Policy Update
Mukti Bari
Background: What is the CCTS?
The Carbon Credits Trading Scheme (CCTS) 2023 marks India’s stride toward reducing greenhouse gas emissions in alignment with its commitments under the Paris Agreement. Created by the Bureau of Energy Efficiency, an entity under the Ministry of Power, the scheme will regulate carbon emissions by introducing a market-based mechanism where companies can trade carbon credits.
Carbon credits represent a permit that assigns a monetary value to one ton of carbon dioxide emissions. Hence, the primary objective of CCTS (2023) is to incentivize businesses to adopt greener technologies by monetizing their efforts to reduce emissions. The scheme targets industries with significant carbon footprints, including power, steel, and cement sectors. Implementation began in 2023, with a phased approach to reaching full operation by 2025-26. Infact, India took a bold decision this year by allowing even non-obligated entities (voluntary players not a part of the aforementioned industries) to participate in carbon trading.
Functioning: What are the features of the CCTS?
Indian enterprises have prior experience implementing voluntary offset initiatives like CDM (Clean Development Mechanism), as well as compliance markets. The number of CDM projects registered by Indian agencies is the second highest worldwide. From 2015 to June 2024, Indian units have been able to conserve about 106 million tonnes of CO2 emissions thanks to the PAT plan. Although entities have been forced to perform mandatory steps by compliance-based instruments, voluntary actors have been rewarded for their additional efforts. Their savings were rewarded in the form of credits or certificates. As a result, the nation has always had the familiarity and capacity to sustain a comprehensive domestic carbon market structure.
CCTS operates on the cap-and-trade principle, where the government sets a cap on the total emissions allowed within the country. Companies are allocated carbon credits based on this cap, with each credit representing one ton of CO2 emissions. Businesses that reduce their emissions can sell their excess credits to other companies that require them, thus creating a financial incentive for reducing emissions.
However, since a unified carbon market and Emissions Trading System (ETS) is a relatively new concept for India, we must understand the intricacies of the CCTS in order to critically dissect it. The following are the salient features of the CCTS 2023 (MoP):
- The Indian Carbon Market (ICM) is set to be a key driver in India’s transition to a low-carbon economy. By assigning a price to greenhouse gas (GHG) emissions through the trading of Carbon Credit Certificates, the ICM will accelerate decarbonization efforts.
- The trading of carbon credits will occur on designated power exchanges regulated by the Central Electricity Regulatory Commission (CERC). CERC will manage and regulate trading activities, while the Grid Controller of India Limited (GCIL) will act as the registry, handling entity registrations and maintaining transaction records.
- A National Steering Committee will govern the carbon market, offering recommendations to the Bureau of Energy Efficiency (BEE) and setting rules and regulations. BEE will manage the scheme’s operations, including sector identification, setting emissions reduction targets, and issuing carbon credits.
- The Bureau of Energy Efficiency (BEE) will administer the ICM, defining GHG emissions targets for obligated entities. GCIL will manage the ICM Registry and oversee transactions, while CERC will regulate trading activities, ensuring transparency and preventing fraud.
- The government has introduced the Carbon Capture Utilization and Storage (CCUS) policy to reduce emissions across various industrial sectors, encouraging the adoption of CCUS technologies as part of climate mitigation efforts.
- The Carbon Credit Trading Scheme is central to India’s climate change strategy, promoting the adoption of CCUS, fostering low-carbon markets, and supporting industrial decarbonization. By leveraging carbon credit trading, India is positioning itself for a sustainable, net-zero future, with private entities playing a crucial role in these efforts.
Impact: What does the future look like with the CCTS?
As we can see in the graph, renewable energy has the largest growth in terms of electricity supply in India. Hence, it follows from this that India’s engagement in the carbon credit market has come at the right time. In order to expedite the decarbonization of the Indian economy, the ICM framework is probably going to guarantee long-term investments in GHG emissions reduction technologies, initiatives, and procedures.
