Climate Change

Lessons from PAT scheme can shape Indian carbon market

Carbon Credit and Trading Scheme must set ambitious targets and robust framework; compliance must be timely and with real penalties  

By Manas Agrawal
Published: Wednesday 04 October 2023
Photo: iStock__

India is all set to steer towards a regulatory carbon market in the country, ahead of its announcement in the Energy Conservation Amendment Bill passed in December 2022. The Carbon Credit and Trading Scheme (CCTS) was also notified in June 2023, setting up a regulatory framework for the market. 

The Indian carbon market will succeed the Perform, Achieve and Trade (PAT) scheme, which was developed in 2012 as a mechanism for reducing energy use in large industries. However, the scheme  is already burdened with its own set of challenges with compliance and targets

Questions remain about whether the new carbon market regime will prove to be an effective mechanism for reducing greenhouse gas (GHG) emissions and implementing lessons learned from the PAT scheme. 

Emission trading with four industries

Carbon markets, considered a critical component of global climate change mitigation efforts, operate as trading systems where carbon credits are bought and sold. These markets incentivise emissions reduction among businesses, governments, and entities by providing a financial motive to decrease carbon emissions.  

A National Steering Committee for Indian Carbon Market (NSCICM), constituting 19-22 members from different ministries and sector experts, will be responsible for direct oversight over the functioning of the Indian carbon market, according to the CCTS notification. 

The Bureau of Energy Efficiency (BEE) will be the administrator and decide the target and trajectory, appoint accredited carbon verifiers, issue carbon credit certificates and look into the development of a market stability mechanism. 

The notification further appointed the Central Electricity Regulatory Commission as the regulatory body for the trading of certificates and the Grid Controller of India as the record holder that will maintain the registry.

Source: BEE stakeholder consultation for accredited carbon verifiers under Indian carbon market

A recent article by news agency Reuters on carbon trading in India revealed that compliance for emission reduction for four industries — iron and steel, cement, petrochemicals and pulp and paper — will be set by the end of the year. 

The mandate for emitters in these four industries will be given for the year 2024-2025 and trading will start in 2025-2026. PAT provided companies with three years of compliance. However, for this, the compliance cycle would be annual. The domestic carbon market would follow a baseline-and-credit mechanism wherein emission intensity targets would be given to emitters at the start of the compliance cycle. 

Iron and steel and cement are the top emitting industries in the country after the power sector. New Delhi-based think tank Centre for Science and Environment’s (CSE) consultation with experts have suggested these four industries are being considered for a pilot for the target year of 2024-2025 and the power sector may be included in later stages. 

The targets and benchmarks will most likely be announced by the end of the year. Further, CCTS will likely transition from the existing PAT scheme, wherein industries will have to focus on a single target-based scheme for emission reduction. 

Under the PAT scheme, BEE notifies targets to designated consumers (DC), who are given three years to implement measures for energy conservation. After which, their consumption is monitored and verified. 

DCs that overachieve the target are provided energy saving certificates or ESCerts. One ESCerts equals saving of one tonne of oil equivalent. The DCs that fail to achieve the target can purchase these ESCerts to meet the targets. 

PAT scheme covers 1,212 DCs from 13 energy-intensive sectors of the country. The CCTS has similar ambitions and regulations, with targets more focused on emission reduction. The unit reduction in the PAT scheme was based on per tonne of oil equivalent, which would be per tonne of GHG equivalent in CCTS. 

At present, PAT is in its sixth cycle and targets for PAT-VII and VIII have already been notified for 2024-2025 and 2025-2026. More clarity is needed as to how the four industries will comply with both PAT and CCTS targets simultaneously.

PAT: (Under) Perform, (Over) Achieve Trade Scheme

The PAT scheme has been in force for more than a decade and has faced some crucial shortcomings in compliance and target setting. Here a few major issues:

Lenient targets, overachieved by most: There was only a feeble three per cent GHG emission reduction in the power sector, showed CSE’s 2021 analysis of PAT-I and II. Analysis showed the targets set were very lenient. 

For instance, in PAT-I, most sectors overachieved their targets by 41 to 142 per cent. Only the power sector, which had the lowest energy reduction target at 3.07 per cent, failed to achieve the target. 

Excess ESCerts, cheaper price: For PAT-II, 5.7 million ESCerts were issued whereas the demand was only 3.66 million, Prayas energy group’s 2023 analysis on trading of ESCerts underlined. More than 22 sessions of trading have been conducted so far for PAT-II but only 1.62 million ESCerts have been traded, amounting to only 44 per cent of the mandate. 

The price of one ESCert during PAT-I and starting sessions of PAT-II varied from Rs 200-1,200. A floor price of Rs 1,840 was then set for PAT-II and all ESCerts have been traded at the floor price since there is excess availability

Increased non-complianceThe trading cycle for PAT-II started in 2021 and there have been multiple extensions from the BEE for ESCerts. But even after repeated extensions of the trading window, 56 per cent of the mandatory ESCerts are yet to be purchased, DCs have failed to comply and the BEE is yet to penalise DCs. 

Delayed ComplianceFor PAT-II, the official deadline for DCs to buy ESCerts was set for 2021, which is yet to be finished. The Union Ministry of Power has not yet issued ESCerts for subsequent cycles.

Delays in PAT cycles

Source: Prayas energy group, 2023

Lessons for carbon market

The PAT scheme has fallen short with a long and delayed compliance cycle, lack of penalty on non-compliance, lenient targets, excess availability of ESCerts and lack of data transparency. Moreover, emerging carbon markets of Asian countries like China, Indonesia and Korea are troubled with low price of carbon credits or credits allocated for free. 

If carbon market trading is to succeed the PAT scheme, it would need: 

  • Ambitious targets: The targets set by the NSCICM should push industries to perform beyond their existing commitments and industry best standards.
  • Robust governance and implementation: Heavy penalties for underachievers and assuring implementation of penalties are needed.
  • Effective compliance: The compliance cycle in CCTS might be reduced from three years in PAT, increasing chances of delay. It is imperative to ensure no delay in compliance with real penalties.
  • Higher credit price: The floor price of trading of credits must justify the emission abatement. A market stability mechanism is needed to deal with discrepancies in availability of credits.  
  • Data transparency: The data for designated consumers, such as energy consumption and achieved reductions, were kept confidential for the PAT cycles. Target setting methodology, mechanism of price setting and details of emission targets for entities need to be disclosed. 

India’s updated nationally determined contributions to the United Nations Framework Convention on Climate Change sets a target to reduce emission intensity by gross domestic product to 45 per cent and to achieve 50 per cent renewable capacity in the power sector. 

Therefore, there’s urgency for decarbonisation and an effective carbon market with stringent targets needs to roll out soon. The carbon market will need to focus on low-carbon investment in industries, rather than becoming a mechanism that provides emitters to trade in pollution. 

“This transition from the PAT scheme to the carbon market is a renewed opportunity for the emission / energy market to reset, restructure and achieve desired reductions, as well as generate finance to support the decarbonisation of Indian industry. But this can only happen if CCTS targets are ambitious, framework is robust, compliance is timely and penalties are real,” said Parth Kumar, programme manager for industrial pollution at CSE.

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