CSE recommends pathways for effective implementation of upcoming Indian Carbon Market

Finance minister Nirmala Sitharaman had announced (Budget 2024-25) that “appropriate regulations for transition of hard-to-abate sectors from Perform, Achieve and Trade (PAT) mode to Indian Carbon Market (ICM) mode will be put in place” 

Opportune time to learn from other emission trading schemes worldwide, and apply those learnings as India gets set to create its own carbon market. CSE brings out analytical report assessing different emission trading schemes, and puts forth a roadmap for India for making the scheme effective  

Access the proceedings of the CSE webinar and its new report here: https://www.cseindia.org/shaping-india-s-carbon-market-perspectives-from-india-and-the-world-12309 

New Delhi, August 13, 2024: As India prepares to roll out its own national compliance-based carbon market, Centre for Science and Environment (CSE) has prepared a clear roadmap to help it along. India’s finance minister Nirmala Sitharaman had announced in the Budget of 2024-25 that a plan and appropriate regulations will be put in place for the transition of hard-to-abate sectors from a Perform, Achieve and Trade (PAT) mode to an Indian Carbon Market (ICM) mode. 

CSE released its proposed roadmap – as part of its new report titled The Indian Carbon Market: Pathways towards an effective mechanism -- here today at a global webinar. 

India has pledged to meet its Nationally Determined Contribution (NDC) targets by 2030, and aims for net-zero emissions by 2070, in line with the United Nations Framework Convention on Climate Change (UNFCCC) guidelines. To meet these ambitious goals, the country has set out on a pathway to develop and launch its own national compliance-based carbon market. 

Formation of the Indian Carbon Market (ICM) had been announced under the Energy Conservation (Amendment) Act of 2022. More recently, The Carbon Credit and Trading Scheme (CCTS) was notified in July 2023, with an aim to reduce GHG emissions. 

Speaking in the webinar, CSE director general Sunita Narain said: “The upcoming Indian Carbon Market scheme should kick start with a large coverage of the country's emissions. A single nation-wide carbon market scheme for carbon-intensive sectors should be brought in to ensure effective implementation and avoid any complexity. For this scheme to be effective, it also needs to ensure a high carbon price, data integrity and transparency.” 

What does the CSE report say

CSE’s new report aims to collate a clear set of learnings from past and present compliance-based emission trading schemes worldwide, including those operating in India. This learning would help facilitate effective operationalisation of carbon markets in India; it would also ensure they serve their intended purpose of reducing emissions. 

The report has analysed four Emission Trading Schemes (ETS) in use worldwide: the European Union Emission Trading System, the Korean ETS, the Chinese ETS, and the Surat ETS. India's Perform, Achieve, and Trade (PAT) scheme, which specified energy reduction targets over three-year cycles, has also been assessed as it sets the base for the upcoming Indian Carbon Market scheme. 

Says Nivit Yadav, programme director, industrial pollution, CSE: “The PAT scheme was initiated with the good intention of increasing energy efficiency in industrial sectors, but faced several shortcomings in implementation. Our analysis shows it has achieved marginal emissions reduction, which is not enough as India attempts to travel towards decarbonisation, especially in the hard-to-abate industries.” 

In its PAT assessment, CSE has analysed emissions reductions in the power, steel and cement sectors. Says Parth Kumar, programme manager, industrial pollution, CSE: “We have found that in 2016, the Indian steel sector emissions stood at 135 million tonne (MT) of CO₂ while it managed to reduce an average of only 2.5 MT of CO₂ emissions per year between 2012 and 2020 (as per BEE data) -- the sector reduced a mere 1.85 per cent emissions in a year. Similarly, the cement sector’s reduction was less than 1 per cent, while the power sector managed to cut down 2.3 per cent of its overall CO₂ emissions of 2016 over a span of 6 years. Our analysis has highlighted the challenges in the PAT scheme, which include excess availability of ESCerts, lenient targets and delayed compliance. The newly proposed Carbon Credit and Trading Scheme (CCTS) which aims to build on PAT's framework, needs to address these shortcomings.” 

What can be the challenges for the proposed new scheme?

