As Carbon Trading Takes Off, Focus On Building A Robust Market

Who would have imagined carbon to become a priced commodity that can be traded one day? The Kyoto Protocol of 1997 envisaged exactly that when leaders from 38 industrialised nations came together and agreed to follow a system of carbon trading, pledging to bring down their emissions by an average of 5 per cent below the 1990 levels. The seminal environmental treaty put a cap on emissions and decided that the countries that wanted to emit more needed to buy carbon credits from countries that emitted less. That is how the carbon market came into being, a place where carbon credits began to be purchased and sold.

What started over two decades ago is picking up pace now as carbon markets—compliance and voluntary—across the world are bustling with energy today.

India is not too far behind either, armed with its own buoyant carbon market with several carbon traders, companies eagerly engaging in buying and selling credits, emission trading schemes by different states and other activities in the pipeline.

"The recent interest in the carbon market is fuelled by the private sector acknowledging that net zero transition is necessary as is the need for financing the same. Companies have realised that efficient processes are good economics and therefore there is a need for investing in this," says Prarthana Borah, Director, India, Carbon Disclosure Project. 

The Making Of A Market

Between the Kyoto Protocol and the milestone Paris Agreement in 2015, there was a long silence. However, things seem to have changed after that.

“From 2019 onwards, there has been a lot of excitement, majorly driven by the private sector by science-based targets,” says Jasmeet Singh Bajaj, director, India, FairClimateFund, which works in the field of climate strategies, carbon footprints and CO2 reduction.

Case in point: EKI Energy Services. The Indore-based private company, which has been in the business of carbon trading for more than a decade, entered its best phase only in the last couple of years. The climate change advisory company made its BSE debut in 2021 and also achieved a $1 billion valuation earlier this year. 

Today, EKI is helping 2,500 customers walk towards their ESG goals through carbon offsetting, shift to renewable energy and carbon neutrality. This year, the company announced its commitment to become net-zero by 2030 and its target to mobilise up to 1 billion credits by 2027.

“As industry challenges ease, the sector will witness massive growth and we are all geared up to make the most of its potential. We are a one-stop solution for carbon management, starting from registration of projects to its verification and global accreditations,” says Manish Dabkara, CMD and CEO of EKI Energy Services, adding that the company had witnessed one of the most successful IPOs of 2021 and that it recently migrated to the Main Board of BSE.

EKI Energy Services has major organisations like the The World Bank, International Monetary Fund,  World Bank, Airports Authority of India, Oil and Natural Gas Corporation, NTPC, Indian Railways, Indian Oil Corporation and ReNew Power in its client list.

While Article 6 of the Paris Climate Agreement, adopted by 197 countries, shaped up the carbon market enunciated in Clean Development Mechanism of the Kyoto Protocol, a decisive push has come from the UN Climate Change Conference (COP26) held in Glasgow last year. 

“PM Modi committing to net-zero targets by 2070 indicates that India will have to start capping emissions. Companies, already under investor and supply chain pressure for sustainability auditing, now need to be prepared for local regulations that attempt to curb carbon emissions,” points out Damandeep Singh Ahluwalia, Climate Change and Sustainability Services Associate Partner, EY India.

Heading in that direction, the Bureau of Energy Efficiency, under the Ministry of Power, proposed a draft blueprint for a National Carbon Market last year. Other than that, the pilot emissions trading scheme launched in Ahmedabad, Surat and Ludhiana, major industrial hubs, to tackle particulate matter pollution have also been positive steps. The one conducted in Surat in September 2019 had participating industries witness a reduction in their particulate matter pollution by 24 per cent, an initial analysis found.

A Buzzing Market

According to various reports, the carbon trading market is growing exponentially. The voluntary carbon market, driven by industries to achieve voluntary climate goals, has risen in prominence. According to the Ecosystem Marketplace, a US-based not-for-profit, the total value of transactions in the voluntary carbon market (VCM) hit $1 billion in 2021 for the first time in its history.

On the voluntary international market, Indian carbon credits trade anywhere between $0.5 and $15 per tonne of CO2. Under the Perform, Trade and Achieve (PAT) scheme, the domestic scheme implemented by the Bureau of Energy Efficiency as part of the National Mission for Enhanced Energy Efficiency, energy saving certificates and renewable energy certificates are traded.

Ahluwalia says that while the demand for carbon credits exists mostly in the global market at present, it will grow when there are avenues in the domestic market. 

“Earlier, under the Kyoto protocol, all supply was for the global market. Now, the EU and other buyers are asking developing economies to develop domestic carbon markets from which international trade will grow. They are also putting pressure on the markets,” he says, adding that emerging countries will have to show local action and the surplus can be sold to meet global requirements. 

To give an insight into the scope of the market, Dabkara cites a study published by Trove Research and University College London which said that carbon credit prices are expected to rise exponentially as demand for carbon credits is expected to increase fivefold or even tenfold over the next decade with companies seeking to deliver on their net-zero emissions pledges. That would also help incentivise investments in climate action by encouraging landowners to shift some of their income away from agriculture and towards preserving forests and planting trees, he says.

This kind of commodification of carbon will not only be an effective way to prevent pollution and the release of greenhouse gases into the atmosphere but also to provide an opportunity to generate funds, offering countries and companies an economic incentive to build a cleaner world.