Delays in India's carbon trading scheme raise concerns amid UN warning

Delays in setting up a carbon market in India have become a pressing concern now, especially after a UN body warned this week of the perils of going slow on emission reductions

India may announce a new carbon trading regime, covering less than a third of its rapidly multiplying emissions, only in late 2025 or 2026, nearly three years after approval, according to several officials who spoke to Business Standard.

 

A senior official from a state energy company, who attended a recent meeting with officials from Niti Aayog and the Bureau of Energy Efficiency (BEE), an arm of the power ministry, which is tasked with overseeing the carbon credit trading scheme (CCTS), said that a programme to trade carbon credits will be in place by late 2025; other officials, however, spoke of a date closer to mid-2026.

 

The government authorised the creation of an Indian Carbon Market (ICM) in June 2023, and BEE sought industry feedback in November towards eligibility and compliance procedures for CCTS. Things have been quiet since, with BEE officials saying that they are still working on the details. 

The benefits of a carbon market take time to trickle in. India is already leaving out of CCTS heavily polluting, politically sensitive sectors such as electricity and agriculture, crimping its effectiveness, industry officials said. 

 

India may see an impact on its air quality by 2031 only, with obligated entities under CCTS covering only 30 per cent of the country’s emissions, leaving the rest unsupervised and our atmosphere exposed. 

There is a “lag effect” of three-five years for a carbon market to have an impact on emissions, said Tarana Ahmad, manager, carbon market intelligence, at California-based sustainability consultant cKinetics in a presentation in Delhi last week. 

Delays in creating ICM and addressing emissions threaten the country’s commitments to becoming “Net Zero” by 2070. ICM would enable operation of a domestic CCTS in line with United Nations (UN) regulations and set a cap on emissions by industries. 

The delays, which stem from lobbying by industry bodies, seeking protectionist policies and lower compliance, have become a pressing concern especially after a UN body warned this week of the perils of putting brakes on emission reductions. 

World at Risk 

On October 28, the UN Climate Change released the 2024 Nationally Determined Contributions (NDC) Synthesis Report, which assesses the combined impact of nations’ current national climate plans, or NDCs, on expected global emissions in 2030. And the prognosis was bleak. 

The NDCs, including those by China, the US and India, the world’s three biggest polluters, reflect global emissions of 51.5 gigatonnes of CO2 equivalent in 2030 — a level only 2.6 per cent lower than that in 2019, and far short of the 43 per cent reduction envisaged by 2030. 

“Greenhouse gas pollution at these levels will guarantee a human and economic train wreck for every country, without exception,” said Simon Stiell, a top climate change official and UN Climate Change executive secretary. 

“By 2035, net global greenhouse gas emissions need to be cut by 60% compared to 2019 levels, critical to limiting global heating to 1.5°C this century. Current national climate plans fall miles short of what’s needed to stop global heating from crippling every economy, and wrecking billions of lives and livelihoods across every country,” he observed. 

New NDCs, due in 2025, must set ambitious new emissions targets that are economy-wide, covering all greenhouse gases, and keeping 1.5°C alive, broken down into sectors and gases, and must be credible, backed by substantive regulations, laws, and funding to ensure goals are met and plans implemented, Stiell said. They should have a time horizon of 2035, with much stronger 2030 targets to drive the deep emissions cuts needed. The ICM will be linked to India’s NDC to calculate compliance targets. 

Winners & Losers 

Electricity has been the most responsive on emissions in most jurisdictions but India has kept fossil fuel generators out of the CCTS purview. Agriculture is also out of CCTS. It is unclear if coal-fired plants, India’s biggest source of electricity and the biggest polluters, will be asked to keep a check on their emissions. 

BEE, earlier this month, announced a list of industries that would qualify for carbon credits. In the energy sector, it included green hydrogen, compressed biogas, electric vehicles, carbon capture & storage, and offshore wind, among others. But it did away with the low hanging fruit of terrestrial solar and onshore wind. It, however, made allowance for renewables with storage, without specifying a storage mechanism. 

Some plain vanilla renewable developers told Business Standard that solar and wind produce clean energy and must be eligible for credits. They said that they have told the government and expect a new list of industries eligible under the CCTS in January. 

This is a small example of the pulls and pushes experienced by Indian policymakers as they try to set a cap on emissions — any violation above the cap forces the industry or entity to buy credits, and coming below the ceiling enables them to accrue credits. 

Programme Contours 

The EU and the UK were the earliest to set up a carbon market in 2005 followed by California in 2012. But unlike most of the programmes that track overall emissions, India’s CCTS is going to be an intensity-based mandatory programme for energy-intensive industries, where the government will set the emission-intensity targets (greenhouse gas emission per unit of output) for these entities for compliance, Ahmad said. Only marginal emissions above and below the benchmark are subject to credit/deficit generation. As GDP has grown, India’s emissions intensity has fallen in the last 20 years. 

Ahmad said CCTS ought to target a price floor of Rs 2,400 per tonne CO2e ($30) in the beginning, with prices rising into the future, to have a meaningful impact from a carbon intensity perspective that could mean a 2.2 per cent reduction on emission intensity from a baseline every year from 2026 onwards. 

A World Bank official told Business Standard that buyers want low-priced credits and so do nations to meet NDC commitments. But what is crucial for the CCTS is to have a consistent policy while keeping the emissions cap at a point where it encourages investments and compliance, said Kaushik Deb, head of Energy Policy Institute at University of Chicago’s India team. 

Deb is no stranger to CCTS having pioneered India’s first emission cap and trade scheme in Surat for Gujarat state pollution authority, and later expanded it to other areas. Companies were asked to comply every three months, enabling trading of credits around the year. 

EU CBAM’s Contribution 

The European Union’s much-maligned Carbon Border Adjustment Mechanism (CBAM), an EU carbon tax, which Finance Minister Nirmala Sitharaman termed “unilateral and arbitrary” at an event this month, may act as a lever to prod Indian officials and industries to settle soon on a carbon market mechanism, industry officials said. CBAM is a tariff for polluting products entering the EU, coming into play from 2026. 

“Taiwan very recently instituted a carbon fee after industries were concerned about CBAM,” said Robert Shih, general manager at Taiwan-based YC Holdings, to Business Standard. “In a good way, Europe is pushing new policies for the rest of the world to wake up. You can’t hide behind your national commitments,” Shih added. 

Credits under the CCTS can help evade CBAM, ensuring that the money at least stays in India, an industry official said. Concerns over CBAM have already pushed the steel ministry to award a trial to Gensol Engineering for a green hydrogen-powered steel facility. 

Existing Schemes 

India currently operates a domestic carbon credit mechanism, Renewable Energy Certificate (REC) Scheme, wherein each renewable generator receives one certificate for every megawatt hour of power supplied to the grid. Earned RECs can be sold to other polluting entities as a carbon credit, for example, to offset their emissions mandates. These certificates are traded on the Indian Energy Exchange and utilities use these RECs to meet their renewable purchase obligations (RPOs). 

But the REC scheme has imploded, industry officials said, after prices of the certificates swung from Rs 1,000 in January 2023 to a record low of around Rs 112 now. That enables utilities to meet RPOs on the cheap, industry officials said. The scheme also excluded traders, aggregators and investors, allowing only actual users. Deb said such policy errors should not find a place in the CCTS. 

A World Bank study shows that the minimum carbon price must be $40-$60/tonne by 2025 and around $100/tonne by 2030 to meet current NDC targets globally. By contrast, India’s RECs trade at a little above a dollar, and its voluntary credits are also getting only around $1.50/tonne, two industry officials told Business Standard.