The Rajya Sabha passed the Energy Conservation (Amendment) Bill in December 2022. The bill aims to regulate and decarbonise energy consumption by industries, households, transportation, and others. Most provisions aim to promote renewable energy for industries and infrastructure. More interestingly, the bill proposes a carbon trading market in India.
A carbon credit is a saleable equivalent of one metric tonne of carbon dioxide emission. Like any other market, a carbon market enables the sale and purchase of carbon credits. Carbon markets can be regulated (cap-and-trade) or voluntary. Under a cap-and-trade system, companies are allotted carbon credits corresponding to the amount of greenhouse gases they are allowed to emit. Those who produce fewer tonnes of carbon than the capped amount can trade, sell or hold the remaining carbon credits. For instance, two companies, A and B, have 100 carbon credits, allowing them to emit 100 tons of greenhouse gases. Company A emits only 80 tons of greenhouse gases, with 20 extra credits. Company B estimates it will emit 120 tons of greenhouse gases, which is 20 tons above the permitted limit. In this situation, company B can purchase the excess carbon credits that company A has, thereby purchasing the rights to emit the extra 20 tons of greenhouse gases.
On the other hand, a voluntary market exists outside a regulatory framework. Here, companies and individuals can choose to offset their emissions by purchasing carbon credits without any mandate or requirement to do so.
The amendment calls for the central government to establish a regulated carbon trading market within India. Elaborating on the scheme, Raj Kumar Singh, Union Minister for Power and New and Renewable Energy, said, “What we are going to put in place is a system of the carbon market. We already have some sort of carbon market here because when we have a renewable energy certificate that\’s carbon credit. Then we have energy-saving certificates that are carbon credits. Now we are going to combine that into one carbon credit and it be sold.” Carbon pricing, or determining the cost of emitting GHGs, will essentially make carbon-intensive energy more expensive.
Carbon pricing will be vital to encouraging the shift to renewable resources to incur lesser expenses and devising investment decisions and risk assessment strategies congruent with national (or global) sustainability standards. However, the Centre of Science and Environment (CSE) found that the value of ESCerts was very low compared to the investment needed to reduce energy consumption. Hence, the proposed carbon market must actively look to avoid such circumstances while regulating compliance from corporations. Moreover, while the ICP has proven beneficial for Indian entities in an international credit market, its operation within a regulated domestic framework can incentivise smaller and newer businesses to participate in a carbon trading market.
The Union government initially intended to accompany the domestic carbon market with a ban on the exports of credits, with Singh stating, “Carbon credits are not going to be exported. No question. These credits will have to be generated by domestic companies, bought by domestic companies.” However, later on, he clarified, “we would want to keep it [carbon credits] to ourselves because we want to achieve our NDCs but anything beyond what we require can be sold anywhere in the world.” India is the largest exporter of carbon credits globally. Putting a stop to credit exports completely or even partially has the potential to increase global carbon credit demand, thereby raising carbon credit prices internationally. A similar scenario unfolded in April 2022 when Indonesia, the largest exporter of palm oil, banned its export. This ban severely affected the global food industry, with palm oil prices shooting up immediately.
Conversely, in the domestic context, the price of carbon credits might drop considerably due to excess supply. When credits become cheaper, organisations and corporations will be more inclined to purchase them instead of investing in making their businesses, products, and supply chains more sustainable and carbon neutral. In this scenario, even though conceptualised to reduce emissions, carbon credits can become a tool for greenwashing.
Manish Dabkara, CMD&CEO, EKI Energy Services Ltd, said, “… compared to developed markets like the US, Voluntary Carbon Credits market in India is still in its infancy. There is a need for regulatory frameworks and policy guidelines that provide clear mandates on emission reductions.” A regulated market with assessment and disclosure mechanisms will ensure organisations are aware of their GHG emissions. Private manufacturers can set individual targets for offsetting carbon. Codified targets are expected to anchor market relations between buyers and sellers of carbon credits. A cap-and-trade emissions market can provide a productive ecosystem in determining floor prices, setting individual targets that align with regional and national targets, and reducing net carbon emissions. While the bill does not specify the kind of market setup for carbon trading in India, a more iterative approach can be anticipated in establishing a nascent credits market.