Assessing India’s carbon credit trading scheme targets

The Indian government recently announced greenhouse gas emissions intensity of production targets for entities (such as a steel plant) operating within eight of the nine heavy industrial sectors covered in India’s Carbon Credit Trading Scheme’s (CCTS) compliance mechanism. The eight sectors are aluminium, cement, paper and pulp, chlor-alkali, iron and steel, textile, petrochemicals and petro refineries. So, is there a way to understand whether these are ambitious targets or not?

The first question one needs to ask is this: should we measure ambition at the entity level, or at the sector level or the level of the economy? Our analysis shows that the ambition of India’s carbon market targets should be assessed at the aggregate economy-wide level, and not at the level of individual entities or sectors.

An economy-wide lens is more important

We can look at the Perform, Achieve and Trade (PAT) scheme, which is India’s flagship energy efficiency programme for large industries. Under PAT, energy-intensive industries are given targets to reduce their energy use; those which exceed their targets can trade the excess savings with others. We analysed performance data from four sectors under the PAT Cycle I (2012–14) and found a mixed but interesting picture. In some entities, the energy used per unit of production (energy intensity) increased but decreased in others. At the sector level, energy intensity rose in two sectors (paper and chlor alkali) and fell in the other two (aluminium and cement). However, when we combined emissions, output and price data from all four sectors and adjusted for inflation, less energy was used, overall, to produce the same amount of economic output.

This shows that even if energy efficiency rises or falls in some entities or sectors, India’s overall energy use can still become more efficient. We found similar behaviour across other PAT cycles and sectors. These observations give us a useful insight — India’s PAT scheme was able to effectively use market mechanisms to achieve energy intensity reduction at an aggregate level. The decrease in overall energy intensity, even as it rose for some entities, shows that the market mechanism worked; those companies were able to buy energy efficiency certificates instead of undertaking costly in-house changes.

But, this in itself does not tell us if the aggregate energy intensity reduction was aggressive or business-as-usual. This does, however, tell us that one should only analyse the aggregate target to infer whether it was aggressive or not. That is, for an externality-driven market, achieving reduction at an aggregate level is far more important than achieving the same at the entity level for ‘all’ entities. An emissions trading scheme does not bother about individual entities or sectors. It bothers about the economy-level aggregate effect, which is where, ideally, the ambition should be evaluated.

But are not entity or sector-level targets important to reduce emissions as well? A research paper by the Council on Energy, Environment and Water (CEEW) shows that entity or sector-level targets only determine financial transfers across entities and sectors, and not the overall emission intensity decline.

Comparing the new CCTS targets with historical sector-level performance under the PAT scheme also is not the most meaningful approach to assess ambition. Just because the reduction in emissions in the past has been modest at the industry level, it cannot be the case for the future. Our mitigation actions have to progressively become more ambitious than in the past. Therefore, only a comparison with a future trajectory aligned with a pathway towards India’s stated Nationally Determined Contributions (NDC) and a 2070 net-zero future is relevant. While the industry sector-specific CCTS targets cannot be directly compared with the economy-wide NDC target, economy-wide modelling assessments can give useful information in this regard.

Emissions intensity to decline

According to our recent modelling of a 2030 NDC-aligned emissions reduction scenario for India, the carbon dioxide emissions intensity of India’s energy sector (per unit of GDP) is expected to decline at an average annual rate of 3.44% between 2025 and 2030. In comparison, the emissions intensity of value added (EIVA) in India’s manufacturing sector is projected to decline by at least 2.53% annually over the same period. This suggests that in the near-term, industry may decarbonise at a slower pace than other sectors — particularly the power sector, which has more low-cost mitigation opportunities.

Against this backdrop, the combined average annual EIVA reduction for the eight sectors based on current CCTS targets — indicative of sector-specific commodity price data (a rough proxy for value added), and projected production growth rates — is estimated at 1.68% between 2023-24 and 2026-27. Early signs suggest that the industrial targets under CCTS may not be ambitious enough.

While this is not directly comparable since entities covered under the carbon trading scheme represent only a portion of India’s overall manufacturing base, it is still the most relevant benchmark available until detailed modelling is done for all sectors. Ultimately, it is the aggregate decline that will determine whether India’s effort is truly ambitious.

Vaibhav Chaturvedi is Senior Fellow at the Council on Energy, Environment and Water (CEEW). Darshna Singh is Research Analyst at the Council on Energy, Environment and Water (CEEW). The views expressed are personal