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India is poised to launch its own national carbon market, a crucial step towards achieving its ambitious climate goals. Delhi-based think tank Centre for Science and Environment (CSE) on August 13, 2024 released a report, The Indian Carbon Market: Pathways towards an effective mechanism, offering a roadmap to ensure the market’s effectiveness in curbing emissions.
Finance Minister Nirmala Sitharaman announced the transition of hard-to-abate sectors from the existing Perform, Achieve and Trade (PAT) scheme to the upcoming Indian Carbon Market (ICM) in the 2024-25 Budget. This shift aims to accelerate emissions reduction and meet India's Nationally Determined Contribution targets by 2030 under the 2015 Paris Agreement. The country also aims for Net Zero emissions by 2070, in line with the United Nations Framework Convention on Climate Change guidelines.
As India prepares to launch its own carbon market, now is an excellent time to learn from other emission trading schemes around the world and apply what we have learnt. The Carbon Credit and Trading Scheme (CCTS), announced in July 2023, aims to reduce greenhouse gas emissions.
“The upcoming Indian Carbon Market scheme should kick off with a large coverage of the country’s emissions. A single nationwide carbon market scheme for carbon-intensive sectors should be brought in to ensure effective implementation and avoid any complexity. For this scheme to be effective, it also needs to ensure a high carbon price, data integrity and transparency,” CSE Director General Sunita Narain said at a webinar during the launch of the report.
CSE’s report analysed existing emission trading schemes (ETS) worldwide, including the European Union ETS, Korean ETS, Chinese ETS, and India’s own PAT scheme. The analysis highlighted both successes and shortcomings, offering valuable insights for designing the ICM.
“The PAT scheme was initiated with the good intention of increasing energy efficiency in industrial sectors, but faced several shortcomings in implementation. Our analysis shows it has achieved marginal emissions reduction, which is not enough as India attempts to travel towards decarbonisation, especially in the hard-to-abate industries,” Nivit Yadav, programme director for industrial pollution, CSE, said in a press statement.
CSE also pointed out the risk of unambitious target setting, emphasising that ambitious targets for individual entities and sectors are essential to avoid overachievement and the accumulation of surplus carbon credits. Additionally, it stressed the need for robust data verification and public access to data to prevent fraud and maintain market integrity.
“As CCTS is modeled after the PAT scheme, it must avoid past mistakes by setting ambitious targets for individual entities and sectors, considering best practices and going beyond existing policy and company targets to ensure the market drives genuine progress rather than mere compliance,” Parth Kumar, programme manager for industrial pollution, CSE, said in the release.
To further support the ICM, the report suggested implementing a market stability mechanism to manage fluctuations in carbon credit supply and demand. It also underscored the importance of imposing stringent penalties for non-compliance to enforce emission reduction targets effectively.
The challenges related to offset credits are highlighted, with the report urging careful consideration of the integrity of offset markets and their interaction with the ICM. Moreover, the inclusion of micro, small and medium enterprises was deemed critical, particularly in addressing data collection challenges and ensuring a level playing field for smaller industries.
Lastly, the report argued for the integration of the power sector, specifically thermal power plants, which are significant emitters, as essential for achieving substantial emissions reduction.
CSE recommended several measures to address these challenges in its report. It advocated for a single nationwide scheme, streamlining the carbon market with a unified approach for high-emitting sectors, which is crucial for efficient implementation. The report emphasised the importance of setting ambitious targets, establishing a high floor price, and implementing market stability mechanisms to drive emissions reduction.
To ensure market integrity, the think tank called for enhanced data quality and transparency through rigorous data verification, improved monitoring, and public access to data.
“The capacity of carbon auditors needs to be ramped up at a high pace; the current capacity will not suffice. Meanwhile, bringing in automation and technology in different stages of monitoring reporting and verification can reduce the chances of human error while also making the process faster,” said Manas Agrawal, research associate for industrial pollution, CSE.
Moreover, the long-term decarbonisation plans of the obligated entities should be made available in the public domain, Agrawal added. “The Bureau of Energy Efficiency — the administrator of CCTS — should release impact reports at regular intervals. These can be some crucial steps towards data transparency,” he said.
Additionally, the paper suggested the creation of mechanisms to generate revenue from the scheme, which could be used to support clean technology adoption in the MSME sector. CSE stressed the importance of including the power sector in the carbon market, as its integration will significantly contribute to India’s decarbonisation goals.
A successful launch of ICM holds the potential to significantly accelerate India’s progress towards its climate goals. By learning from global experiences and implementing the recommendations outlined in the CSE report, India can establish a robust carbon market that effectively curbs emissions and paves the way for a cleaner future.
