Carbon credits represent the right to offset carbon dioxide emissions and can be traded within carbon markets. These credits are generated through initiatives that either reduce the amount of carbon dioxide released into the atmosphere or capture atmospheric carbon dioxide. The tradable nature of these credits facilitates the buying, selling, and transfer of emissions reductions, with a market price typically assigned to carbon emissions. Carbon markets are strategically designed to incentivize the reduction of greenhouse gas emissions, thereby promoting environmental sustainability, and supporting efforts toward a cleaner and more sustainable future.
Carbon credits offer significant benefits
- On the environment front, these credits allow companies to offset the greenhouse gases and by doing so provide incentives through various sustainable projects.
- On the business finance front, it leads to a positive impact on the investors regarding the commitment shown by the organisation towards combating climate change. Thereby improving the brand image of the organisation. For instance, Reliance Industries have emerged as a significant entity leading to maximum investor appreciation in the carbon reduction sector. It has made several investments in the renewable sector and is focusing on green hydrogen production.
- Credits earned can be traded in the carbon markets and in turn receive incentives and financing for sustainable projects.
- It brings the world a step closer to achieving sustainable development goals.
Indian carbon market and system overview
The amended Energy Conservation Act, 2022 empowers Indian Government to establish carbon market and to authorise designated agencies to issue carbon credit certificates (CCC). Each CCC will represent one tonne of CO2 equivalent (tCO2e) reduction or removal from atmosphere. In July 2024, the Indian government implemented detailed regulations for the upcoming compliance carbon market as part of the Carbon Credit Trading Scheme (CCTS), covering both direct (scope 1) and indirect (scope 2) emissions.
The compliance mechanism, which attempts to address emissions from its energy usage and industrial sectors, and the offset mechanism, which encourages voluntary actions by entities for GHG reductions, are the two main mechanisms of the Indian Carbon Market Framework.
The government notifies obligated entities with a mandatory emissions intensity target (baseline), defined as tons of CO2 equivalent per unit of output, for each year of the specified compliance period. Entities that overachieve their GHG emissions intensity target will be eligible for the issuance of CCCs, and entities that fall short of their target will be required to purchase and surrender an equivalent number of certificates to compensate for the shortfall. At the end of the compliance year, entities can bank any surplus certificates for future use or trade them with other participants.
The certificates will be exchanged via the national power exchanges. Entities with obligations must sign up on a national registry, while participation in trading is optional for non-obligated entities if they choose to engage. At the outset, the scheme will not permit over the counter (OTC) trading. The regulatory frameworks of CCTS are managed by the Ministry of Power.
Source: 6w research report, F- forecasted
Types of carbon credits in India
Indian carbon credits are generally categorized into two types: compliance carbon credits and voluntary carbon credits, both aimed at mitigating greenhouse gas emissions.
- Compliance carbon credit: These are mandatory for entities that fall under specific sectors, and to abide by the regulatory framework set by the government. It includes the Mandatory Carbon Credit Certificates (M-CCC) which are for the energy intensive industries. Companies such as NTPC, Tata Steel, Ultratech Cement are some of the organizations that adhere to compliance carbon market.
- Voluntary carbon credit (VCM): These are generated from projects that voluntarily reduce or avoid GHG emissions through their projects, thereby allowing non-obligated entities to participate in the carbon market. As of January 2022, there were 921 projects registered under the two leading carbon crediting programs, Verra and Gold Standard. By June 2023, this number had increased to 1,451 registered projects. These projects focus on renewable energy and sustainable agriculture practices, encouraging farmers to adopt sustainable practices while generating additional income through carbon markets.
Regulatory and government initiatives
The immediate requirement to reach ‘net zero’ and the sustainable development goals is to implement robust policies and strategies that effectively reduce greenhouse gas emissions, enhance renewable energy adoption, and promote sustainable practices across various sectors. India amended its Nationally Determined Contributions (NDC) goal under the Paris Climate Agreement, aiming to cut greenhouse gas emissions intensity by 45% by 2030, rather than the previously set 33–35%, from 2005 levels.
By using the carbon credit certificates to price greenhouse gas (GHG) emissions, the Indian Carbon Market (ICM) emerged as a national framework for decarbonizing the economy. The ICM seeks to raise funds for low-carbon projects and technologies.
The Carbon Credit Trading Scheme (CCTS) has been revamped in June 2023, to maximize efforts towards reducing emissions by allowing non-obligated entities to participate in carbon markets thereby expanding to individuals and small entities. The CCTS also established sector specific GHG intensity benchmarks.
Challenges and solutions of carbon credits
- The CCTS’ complete implementation is projected to commence in late 2025 or 2026, almost three years later than planned. The energy sector is the focus of the present CCTS, which excludes other significant emitters like industries and transportation. This limited scope delays the implantation of a comprehensive strategy aiming for carbon reduction and restricts the overall influence on national emissions. To enhance stakeholder participation in carbon markets, the CCTS has undergone ongoing improvements to enable individual involvement in the voluntary carbon market. A more effective solution would involve implementing targeted outreach programs and educational initiatives that inform individuals about the benefits and processes of participating in these markets, alongside creating accessible platforms for trading and investment in carbon credits.
- High compliance expenses related to monitoring, verification, and trade infrastructure are a problem for many industries, particularly micro, small, and medium-sized businesses (MSMEs). Participation in the carbon market may be discouraged by these prices, which can be prohibited. To alleviate the burden of high compliance costs on MSMEs, targeted financial support and simplified regulatory frameworks should be implemented. Additionally, fostering collaboration among industries can enhance access to shared monitoring and verification resources, reducing individual expenses.
- The current system lacks standardised protocols, leading to inconsistencies in credit quality and undermining investor confidence. High verification costs can also be prohibitive for small-scale projects, limiting their ability to participate in the market. To tackle this challenge, ICM and CCTS frameworks along with other systems have been developed to have standardised protocols for the stakeholders.
Outlook
India is well-positioned to become a global carbon credit supplier owing to its favourable geography. Carbon credit and carbon markets can foster economic growth by creating green jobs in the renewable energy, sustainable agriculture, and forest conservation space. By including agriculture, forestry, waste management, and transportation, India with the help of CCTS is tapping into a broader range of projects that contribute to emission reductions. This diversification can enhance the overall effectiveness of the carbon market. There have been several reforms in the CCTS such as including participation of individuals in carbon market trading. These initiatives not only position India as a leader in the global carbon offset market but also pave the way for sustainable development, ensuring a greener future while driving economic growth and resilience.
