Greenhouse gas (GHG) emissions reduction is a collective imperative for Asia, a region increasingly facing the adverse impacts of climate change. As Asian economies chart their development pathways, they are finding innovative ways to align economic and climate imperatives. India has a unique opportunity to steer regional dynamics and influence climate ambition.
Emission Trading Systems (ETSs), a set of policies to control the amount of total emissions through a market mechanism, have emerged as powerful tools worldwide to drive down emissions while generating vital finance for decarbonising power and industrial sectors and supporting vulnerable communities. The Indian government deserves recognition for the upcoming launch of its Carbon Credit Trading Scheme (CCTS), which is a significant step forward in its decarbonization journey. The scheme has the potential to become one of the largest ETSs globally.
As India introduces and tests its CCTS, it stands to benefit from lessons learned by key carbon pricing systems around the world, including the European Union (EU) ETS and South Korea’s K-ETS, launched in 2015 as the first nationwide scheme in East Asia. Three key considerations could shape the long-term effectiveness of the policy and reinforce India’s position as a climate leader in the Global South.
First, policy certainty is a necessary condition for long-term investment. Early investments in decarbonisation reduce long-term costs and enhance competitiveness, making mitigation cheaper than the cost of delay. The key to unlocking these investments is certainty—policies and frameworks must be in place to yield long-term benefits. For industries, particularly those in hard-to-abate sectors, a clear policy direction is essential for planning decarbonisation efforts and investing in new technologies.
For instance, in South Korea, despite a relatively low carbon price at present (under $10 per tonne), companies base their investment decision-making for decarbonisation technologies on expectations of the future price, given the long-term nature of these investments. As the K-ETS cap is directly linked to Korea’s national GHG emission target, declining to zero by 2050, there is long-term visibility about how the carbon price might evolve. For example, one of the leading companies covered by the K-ETS assumes a price of around $40 per tonne by 2030, and increasing significantly after then. India must offer similar certainty to businesses by linking the emission targets under the CCTS with India’s national GHG emission reduction targets. It will also be important to develop a long-term plan for the evolution of the design of the CCTS. A predictable, stable policy environment will encourage both domestic and international investment in clean technologies necessary for India to meet its climate ambitions.
Second, ETS must be flexible to remain effective in the face of changing economic conditions. The EU ETS, for instance, weathered the 2009 economic crisis and underwent significant reforms to adapt.
Such flexibility is vital for the success of an ETS. While the carbon price in the EU dropped significantly as a result of this economic challenge, the system was redesigned to ensure long-term sustainability. In the EU, carbon prices have since increased to approximately $70 per tonne, and emissions have decreased by 15.5% in just one year. With emissions now around 47% below 2005 levels, the EU demonstrates how emissions trading can drive decarbonisation. India should take a similar approach—building flexibility into the CCTS to allow for adjustments and ensuring that the system can evolve in response to global economic trends and emerging challenges.
Third, India’s CCTS offers a significant opportunity not only to reduce emissions by the effect of the carbon price but also to generate finance to support investment in decarbonisation technologies that are not yet commercially viable. Auctioning emissions allowances, as opposed to giving them away for free, is a critical tool for countries to generate revenue for such investments while also driving decarbonisation through a strong carbon price signal. Such investment support will also be invaluable in reducing exposure to charges under the EU’s Carbon Border Adjustment Mechanism (CBAM), by further reducing the embedded carbon of relevant goods exported to the EU.
Asia Society Policy Institute’s analysis shows that India could raise between $700 billion and $1.4 trillion by 2050 by auctioning emissions allowances in the power sector alone. Furthermore, India could pursue innovative financial instruments like the climate transition bonds recently introduced by the Japanese government, which could unlock finance immediately for industrial decarbonisation projects funded by future ETS auctioning and offer policy certainty to market participants.
India is in a favourable position to drive global climate ambition and share best practices, especially with other like-minded emerging economies and Global South nations. For instance, adopting an effective ETS will accelerate progress toward India’s 2070 net-zero target and set the stage for India to announce a robust benchmarking goal for 2035 this year under the Paris Agreement process. These actions could propel India forward on its stated interest to host COP33, the annual global climate gathering, in 2028. India’s upcoming CCTS is an opportunity to set a global standard for carbon pricing and climate action, to meet its climate targets, and also to lead by example.
This article is authored by Kyung-wha Kang, president and chief executive officer, Asia Society.
