By Somit Dasgupta
The much-awaited targets for the reduction in emissions intensity under the carbon credit trading scheme (CCTS) was announced in April 2025. Readers would be aware that the detailed procedure for the scheme was made public in July 2024, and this scheme will eventually take over the ongoing Perform, Achieve and Trade (PAT) scheme. Of course, the parameter that would be monitored will change from the product’s energy consumed per unit to greenhouse gas (GHG) emitted per unit. The latest notification has given the base figure for GHG emissions (2023-24) and the corresponding targets for 2025-26 and 2026-27.
A glance at the notification reveals that it is extremely small in scope and covers less than 10% of India’s GHG emissions. Only four sectors are being covered initially—cement, aluminium, pulp & paper, and chlor-alkali. In all, 282 units have been identified and given their target emissions intensity. The notification is actually a draft and comments were sought by around mid-May. Ideally, the notification should have been supplemented with a technical note, indicating how the targets have been arrived at, which apparently has been done after multiple rounds of consultations. It is, however, seen that there are large variations in the targets within each sector and they also vary across sectors. Moreover, the targets for the first year are more modest compared to the next year. Had a technical note been released along with the notification, it would have lent transparency to the entire process.
The existing PAT scheme covers 13 sectors which account for about 60% of India’s emissions. It is no secret that the target reductions under PAT have been extremely modest. This has led to depressed prices of the energy saving certificates (EScerts). This is bound to happen if the supply of EScerts far outweighs the demand. Reasons for low demand are twofold. One, as already mentioned, the targets were modest and hence achieved, with EScerts being issued. Second, there is a lack of regulatory supervision when it comes to buying EScerts, with no penalties being levied on the defaulters. The maladies of the PAT scheme will definitely creep into the CCTS if the targets are again kept modest.
Arriving at a low carbon price will defeat the purpose of the scheme. A think-tank in Delhi Centre for Science and Environment (CSE) has estimated that the targets under CCTS are a little more ambitious vis-à-vis PAT. It may, however, be added that the parameters under the two schemes are different though there is interdependence. After all, energy consumption is directly related to GHG emissions. Whether the targets set are good enough to arrive at a realistic carbon price, only time will tell. The CCTS has kept a provision of penalties (called compensation), which would be double the carbon price. This ensures that it would make economic sense to buy the certificates rather than pay a penalty.
The real test is whether CCTS will function in respect of government-owned, loss-making units whose prices are determined on a cost-plus basis. The reference is, of course, to the power sector, though as of now, this sector is outside the purview of CCTS. The power sector, incidentally, accounts for almost 40% of India’s GHG emissions and hence the efficacy of CCTS here is vital. Once the power sector is included within the purview of CCTS, there would be two regulatory bodies governing the sector, namely the Bureau of Energy Efficiency (BEE) and the electricity regulatory commissions (ERCs).
As is well known, the regulatory commissions determine the retail tariff for the distribution companies (discoms) as well as the generation tariff for those generators who have not come through the competitive bidding route. To do that, the ERCs lay down the trajectory transmission and distribution (T&D) losses for discoms and the generators, with a certain heat rate assumed. Based on this, the tariffs are determined. Under the CCTS, the BEE too will make certain assumptions about the T&D losses and the heat rate to determine the targets for emissions intensity. It is obvious that any divergence in these assumptions will bring the BEE and the ERCs in conflict. Moreover, when a cost-plus entity (like a generation plant or discom) has to incur expenditure to buy certificates under CCTS (if it does not meet its emission target), should this be treated as legitimate expenditure and recovered through tariff? The same question would be valid in case a penalty is levied. Either way, it would be unfair as far as the retail consumers are concerned and the fact is that a majority of the discoms have no surplus within themselves to pay for this. How this problem will play out will only be known after the power sector is brought into the fold of CCTS.
Globally, till the mid of last year, about 89 countries had introduced some form of a carbon market, covering about 25% of the world’s emissions. Many countries have introduced it in the power sector as well. Some notable examples are the European Union, the UK, Canada, New Zealand, and the Republic of Korea. This list is, of course, not exhaustive. India’s attempt in having a CCTS has only just begun and it may take a decade before a mature scheme takes shape and determines a realistic carbon price. The fact that India’s biggest emitter, the power sector, is a regulated cost-plus entity may make the process more cumbersome.
Co-authored with Diya Dasgupta, fellow, ICRIER
The writer is senior visiting fellow, ICRIER.
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