to achieve these targets in a cost-effective manner. The current Perform Achieve and Trade (PAT) scheme allows trading of Energy Saving Certificates but faces challenges like limited participation and lack of fungibility.

Developments in Indian Carbon Trading System

Perform Achieve and Trade (PAT) Scheme

Energy Saving Certificates (ESCerts) play a crucial role in India’s Perform Achieve and Trade (PAT) scheme, which aims to enhance energy efficiency in energy-intensive industries. These certificates are issued to designated consumers (DCs) who achieve energy savings beyond their targets, and can be traded in the market.

However, the issuance and trading of ESCerts face several challenges. One of the key challenges is related to transparency. There is a need for a transparent and reliable mechanism to track and verify the energy savings achieved by the DCs. This is important to ensure that only genuine ESCerts are issued and traded in the market.

Another challenge is related to monitoring. It is important to have a robust monitoring system in place to track the energy consumption and savings of the DCs. This will help in accurately assessing the energy savings achieved and determining the eligibility for ESCerts.

Verification is also a critical issue. There is a need for an independent verification process to verify the energy savings claimed by the DCs. This will help in ensuring the credibility of the ESCerts and preventing any fraudulent activities.

Enforcement is another challenge in the issuance and trading of ESCerts. There is a need for strict enforcement of the rules and regulations governing the PAT scheme. This will help in deterring any non-compliance and ensuring the integrity of the ESCert market.

Issuance, trading and challenges seen with Energy Saving Certificates (ESCerts)

Issuance and trading of ESCerts have faced challenges due to high supply, low demand, limited participation, and short trading windows.

In PAT Cycle I, the market experienced an oversupply of ESCerts with only 14% being purchased, while 2.5 million were banked forward. The limited demand and buyers in the market have resulted in depressed prices for these certificates.

Additionally, the short 4-month trading window further restricts participation and discovery.

These challenges highlight the need for a redesign of the market to incentivize investments in energy efficiency by DCs. The current system has failed to effectively drive continuous emissions reductions as intended.

Addressing these issues is crucial to ensure that ESCerts play a significant role in promoting sustainable energy practices in India’s carbon trading system.

Government Plans for Indian Carbon Market

Objectives of developing Indian Carbon Market (ICM)

The development of the Indian Carbon Market (ICM) is driven by the objectives of facilitating India’s enhanced climate targets and promoting a transition to a low carbon economy. The proposed features of the ICM include sector-specific benchmarks and emissions intensity targets, as well as trading of carbon credits based on performance against these targets.

Recent stakeholder consultations have played a crucial role in shaping the design and implementation of the ICM, ensuring that it aligns with India’s climate goals. Additionally, fungibility between ESCerts (Energy Savings Certificates) and emission reductions units will enhance flexibility in meeting compliance obligations.

Transitioning to yearly compliance and trading cycles will provide a more efficient mechanism for monitoring and reducing emissions. Moreover, allowing voluntary entities to participate in the market will mobilize new mitigation opportunities from non-obligated sectors, further supporting India’s low carbon transition and sustainable growth.

Proposed features of ICM

Standardized methodologies for estimating emissions reductions from various projects will be developed by the Indian Carbon Trading System, along with validation, verification, and issuance processes. These methodologies will ensure consistency and accuracy in assessing the environmental impact of different initiatives.

The ICM also plans to establish a comprehensive governance structure that defines the roles and responsibilities of all entities involved in the carbon market. This will help streamline operations and ensure transparency throughout the trading process.

Additionally, the ICM aims to introduce a voluntary mechanism that allows non-obligated entities to participate in carbon credit trading. This inclusive approach will encourage wider participation and enhance the overall effectiveness of emissions reduction efforts in India.

Furthermore, the development of an Indian carbon registry system will facilitate tracking and trading of credits, while exploring global applications for enlisting verifiers will ensure international credibility and adherence to established standards.

Key Policy Changes Proposed

Fungibility between ESCerts and emission reductions units

Alignment between Energy Saving Certificates (ESCerts) and emission reduction units (ERUs) would enhance the fungibility of these instruments, promoting compatibility with global carbon markets. Currently, ESCerts are denominated in tons of oil equivalent energy savings, while ERUs represent one ton of CO2 equivalent emissions reduced.

To make ESCerts fungible with ERUs, sector-specific conversion factors based on emissions and energy use data of PAT entities can be used. This alignment would ensure that ESCerts can be seamlessly converted into ERUs, allowing for greater flexibility in trading and increasing the scope for participation in carbon markets under the Indian Carbon Market (ICM).

Transitioning to yearly compliance and trading cycles

The transition to yearly compliance and trading cycles would necessitate adjustments in targets, but it would facilitate regular and streamlined compliance and trading, contributing to improved market stability and ensuring more consistent participation.

