Progression Of The Indian Carbon Market: Path To A Greener Future?

At the United Nations Framework Convention on Climate Change (“UNFCCC”) in 2021, India avowed its mission for Net Zero emissions by 2070. The Global Warming Potential as enumerated in India’s Biennial Update Report with UNFCCC establishes the conversion of GHG emissions to Carbon Dioxide (“CO₂”) equivalent designed to augment the possibility of potential fuel switch and a recourse to non-fossil fuel energy. This report has emphasised on a very essential criterion of fostering the expansion of GHG emission intensity reduction trajectory configured for definitive sectors which is, as of now, contingent on the cost for technology implementation in India. As asserted by India, only a meagre percentile of around 14% of the big conglomerates or entities such as Reliance Industries, Adani Group, Mahindra & Mahindra, Tata Consultancy Services, Wipro of many others have integrated the legitimate aim for reduction of carbon emissions in their Corporate Social Responsibility ("CSR") policy.

To incentivize these businesses, Ministry of Power, in consultation with Bureau of Energy Efficiency ("BEE") poised the Carbon Credit Trading Scheme, 2023 (“CCTS”) in November 2023 with respect to the powers conferred by clause (w) of Section 14 of the Energy Conservation Act, 2001. CCTS is a rudimentary framework beckoning the roles and responsibilities of different committees along with a glimpse of the procedure vis-à-vis trading of Carbon Credit Certificates (“CCCs”) which may be procured on transcending the target set to cutback the CO₂ emissions.

This post attempts to expound on India’s new regimes to strengthen the Indian Carbon Market, its purported barriers and critiques along with the striking contrast of methodology from up and running established international trading systems. Moreover, it engages and analyses the idea of escalation in Foreign Investment and Foreign Direct Investment (“FDI”) relative to the different sectors in the Indian Carbon Market. The goal is to provide a holistic view of the ongoing progress in the Carbon Credit Market with respect to the Compliance and Offset mechanism as well as a conclusion inclusive of a few suggestions.

Incongruity between International and Indian Trading Systems

Unlike the European Union Emissions Trading System (“EU ETS”) or California cap-and-trade, the Indian Carbon Market is all set to follow a converse methodology of baseline-and-credit system which sanctions the emission intensity baseline to act as an instrument to measure, identify and accordingly provide CCCs for curtailment of GHG emissions and exceeding the annual emission target. Nonetheless, the baseline-and-credit system is the subject of conjecture possessing fundamental loopholes may foreseeably flounder in creating an impression, especially in India since firstly, the substantial lack of an absolute emission reduction target or cap and secondly, the paucity in integration of punitive action on a futile attempt to achieve the positioned emission target. This may induce the entities to neither purchase sustainable plant/machinery, nor indulge in less emission-intensive activities. Consequently, this will hinder India's colossal vision of Net Zero emissions by 2070.

A possible surge in Foreign Investment

Earlier this year, the British International Investment (“BII”) divulged its plan to invest USD 250 Million in India as a third-party commercial capital with the intention to bolster the goal of Net Zero. The early stage plan for BII is to invest in ultramodern technologies, devise decarbonization platforms and is even keen on taking small co-investment stakes along with varying venture capitalists. In furtherance to this, since last year, Japan and India have been immersed in mapping a carbon-credit agreement as per Article 6 of the Paris Agreement under UNFCCC which validates the contracting countries and private companies of the contracting countries to trade and share carbon credits. The positioning of compliance mechanisms and voluntary standards specific to India has the potential that empower a notable influx of Foreign Investment, heretofore, a few European countries and the UK are following the Indian Carbon Market screenplay very closely.

Foreign Direct Investment ("FDI") in accordance to numerous studies and analysis has yielded parallel and linear growth to the market size of carbon credit industry subject to a constant burgeoning of the economy and a few other fickle market factors. As reported by the Trade Promotion Council of India in June 2022, India has already funneled over USD 10 Billion till 2020 which accounts for almost 31% of all the projects under the Clean Development Mechanism (“CDM”) by the UNFCCC.