Progressive Indian businesses that have already plotted their low-carbon growth paths will also receive incentives under the CCTS 2023. India’s goal of attaining net zero by 2070 and its updated Nationally Determined Contribution (NDC) by 2030 are aligned with the focus on cutting carbon emissions. The specific procedures will include the framework for tracking, reporting, and verifying greenhouse gas emissions as well as the requirements for issuing carbon credit certificates, which may include the validity, floor price, and forbearance price of the certificates.
Emerging Issues: What could go wrong?
Since the Scheme has not been fully deployed, we do not know how successful it has been so far. Hence, depending on the implementation of the scheme, the following issues may arise:
- There are a few lessons to be learnt from the PAT (Under Perform, Over Achieve Trade) Scheme. It has been in force for over a decade, and has faced severe compliance and target setting issues. There was only a feeble three per cent GHG emission reduction in the power sector, which according to analyses, was very lenient. There was increasing non-compliance and delayed compliance that was not addressed or penalized. Hence, CCTS needs ambitious targets and robust implementation to succeed.
- Uneven adoption and implementation across states could lead to inconsistent outcomes, weakening the scheme’s overall effectiveness. Hence, there needs to be clear and achievable goal setting for each state for the CCTS. There should be strict monitoring and evaluation, and strong implementation of penalties as well.
- Ensuring accurate and timely measurement and verification of emissions remains a significant hurdle, potentially undermining the scheme’s credibility. This is because if stakeholders (such as the community) feel that the credits generated are not genuinely reducing emissions, it could reduce people’s trust in the scheme. Voluntarily participating firms may back out, reducing market participation, and ultimately hinder the scheme’s effectiveness.
Way Forward: What can we expect?
The CCTS will hopefully chart a way forward for ensuring an economically just and equitable future, where the biggest polluters actually pay for the cost of their actions rather than those least responsible for it. Moving forward, the focus must remain on the quality of the carbon credits to ensure an effective transition into an Emissions Trading System:
- Credibility: Trustworthy carbon credits that are openly monitored, accompanied by the required paperwork and certified by respectable organizations. These would be third-party organizations that ensures that carbon credits produced by firms meet international standards for carbon offsetting. Ensuring that carbon credits are monitored would reduce the risk of fraudulent or low-quality credits entering the market, and retains the integrity of the CCTS.
- Durability: The carbon credit’s level of permanence. The carbon credit should have a lasting impact, which assures that the effect of the carbon credit is not reversed. For instance, the durability of a carbon credit generated by planting trees would depend on the long-term survival of those trees. This ensures that the environmental benefits are not short-lived, and the carbon credits actually serve their purpose of long term carbon reduction.
- Spillover Effects: Additional favorable social or environmental outcomes attributable to the carbon credit. These could include social benefits, like green job creation in renewable energy projects, or other environmental benefits outside of reduced carbon emissions, such as improved biodiversity from reforestation efforts.
As the roll out for the CCTS nears completion, we must keep an eye out for the implications of it, and hope that it finally drives us toward a greener future.
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References
- Government of India, The Gazette of India (2023). Retrieved from https://beeindia.gov.in/en/programmes/carbon-market.
- Government of India. (n.d.). Carbon market. Bureau of Energy Efficiency. https://beeindia.gov.in/en/programmes/carbon-market
- L, J. (2024, February 22). India revises its Carbon Credit Trading Scheme for voluntary players. Carbon Credits. https://carboncredits.com/india-revises-its-carbon-credit-trading-scheme-for-voluntary-players/
- Philip, D. K. (2024, July 15). India’s carbon market revolution: Balancing economic growth wi… https://www.investindia.gov.in/team-india-blogs/indias-carbon-market-revolution-balancing-economic-growth-climate-responsibility
- PWC. (2023, July 6). Regulatory insights. https://www.pwc.in/assets/pdfs/news-alert/regulatory-insights/2023/pwc_regulatory_insights_6_july_2023_ministry_of_power_notifies_carbon_credit_trading_scheme_2023.pdf
About the Contributor: Mukti Bari is a research intern at IMPRI. She is a student of Economics pursuing her B.A. at Symbiosis School for Liberal Arts.
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