India's Carbon Market Roadmap Unveiled By CSE

In the 2024-25 Budget, India’s Finance Minister, Nirmala Sitharaman, announced that a plan and appropriate regulations would be implemented to transition hard-to-abate sectors from the Perform, Achieve, and Trade (PAT) scheme to the Indian Carbon Market (ICM) mode. 

CSE released its proposed roadmap today during a global webinar as part of its new report titled The Indian Carbon Market: Pathways towards an Effective Mechanism. This report collates lessons from compliance-based emission trading schemes worldwide, including those in India, to facilitate the effective operationalisation of carbon markets in India. The goal is to ensure these markets serve their intended purpose of reducing emissions. 

India has pledged to meet its Nationally Determined Contribution (NDC) targets by 2030. It aims for net-zero emissions by 2070, in line with the United Nations Framework Convention on Climate Change (UNFCCC) guidelines. The country is developing and launching its own national compliance-based carbon market to achieve these ambitious goals.

The formation of the Indian Carbon Market (ICM) was initially announced under the Energy Conservation (Amendment) Act of 2022. More recently, the Carbon Credit and Trading Scheme (CCTS) was notified in July 2023 to reduce greenhouse gas (GHG) emissions. 

The CSE report analyses four Emission Trading Schemes (ETS) currently in use worldwide: the European Union Emission Trading System, the Korean ETS, the Chinese ETS, and the Surat ETS. It also assesses India's Perform, Achieve, and Trade (PAT) scheme, which has set the base for the upcoming Indian Carbon Market scheme by specifying energy reduction targets over three-year cycles. 

In its assessment of the PAT scheme, CSE examined emissions reductions in the power, steel, and cement sectors. According to Parth Kumar, Programme Manager for Industrial Pollution at CSE, the findings reveal that the Indian steel sector's emissions stood at 135 million tonnes (MT) of CO2 in 2016, but the sector managed to reduce an average of only 2.5 MT of CO2 emissions per year between 2012 and 2020. This equates to a mere 1.85 percent reduction in emissions annually. 

Similarly, the cement sector’s reduction was less than 1 percent, while the power sector managed to cut down 2.3 percent of its overall CO2 emissions in 2016 over six years. These findings highlight the challenges in the PAT scheme, which include the excess availability of Energy Saving Certificates (ESCerts), lenient targets, and delayed compliance. The newly proposed Carbon Credit and Trading Scheme (CCTS), which aims to build on the PAT framework, needs to address these shortcomings. 

Several challenges could affect the proposed new scheme. One significant issue is the low price of carbon credits and low market liquidity. Many global carbon markets, including India’s PAT scheme, initially faced challenges such as low pricing and excess availability of certificates. 

Additionally, the PAT scheme has faced criticism for setting unambitious targets, leading to the overachievement of goals and an oversupply of ESCerts, which has resulted in poor market prices. Kumar emphasises that CCTS must avoid these past mistakes by setting ambitious targets for individual entities and sectors, considering best practices and going beyond existing policies to ensure the market drives genuine progress rather than mere compliance. 

Another challenge is the dependence on the PAT scheme, which may limit the potential of CCTS and its selection of obligated entities, making the scheme less effective and potentially delaying decarbonisation efforts. 

Running both schemes concurrently could create confusion within the sector. Currently, entities completing their PAT cycle are expected to receive CCTS targets, which may not be the best way to shortlist participants for the scheme. This approach does not clearly signal the need to achieve maximum emission reductions under CCTS. 

The scheme also lacks a revenue generation clause. While ETS schemes worldwide generate revenue through auctioning allowances, which are then allocated to modernisation, support for new entrants and small businesses, and financing decarbonisation, the Indian Carbon Market model currently does not propose any form of auctioning, which limits the potential for revenue generation. 

Data quality is another concern, as issues have been reported in other ETSs, such as data fraud in the Chinese ETS. The PAT scheme has also faced transparency concerns, and smaller industries in CCTS may struggle to produce accurate data for their raw materials and fuels, which are often sourced from informal markets. 

The absence of a market stability mechanism is also problematic. Such mechanisms play a crucial role in ensuring stability by holding and releasing credits into the market in response to unexpected external events. The Indian Carbon Market has yet to propose any detailed mechanism for this. 

Non-imposition of penalties has been another issue under the PAT scheme, where penalties are rarely enforced. Even if penalties are strict, the effectiveness of the scheme is undermined if regulators do not impose them, as was the case with power sector defaulters under PAT. If similar practices continue under CCTS, entities may disregard their obligations to buy credits. 

The inclusion of offset credits and interaction with other credit schemes also pose challenges. The proposed CCTS will include offset market credits, but experiences from markets like the EU-ETS show challenges with offset surges and integrity issues. India’s various market-based mechanisms aim to enhance sustainability and efficiency, but oversupply in older schemes like PAT and potential double counting among different upcoming credit systems could threaten the integrity of credits and require strict regulatory frameworks. 

Additionally, the CCTS aims to include large industrial sectors, many of which rely on MSMEs. These MSMEs may become part of the market, directly or indirectly, but they face challenges such as obtaining accurate emissions data, using inefficient technologies and fuels, and lacking financing sources. These factors hinder their ability to meet targets and may lead to struggles in affording carbon credits, potentially causing unfair competition with larger companies. 

Finally, the exclusion of thermal power plants from the carbon market scheme would miss out on a significant portion of the country’s emissions, as the electricity sector contributes nearly 40 percent of India’s GHG emissions. Several power plants have similar conditions but disparities in efficiency and emissions, and CCTS could play a crucial role in bridging this gap.