The Desi Carbon Market: Where India Stands on Carbon Credits

The global carbon credit market has seen substantial growth in recent years, driven by increasing regulatory frameworks and a global shift towards sustainability. It was valued at $103.8bn in 2023 and is projected to grow at a compound annual growth rate of 14.8% from 2024 to 2032.

The market has become essential for addressing environmental challenges. With corporations committing to sustainability targets, the demand for carbon credits is fuelled by businesses seeking to offset greenhouse gas emissions, leading to the development of advanced trading platforms and diverse carbon offset projects.

Major Carbon Markets

The European Union Emission Trading System (EU UTS) remains a cornerstone of Europe’s climate policy, driving demand for carbon credits through stringent regulations. It is one of the largest and most established carbon markets globally.

Launched in 2005, it covers approximately 40% of the EU’s greenhouse gas emissions. The system operates on a cap-and-trade basis, where a total cap on emissions is sent, and companies can trade allowances as needed. Recent reforms aim to tighten the cap and reduce emissions more rapidly, with a goal of 55% reduction by 2030 compared to 1990 levels.

The North American carbon credit market size was valued at $20bn in 2024. Various carbon markets exist in North America, with California’s cap-and-trade programme being the most prominent. The programme includes stringent emissions reduction targets and allows for the trading of carbon allowances.

The Regional Greenhouse Gas Initiative (RGGI), which includes several northeastern US states is another key player, focusing on reducing emissions from the power sector through a cooperative cap-and-trade approach.

In Asia-Pacific

Japan has implemented its carbon market through the Tokyo Cap-and-Trade programme and the Saitama Cap-and-Trade programme. The first mandatory carbon markets in Asia, these target facilities, aiming to reduce emissions from industrial and commercial sectors.

Japan’s J-Credit Scheme allows companies to earn credits by implementing emission reduction and removal projects, which can then be traded. Japan is also actively involved in international carbon offset mechanisms, supporting its goal to achieve carbon neutrality by 2050.

South Korea operates the Korean Emissions Trading Scheme (K-ETS), launched in 2015. It is the first national cap-and-trade programme in East Asia and the second-largest carbon market globally after the EU ETS.

The K-ETS covers around 70% of the country’s total greenhouse gas emissions, with stringent caps and robust compliance mechanisms. The programme is a cornerstone of South Korea’s strategy to meet its nationally determined contributions under the Paris Agreement, aiming for a 40% reduction in emissions by 2030 compared to 2018 levels. The market allows trading allowances and offsets to help regulated entities comply with emission limits.

G20 Leadership

The group of 20 (G20) is an international economic cooperation forum with its member nations collectively representing 5% of the global gross domestic product (GDP), over 75% of global trade, and about two-thirds of the world’s population. G20 members account for around 80% of global greenhouse gas emissions.

In such a situation, the G20 becomes a vital forum for harmonising carbon credit mechanisms. Serious efforts have been made by G20 member states in recent years to transition towards a net-zero economy. The G20 Delhi Declaration, 2023 lays emphasis on the need to reduce greenhouse gas emissions by 43% by 2030 (relative to 2019 levels).

Paris Agreement as Guide

Article 6 of the Paris Agreement, ratified in 2015 by 195 nations, talks of voluntary contributions among countries to achieve their nationally determined contributions. It established market and non-market-based mechanisms which the parties can follow while trading in carbon credits.

Article 6.2 of the agreement establishes a process to allow parties to participate in emission trading voluntarily, whereas Article 6.4 establishes a new global baseline and credit mechanism by replacing the clean development mechanism (CDM) as defined under the Kyoto Protocol. Non-market approaches are discussed under Article 6.8 which introduces cooperation through finance, technology transfer and capacity building, where no trading of emission reductions is involved.

A rulebook for Article 6 was completed at COP26 in Glasgow. However, the decision regarding the definition, process and procedure was not finalised. At COP27, incremental progress was made on operationalising technical elements of the Article 6 rulebook, including the establishment of reporting rules, registries and governing bodies. At COP28 in Dubai, countries failed to adopt decisions concerning Articles 6.2 and 6.4 due to a lack of consensus on key issues.

Future Projections

Looking ahead, the carbon credit market is expected to expand significantly, potentially reaching $1trn by 2030. Enhanced government regulations are expected to play a pivotal role. Governments are adopting stricter environmental policies and setting ambitious net-zero emissions targets. As countries implement carbon pricing mechanisms like carbon taxes and emission trading systems (ETS), companies will be compelled to offset their emissions, thus increasing demand for carbon credits.

Kenya’s Cookstove Initiative

In rural Kenya, a cookstove project is transforming communities through carbon credits. Traditional cooking methods, which rely on open fires and inefficient stoves, contribute to harmful emissions and indoor air pollution. This initiative replaces these stoves with cleaner, more efficient cookstoves, significantly reducing carbon emissions.

As the project reduces emissions, it generates carbon credits, which are sold to fund the effort. The revenue from these credits ensures the initiative’s sustainability. The model not only helps the environment but also improves local health by reducing respiratory diseases and providing cleaner cooking options to families.

Amazon Rainforest

In Brazil, conservation programmes in the Amazon rainforest show the impact of carbon credits in protecting one of the world’s most vital ecosystems. Deforestation in the Amazon has long been a major contributor to global carbon emissions. To combat this, Brazil has implemented forest conservation initiatives that preserve large swathes of the rainforest.

These programmes generate carbon credits by quantifying the amount of carbon emissions avoided through conservation efforts. The credits are then sold to companies aiming to offset their emissions.