(paraphrased from press articles and research)

• The government of India has released a draft of the Carbon Credit Trading Scheme giving a blueprint of organisational structure.
• India aims to give the domestic carbon market clarity by June.
• This market could reduce the cost of achieving Nationally Determined Contributions and net zero goals.

Summary

The Ministry of Power released a draft of the Carbon Credit Trading Scheme (CCTS), establishing the institutional framework and mechanisms for the functioning of the Indian carbon credit market.

The scheme was introduced through the Energy Conservation (Amendment) Bill, 2022, empowering the central government to specify such a scheme. The bill proposes creating a domestic ‘Carbon Credit Trading market’ in the country and empowering Indian government agencies to issue Carbon Trade Certificates to ensure a smooth carbon trading mechanism in the country.

The power ministry is now finalising the CCTS draft, released on March 27, and had invited comments from the public before April 14. 

The government is planning to notify the Carbon Credits Trading Scheme this June and plans to organise 20-30 workshops nationwide for discussions on various aspects of the market. The BEE is proposed to be the administrator of the ICM.

The proposed board which will regulate the Indian Carbon Market will suggest policies, setup framework for the for voluntary carbon credit trading, and specify criteria for selling carbon credit certificates to foreign buyers. 

The concept of carbon or emissions trading is that countries sell excess emission units – emissions that they are permitted to have but not used – to other countries which need the excess units to meet their emission targets.

The blueprint 

The draft of CCTS laid out the organisational architecture needed to set up and operationalise a domestic carbon market in India. 

It identified the role composition of key constituents:

• the regulator (India Carbon Market Governing Board), 
• the administrator, 
• the registry (the Grid Controller of India), 
• the trading administrator (Central Electricity Regulatory Authority), 
• exchanges and 
• specifications for empanelling auditors and 
• developing methodologies.

The draft proposed a structure for the Indian Carbon Market (ICM), including a voluntary trading and compliance market. Secretaries and joint secretaries of several crucial ministries in union government, will be part of the governing board, which will administer and regulate the market. 

It will include secretaries of the Ministry of Environment, Forest and Climate Change, Ministry of Power, Joint Secretaries of the Ministry of Finance, New and Renewable Energy, Steel, and Coal, along with the chairperson of Central Electricity Authority, CMD, Grid Controller of India Ltd, Director General of Bureau of Energy Efficiency. According to the draft, the proposed board will suggest policies and regulations for the market, set up the framework for voluntary carbon credit trading, and specify criteria for selling carbon credit certificates to foreign buyers.

The draft proposes that the Bureau of Energy Efficiency will be the administrator for the Indian Carbon Market and also work as the secretariat for Indian Carbon Market Governing Board (ICMGB). It will discharge several responsibilities, from developing standards and processes for registering projects under a voluntary mechanism to developing trajectories and targets for the entities under the compliance mechanism. The Bureau will also issue carbon credit certificates (CCC) and develop market stability mechanisms for carbon credits.

The Bureau will specify the procedure, including eligibility criteria for the accreditation of agencies to function as Accredited Carbon Verifiers.

Evolving carbon market

The carbon market has fundamentally changed since the Kyoto Protocol, which created instruments based on the market, like the CDM. Operational since 2006, CDM is part of the global action to create a cleaner and more equitable future by financing emission reduction activities in developing countries. Under this concept, countries without emission reduction targets received CDM funding assistance for their emission reduction initiatives. The CDM projects produced Certified Emission Reductions (CERs), which nations with certain emission reduction targets (mostly developed nations) purchased to achieve their emission-reduction targets.

Criticisms of the CDM are many, especially studies showing that the financing outcomes under CDM do not appear equitable.

Under the Paris Agreement, the concept of a carbon market evolved as every country was supposed to have its Nationally Determined Contributions (NDCs). Parties negotiated rules of Article 6 of the agreement and agreed upon during COP26 in Glasgow. It outlines the mechanism of the voluntary carbon market. To avoid double counting of carbon credits, the article has a provision for ‘corresponding adjustment.’ This adjustment means that carbon credits sold outside the country, cannot be used for meeting the NDCs of the originating country. 

India has now banned carbon trading internationally and domestic credits will be used to meet India’s NDCs, except in cases where high technology expensive assets create carbon credits.

Under the Article 6.2 mechanism, India listed 12 GHG mitigation activities for trading carbon credits in February 2023. It includes the storage component of renewable energy storage, solar thermal power, off-shore wind, green hydrogen, compressed biogas, emerging mobility solutions, high-end technology for energy efficiency, etc.

The complete blueprint of the local carbon market is planned by June 2023.

A potential solution to mobilise finance

In the process of developing the infrastructure, the government is considering the registry as a meta registry that would be in sync with all the international markets and the voluntary carbon markets.

The evolving carbon market can potentially fill the existing financial gap for the energy transition. India is the third biggest emitter even though the per capita emission is still one of the lowest. It is because of the sheer size of the economy that India needs to transition to a low-carbon economy. However, less than 25-27% of the total funds required are available. The carbon markets can be used for financing this transition.

The key premise of the carbon market is that the trade will result in the most efficient pathway to emission reduction. It promises to incentivise sectors and players whose cost of mitigation is higher and also to transfer finances to those who can do it more cost-effectively. It leads to an overall gradual move to efficiency across all sectors and players. The Indian carbon market could similarly, reduce the cost of achieving India’s NDCs and net zero goals while still driving innovation and technology advancements.