By Somit Dasgupta
The government proposes to implement its own version of a carbon credit trading scheme (CCTS) around mid-2026. Amending the Energy Conservation Act, 2021, made the setting up of a carbon market possible, and the scheme was notified in June 2023. A number of organisations will be involved in implementing the CCTS, such as the Bureau of Energy Efficiency (BEE), the ministry of environment, forest and climate change, the Grid Controller of India, the Central Electricity Regulatory Commission, and electricity exchanges. There will also be a national steering committee to oversee the entire functioning of the CCTS.
Readers would be aware that as of now, we have the Perform, Achieve, and Trade (PAT) scheme under the BEE. It has been in operation since 2012. The trading is of energy saving certificates (ESCerts), given to over-achievers and which under-achievers need to purchase, thus determining a market price. PAT will now be replaced by the CCTS, an emissions trading scheme (ETS), and there will be a shift in the metric that would be monitored — from per tonne of oil equivalent to per tonne of greenhouse gas (GHG) equivalent. The scheme will be implemented in stages, and it seems that to begin with it would cover a part of the industrial sector consisting of iron and steel, aluminium, chlor-alkali, cement, fertilisers, pulp and paper, petroleum, refineries, and textiles. According to the latest biennial update report for India (2024) submitted to the United Nations Framework Convention on Climate Change, these sectors together account for about 16% of India’s GHG emissions. The power sector, which has a share of about 40% in India’s GHG emission, will perhaps be added later. An important point to note is that in India, the CCTS is not aiming to reduce the absolute carbon emissions but to decrease the emissions intensity, i.e. emissions per unit of good produced. This is understandable since in India, being a developing economy, per capita consumption of several products is much below the world average. This will inevitably grow over time, leading to more absolute emissions.
Globally, carbon pricing is being done either through an ETS or through the imposition of carbon taxes. As of June 2024, 89 national and sub-national governments had adopted some form of carbon prices. Together, they account for about 12.8 gigatonnes of carbon dioxide equivalent, which is about 25% of the world’s emissions. Incidentally, carbon pricing has been taken up primarily by the high- and middle-income countries (Asian Development Bank). There is, however, wide variation in the number of sectors covered across countries, which leads to differences in the percentage of GHG emissions of the countries under the purview of carbon pricing (see table). In some geographical areas, multiple ETSs may be in force, each targeting different sectors. Germany and Austria are examples where some emissions are covered by the European Union’s (EU) ETS and others by the nation’s own ETS. This also applies to China, where the same area is covered by the national ETS and those of the provinces in question.
While designing a carbon market, several issues must be kept in mind. The first is that the targets for reduction of emissions intensity must be ambitious. It should not be a case of excess supply of carbon credits leading to a very low carbon price. The PAT scheme has had a history of lenient targets, leading to ESCerts being traded at floor levels. Of course, the targets cannot be overambitious, as they will cause a high carbon price leading to an inflationary trend. So, a fine balance must be pursued, which is not easy to decide a priori. Second, there has been a delay in issuing ESCerts, and certificates for PAT IV onwards are yet to be issued, the target date being December 2021. Third, for the market to be effective, compliance must be ensured. Designated consumers (DCs) who fail to achieve targets necessarily must buy carbon certificates. In the case of PAT, more than 50% of the ESCerts which ought to have been purchased have not yet been, and unfortunately no penalty has been levied. Fourth, the scheme should be transparent and actual performance of each DC should be in the public domain. Under PAT, while the target of each DC is notified only those implementing the scheme know the actual performance. Fifth, there is the issue of monitoring and verification. One is not sure of the figures that are being generated from the PAT scheme. Monitoring and verification have also been problematic in the erstwhile scheme of Clean Development Mechanism, with fears of double counting of carbon credits.
For the Indian CCTS to be taken seriously, we will have to align the regulatory framework with international standards and find answers to the lacunae seen in PAT. This will not take place overnight but may take years. Let us not forget that the EU’s ETS programme is still evolving, though it was initiated two decades ago.
The writer is senior visiting fellow, ICRIER.
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