The adoption of Article 6 of the Paris Agreement at COP29 in Baku (2024) has accelerated global compliance carbon markets. India, the world’s third-largest emitter in absolute terms, is developing its own domestic Carbon Credit Trading Scheme (CCTS) to align with Article 6 mechanism. However, the voluntary carbon market (VCM), a critical yet controversial offset mechanism, remains pivotal for India’s decarbonization process.
VCMs gained traction post-2007 with the Clean Development Mechanism (CDM) and surged during the 2012 ‘Carbon Panic’, which got further consolidated with corporate net-zero pledges. Over 6,000 projects are registered across 12 major registries (e.g., Verra, Gold Standard) so far, issuing 2 billion credits in the past decade, with 180 MtCO2 retired in 2024 alone.
Embroiled in controversy
Despite rapid growth, VCM faces scrutiny over quality and integrity as it is mostly unregulated and outside the purview of any regulatory structure. Reports published have showcased global fraudulent behaviour by the stakeholders’ engaged in such carbon credit generation and trading. While the operational principles of ‘Integrity of the carbon market’ require credits to be ‘real, additional, permanent and non-doubled’, in many cases, these are violated.
Additionally, a key instrument to ensure the quality of the credits, is mired with methodological inconsistencies, questions of permanence of emission removals, and issues related to double counting. Poor regulatory and accounting structure, and price distortions and differentials resulting from factors such as credit vintage, methodological heterogeneities, undermine the market credibility and stability.
Restore credibility and integrity
Efforts are being undertaken, of late, to build a robust oversight and enforcement mechanism ensuring integrity through independent standard-setting bodies, such as Integrity Council for the Voluntary Carbon Market (ICVCM) and Voluntary Carbon Markets Integrity Initiative (VCMI). The core carbon principles (CCPs) by ICVCM and claim code of practice by VCMI are designed to ensure that the carbon credits are of high quality, transparent and credible.
Independent standard bodies also have started endorsing the offset projects based on their co-benefits and sustainable development contributions. For instance, Verra’s CCB (Climate, Community & Biodiversity Standards) certification standard entails a set of rigorous guidelines that assess the impact of such projects on climate, local communities, biodiversity, and SD VISTA, an independent standard setting entity, certifies the projects based on their contributions to sustainable development goals (SDGs).
Major registries are joining hands recently to align their accounting frameworks to develop a unified and common assessment tool. There have been recent steps taken to bring an integration between voluntary and regulated carbon markets. As of May 2024, 37 VCM projects have received Letters of Authorisation (LOAs) to supply credits with corresponding adjustments in order to avoid double counting issue.
Way forward for India
India is ranked 2nd in terms of number of projects implemented under the umbrella of VCM with close to 1,400 projected registered under different registries. It is projected that the demand for such a market would escalate in future given the thrust of industrial decarbonisation in the country. Commitments of 127 Indian corporate entities to become net zero and as part of SBTi is a clear manifestation of growing demand for such credits by Indian companies. However, the VCM faces a host of challenges in India such as high transaction costs for small projects, uncertainty about its alignment with the proposed CCTS, and unclear regulations on fund utilisation, necessitating a strategic and multi-faceted approach to maximize its potential. The following are proposed to streamline the process.
Developing a robust regulatory framework: India’s apex body, the National Designated Authority for Implementation of Article 6 (NDAIAPA), should also evaluate how to harmonise the voluntary carbon market with the new offset credits under the CCTS. Establishing a uniform methodology for measuring, reporting, and verifying emissions reductions will enhance transparency and build trust among investors.
Encouraging private sector participation: Incentives for private companies such as tax benefits, subsidies for green projects, GST benefits and capacity-building initiatives can motivate businesses to participate actively in carbon trading.
Leveraging technology: Advanced technologies such as blockchain can be used to enhance the traceability and transparency of carbon credits.
Focusing on nature-based solutions and smart agriculture: India’s biodiversity enables nature-based solutions like mangrove restoration and sustainable agriculture to generate high-quality carbon credits and enhance climate resilience.
Sarangi is Head and Associate Professor, and Shingle is Research Scholar, TERI School of Advanced Studies, New Delhi