Moving from the current 3-year cycle under PAT to annual cycles aligns with global norms seen in carbon markets like the EU ETS. Yearly trading offers several advantages for the Indian carbon trading system.

Firstly, it provides better price discovery as participants can react faster to changing market conditions.

Secondly, it enhances market stability by reducing uncertainties caused by longer compliance periods.

Lastly, yearly compliance ensures a more predictable and consistent participation from industries, leading to a more effective reduction in emissions overall.

This transition would ultimately bring about greater efficiency and effectiveness in India’s efforts towards carbon mitigation.

Allowing participation of voluntary entities

Currently, only entities with emissions reduction targets under PAT can participate in ESCerts trading. However, the Indian Carbon Market (ICM) aims to expand participation to include corporates, private entities, and non-obligated sectors like aviation.

This move aligns with global trends where voluntary buyers play a crucial role in carbon markets. By allowing these entities to participate, the ICM can enhance liquidity and trading activity.

Moreover, many Indian firms have already shown willingness to secure carbon credits for emissions reductions voluntarily. Their participation would not only help them achieve their own sustainability goals but also stimulate market growth by creating additional demand for credits.

Shifting to emissions intensity-based targets

Shifting to emissions intensity-based targets necessitates adjustments in monitoring and verification processes, as well as the establishment of sector-specific performance levels. This transition aligns with India’s goal of reducing emissions intensity of GDP outlined in its Nationally Determined Contributions (NDC).

By setting intensity targets for different sectors based on their current performance levels, India aims to incentivize lower emissions per unit of economic activity while allowing emissions to vary with economic growth. These changes are necessary to prepare India for future carbon markets that trade actual emissions credits rather than energy savings.

Intensity-based targets provide a more flexible approach that takes into account the varying needs and capacities of different sectors, enabling a more efficient allocation of emission reduction efforts across the economy.

ICM benefits and Challenges

Potential benefits of ICM in meeting India’s climate goals

Implementing a market-based mechanism for carbon pricing in India has the potential to contribute significantly towards achieving the country’s climate goals.

The Indian Carbon Market (ICM) incentivizes industries, power producers, corporates, and other entities to reduce their carbon footprint by putting a price on carbon. This not only drives adoption of energy efficiency measures and renewable energy sources but also encourages emissions reduction activities across sectors in a cost-effective manner.

Through ICM, different stakeholders can align themselves towards a common goal, enabling collaborative climate action. Additionally, linking with global carbon markets can provide Indian projects access to larger climate financing pools.

Expected challenges in operationalizing ICM

The effectiveness of the Indian Carbon Trading System in achieving India’s climate goals may be hindered by various challenges that need to be addressed during its operationalization. These challenges include the development of robust emissions monitoring, reporting, and verification systems across various sectors.

It is also important to maintain an optimal balance between supply and demand of credits, implement clear pricing rules and mechanisms, build capacities of regulators and participants, garner stakeholder acceptance and support, and seamlessly integrate the ICM with existing policies and programs like PAT.

Additionally, managing carbon leakage risks is crucial. To address these challenges effectively, a gradual phase-in of the ICM with strong periodic reviews and course corrections can be implemented. This would ensure that the ICM operates smoothly and contributes significantly to India’s climate goals.

Role of ICM in mobilizing climate finance

The Indian Carbon Trading System (ICM) has the potential to play a crucial role in mobilizing climate finance and facilitating India’s transition to a low carbon economy. Through market mechanisms, ICM generates carbon revenues that incentivize both public and private entities to undertake projects aimed at reducing or avoiding greenhouse gas emissions.

These projects can attract climate funds from various sources such as domestic and international entities, banks, and impact investors. By monetizing the value of emissions reductions, ICM enables the flow of climate finance within India and globally.

Consequently, investments in sectors like renewable energy, electric vehicle mobility, and industry emissions reductions can be made, forming the foundation for a resilient low carbon economy in India. The integration of ICM into India’s overall climate finance strategy is essential for achieving sustainable development goals while addressing the challenges posed by climate change.

Conclusion

In summary, the successful implementation of the Indian Carbon Trading System can contribute significantly to India’s emissions reduction goals and position the country as a leader in global climate action. The ICM has the potential to play a crucial role in mobilizing climate finance and enabling India’s low carbon transition.

By putting a price on carbon emissions and incentivizing mitigation activities across sectors, the ICM can help reduce India’s emissions intensity and attract green investments. Furthermore, by spearheading the operationalization of carbon markets, India can inspire other developing countries to take similar actions towards addressing climate change.

However, achieving these outcomes will require timely policy decisions, a well-designed market structure, robust monitoring, reporting, and verification mechanisms, as well as extensive stakeholder engagement. These factors are pivotal for realizing the benefits of the Indian Carbon Market and aligning with both national development needs and international climate change goals.