The sectoral caps under FDI were refurbished in the year 2020, nevertheless, plentiful sectors proscribe a substantial percentage of equity to foreign entities and have several conditions affixed to them. The FDI cap in renewable energy sector being amplified to 100% under the automatic route transpired to be highly profitable, yet, sectors like Agriculture and Plantation which can be extremely valuable for FDI, have their routes for investment completely clogged.

Recent Developments in the Carbon Credit Trading Scheme

The draft propelling a comprehensive abstract of Compliance Mechanism in consonance with the CCTS was proposed by the BEE in November 2023. It centres two contrastive entities qua CCTS i.e. Obligated Entities (Obligated to adhere to emission targets set) and Non-Obligated Entities (Purchase CCCs on a voluntary basis). One of the indispensable aspects of the proposed framework is the outright allotment an annual emission target engaging the Obligated entities positioned for a three-year trajectory period. Augmenting the fulfillment of the premeditated target, the same may shall then be revised. The obligated entity’s success in alleviating GHG emissions to outdo the stipulated annual emission target will effectuate the entity to earn additional CCCs. However, falling short of the annual emission target will enable the entity to purchase the outstanding CCCs in order to execute that target. The GHG emission intensity target will be accorded expressly to each obligated entity on the basis of historical data for an average rate of alleviation in GHG emission intensity across all obligated entities of the sector and the trajectory developed for that sector which only exacerbates the complexity and costs of this procedure. The likelihood for a fair few entities incapability of monitoring and preserving the historical data will translate to an eventual reliance on a theoretical baseline drawn from intricate formulas. Moreover, it is formidable since the polarity in emission intensities among entities is reasonably conspicuous, it is not economical to set baselines and verify emission intensities eminently in hard-to-abate sectors.

Subsequently, the seamless integration of the Offset Mechanism in December 2023 pursuant to the CCTS has accredited the non-obligated entities to trade in the carbon credit market as well. Prior to the amendment, non-obligated entities or individuals could purchase the CCCs for voluntary use but henceforward, these non-obligated entities can register their projects to generate CCCs in lieu of just having the prerogative purchase.

Interweaving Carbon Credit Trading Scheme and Perform, Achieve and Trade Framework (“PAT”)

In a meeting held on 20.10.2023, speakers from the BEE chimed in with the idea of intertwining CCTS with the existing PAT framework for GHG emission reduction. The PAT framework measures reductions per tonne of oil equivalent, whereas the CCTS has reductions per tonne of CO₂ emissions. Juxtaposed to the three-year target period in the PAT cycle, CCTS is posed to have an annual target. Hard-to-abate sectors in India such as cement, iron and steel, pulp and paper may struggle to fulfil the reduction targets, thus, leading to the future possibility of trading Energy-saving certificates ("ESCerts”) and Renewable Energy Certificates (“RECs”) under the PAT framework as offset instruments. The amalgamation of PAT framework and CCTS will unambiguously be a breather for hard-to-abate sectors, despite that, this will compel the contributors to overlook natural mitigation activities such as afforestation, reforestation and various other innovative methods of natural farming which can lessen the carbon footprint.

Looking Ahead

The Mckinsey Report on “Decarbonising India: Charting a pathway for Sustainable Growth" lays down action plans in brief which can be specifically adopted by India in order to accelerate India’s decarbonisation. Some of the suggestions cited are to stimulate implementation of compliance market, lay out a detailed medium-term decarbonization plan, create a national circularity mission and empower companies to play on the front foot.

However, the author believes that the biggest concern of the Indian carbon market is the unpredictability and fickleness, although, the correlation between economic development and carbon emissions is comparatively weak in India, outright decoupling is still a journey to complete. This may cause serious issues in the continuous readjustment of the baseline. Furthermore, many businesses in India are still unsure and hesitant to adopt the idea of integrating and mobilizing the complexity of carbon credit initiative, it is imperative that a standardized compliance mechanism conforming with the International standards is implemented in India forthwith.