A $1Trn Carbon Credit Bazaar Will Emerge By 2030

The carbon market is one of the essential climate-mitigation policy tools used by nations in their emission-reduction strategies. India also opted to develop its carbon credit trading market to fulfil its nationally determined contributions (NDCs) by 2030 when it notified the Carbon Credit Trading Scheme in June 2023 under the Energy Conservation Amendment Act, 2022.

India has a precedent of using market-based mechanisms to fight climate change and reduce greenhouse gas emissions through the Perform, Achieve and Trade (PAT) scheme. The scheme was launched in 2012 and was primarily aimed at reducing energy use in large industries, called ‘designated consumers’.

Using Existing Tools

Building upon the experiences of the PAT scheme, India’s Carbon Credit Trading Scheme (CCTS) aims to reduce greenhouse gas (GHG) emissions by quantifying and pricing GHGs through carbon credit certificates. The PAT scheme identified 1,333 designated consumers across 13 sectors that were given energy conservation targets.

The CCTS defines two tools: the compliance mechanism and the offset mechanism. Under the compliance mechanism, obligated entities must comply with notified GHG emission norms. Under the offset mechanism, non-obligated entities can register their emission-reduction targets for issuance of carbon credit certificates.

India intends to operationalise the trading of carbon credit certificates of mandatory sectors by October 2026 and of voluntary sectors by April 2026.

Markets Law & Policy

The Energy Conservation Act, 2021 and the Environment Protection Act, 1986 confer powers upon the central government to establish a markets-based mechanism and specify standards for trading carbon credits. The Energy Conservation Amendment Act, 2022, provided the legal and regulatory basis for establishing a carbon market in India.

The Act empowered the central government to specify a carbon trading scheme and issue carbon credit certificates (CCCs). On the other hand, the Energy Conservation Act, 1986 empowers the government to specify standards of emission or discharge of pollutants for obligated entities.

First Impressions

The government notified CCTS in June 2023. According to media reports, the complete operations are expected to start late 2025 or 2026. Industry sentiment can be gauged once India’s carbon market becomes operational.

However, the notification of CCTS has generated mixed responses from industry and analysts. Experts argue the potential of greenwashing and highlight the risk of allowing high-emitting industries to buy carbon credits to offset their emissions.

There are also concerns about financial benefits reaching actual emission reducers. Most emission reducers in the developing world are in poor and vulnerable communities. But a chain of mediators, comprising experts and consultants, between credit buyers and emission reducers take almost all the financial benefits.

But India’s booming climate-tech ecosystem seems excited and is well poised to gain from the establishment of a global carbon market. The proceeds from selling carbon credits gives an opportunity to climate-tech start-ups to have an alternative revenue stream.

Chance at Global Leadership

The global momentum toward carbon pricing and emissions trading is increasing steadily, with 75 carbon pricing mechanisms in operation. This reflects a net gain of two carbon pricing instruments over the past year, covering roughly 24% of global emissions.

Middle-income nations such as Brazil, India and Turkiye are making significant strides in implementing carbon-pricing mechanisms. India is uniquely positioned to play a transformative role in the global carbon market with rising GDP, increasing incomes and rapid strides in renewable energy projects. The country is not achieving domestic carbon-reduction targets but also has the potential to emerge as a major supplier of carbon credits to the world.

Finding Framework

For India to establish itself as a global leader in carbon markets, a streamlined regulatory framework is essential. At present, the regulatory landscape for carbon credits in India is fragmented, with different agencies managing various aspects of carbon credit generation and trading.

This fragmented approach can lead to discrepancies in understanding and enforcement, causing uncertainty among investors. To address this challenge, the creation of a unified regulatory authority is imperative.

Such an agency would be responsible for formulating clear, comprehensive regulations governing carbon credit generation, verification, trading and exports. By consolidating governance under a single entity, the country can eliminate ambiguities, build investor confidence and create a cohesive strategy for the carbon credit market.

Standards Challenge

A major challenge in India’s carbon market lies in the lack of standardised protocols for carbon credit verification. Inconsistent verification processes lead to varying credit quality, undermining the credibility of carbon credits in international markets. Establishing uniform verification standards is crucial to ensuring that Indian carbon credits meet global benchmarks.

The unified regulatory authority should develop these protocols, taking into account their applicability across sectors. Benchmarking these standards against international best practices will enhance uniformity and global acceptability. This will also foster transparency and trust among investors and stakeholders, driving demand for Indian carbon credits in international markets.

Furthermore, technology can streamline the verification process, reducing costs and improving the scalability of carbon credit projects. By adopting innovative technological solutions, India can build a resilient and future-ready carbon market.

Global Collaboration

Collaboration with other countries and international organisations involved in carbon markets can open up new opportunities for India.

Carbon credits have become a key component in achieving global net-zero targets, with a rapidly-growing market valued at $103.8bn in 2023. Carbon credits are poised to play a crucial role in the transition to a sustainable, low-carbon future.