• Low price of carbon credit and low market liquidity: Several global carbon markets have initially faced low carbon prices and market liquidity – India’s PAT scheme had also faced the challenge of low pricing and excess availability of certificates. Says Yadav: “Therefore, the upcoming CCTS scheme in India needs to carefully look into generating market activity throughout the year at a good carbon price, which then eventually pushes emitters to accelerate decarbonisation pathways instead of buying credits to fulfill compliance.”
• Unambitious target setting: So far, the PAT scheme has faced criticism for its goal-setting, which was perceived as lacking ambition: this has led to overachievement of targets and an oversupply of ESCerts, leading to a poor market price. Kumar points out: “As CCTS is modeled after the PAT scheme, it must avoid past mistakes by setting ambitious targets for individual entities and sectors, considering best practices and going beyond existing policy and company targets to ensure the market drives genuine progress rather than mere compliance.”
• Dependence on the PAT scheme: “This is one of the biggest challenges, as CCTS is going to transition from PAT. This dependence might limit its potential and its selection of obligated entities, which can make the scheme less effective and delay the decarbonisation efforts,” says Kumar. Running both schemes parallelly can create confusion within the sector and companies. Currently, there are plans for entities completing their PAT cycle to receive CCTS targets, which might not be the best way to shortlist entities for the scheme. This does not give a clear signal to achieve maximum emission reduction from CCTS.
• No revenue generation: Currently, the scheme does not have a clause for revenue generation. ETS schemes around the world have a way of generating revenue through auctioning allowances which are then allotted to modernisation, supporting of new entrants and small business, affected communities, and for financing decarbonisation. Yadav says: “The Indian Carbon Market model does not currently propose any form of auctioning of allowances, therefore we do not foresee revenue generation through it.”
• Data quality: Data quality issues have been reported in the Chinese and Surat ETS, especially data frauds in China ETS. The PAT scheme suffers from data transparency concerns. The smaller industries in CCTS will have a hard time producing data for their raw material and fuels, which are usually sourced from informal markets.
• Absence of a market stability mechanism: Market stability mechanisms play a crucial role in ensuring stability through holding and releasing credits into the market in case of unexpected external events. Currently, the Indian Carbon Market has not come out with any detailed proposed for any such mechanism.
• Non-imposition of penalties: Penalties under the PAT scheme are hardly imposed. Even if penalties are strict, the whole purpose is lost if regulators won’t levy them on entities. This is what happened with the power sector defaulters under the PAT scheme. If a similar practice continues under the CCTS, entities would not care to buy credits even if they are supposed to.
• Challenge of offset credits and other credit schemes: The proposed CCTS will include offset market credits, but experiences from markets like the EU-ETS show challenges with offset surges and integrity issues. India's various market-based mechanisms aim to enhance sustainability and efficiency, but oversupply in older schemes like PAT and potential double counting among different upcoming credit systems pose risks like financial additionality. The integrity of credits and interaction of these schemes with the upcoming CCTS, requires strict regulatory frameworks and check mechanisms.
• The MSME challenge: CCTS aims to include large industrial sectors, but many rely on MSMEs, which may also become a part of the market, sooner or later, directly or indirectly. Challenges include obtaining accurate emissions data from MSMEs, often lacking due to informal fuel sources, and ensuring fair competition between MSMEs and larger companies. MSMEs, often using inefficient technologies and fuels and lack of financing sources, hindering their ability to meet targets and may struggle to afford carbon credits,.
• Exclusion of thermal power plants: Leaving the power sector behind in the carbon market scheme will miss out on a large chunk of the country’s emissions – the electricity sector contributes close to 40 per cent of India’s GHG emissions. There are several power plants with similar conditionalities but disparities in efficiency and emissions: CCTS can play a crucial role in bridging this gap. 

What does CSE recommend?

• Reduce complexity and have a single nation-wide scheme for carbon-intensive sectors: It is essential to free the carbon-intensive sectors from the PAT scheme at the earliest, so that CCTS is the only nation-wide scheme for these sectors, leaving no room for mismanagement and confusion. “The selection of obligated entities from high-emitting industrial sectors should not be based on the PAT cycle: this can reduce the effectiveness of CCTS in its initial phase. Having a single nation-wide scheme for carbon-intensive sectors will enable the biggest polluters and a large number of entities to be given CCTS targets from the very beginning. This will bring a collective zeal and coherence in the sector, and the feeling that all are moving towards a single goal,” notes Kumar.
• Ensure a stable, high carbon price: To do this, it is essential for the upcoming carbon market to set ambitious targets, establish market stability mechanisms, set up a high floor price and implement sizable penalties effectively. Voluntary credits should be limited to less than 5 per cent and should be of high integrity.
• Ensure data quality and improved transparency: To avoid data fraud as seen in the Chinese ETS, India must consider introducing heavy penalties and rigorous monitoring cycles for the obligated entities -- China has done it in its 2024 regulation. It is also essential to build the capacity of carbon verifiers, involve multiple agencies in this job, and increase their numbers to ensure smooth data collection and MRV. It is essential to share reporting data in the public domain, which would then shield the data from manipulation.
• Introduce revenue generation to support MSMEs: The current Indian carbon market model lacks revenue generation mechanisms -- it is crucial to devise methods to generate revenue from the scheme, which could fund MSMEs. A system (technological and financial) needs to be developed to support the MSME sector under CCTS to create a level playing field for them.
• Consider inclusion of thermal power sector: To address the significant contribution of the power sector to greenhouse gas emissions and to ensure effective progress towards India’s NDC targets, it is imperative to include the power sector in the carbon market scheme. The sector’s continuation under the PAT scheme might not be enough for the future needs of decarbonisation. 

“Power plants have shown subpar performance when it comes to meeting deadlines, targets of current schemes in the sector like meeting SOx emission norms, biomass co-firing and others. Inclusion of thermal power plants in the CCTS will give an added push for power plants to implement emission reduction policies like biomass co-firing and other upcoming policies. ” adds Yadav. 

For more details, interviews etc, please contact: Souparno Banerjee, souparno@cseindia.org, 9910864339