Carbon Markets

India is at a critical juncture as it seeks to address climate change while meeting its developmental goals. The introduction of a Carbon Market in India marks a significant policy shift, with the government aiming to enhance Carbon Emissions Reduction (CER) and integrate market-based solutions, such as India's Carbon Tax, to curb greenhouse gas emissions.

As the third-largest emitter of greenhouse gases in the world, India faces the dual challenge of balancing its climate objectives with its economic growth aspirations. The Finance Minister’s recent announcement to shift industries from energy efficiency targets to emission targets marks a pivotal change in policy. This signals the beginning of India’s exploration of carbon markets as a mechanism for Carbon Emissions Reduction.

While India is not obligated to mandatory emission reductions under its Nationally Determined Contributions (NDCs), the move towards establishing a Carbon Market in India offers a significant opportunity.

This step is part of India’s broader strategy to leverage market-based solutions, including India’s Carbon Tax, to drive climate action while also fostering sustainable development.

It is a market-based mechanism designed to reduce greenhouse gas emissions by creating financial incentives for individuals and organizations to reduce their carbon footprint. These markets operate on the principle of cap-and-trade, where a regulatory body sets a cap on the total allowable emissions, and entities that exceed their emission limits are required to purchase carbon credits from those who have reduced emissions below their limits.

Types of Carbon Markets

1. Compliance Markets: These are mandatory markets where entities must purchase carbon credits to offset their emissions. They are typically aimed at large industrial polluters.
2. Voluntary Markets: These markets allow individuals, businesses, and organizations to voluntarily purchase carbon credits to offset their emissions beyond regulatory requirements.

India is already a significant player in the voluntary carbon market, contributing around 17% of the global supply. Indian companies trade carbon credits, generating revenue while contributing to Carbon Emissions Reduction efforts.

The Carbon Market in India is poised to evolve, particularly with the launch of the Carbon Credits Trading Scheme (CCTS), which will integrate both compliance and voluntary segments.

Carbon credits represent a reduction in greenhouse gas emissions that can be traded. One carbon credit equates to one ton of carbon dioxide equivalent (tCO2e) that has been reduced or avoided. Carbon credits are generated through activities such as:

• Implementing energy-efficient technologies
• Reducing waste
• Transitioning to renewable energy sources
• Preventing deforestation
• Promoting reforestation

Carbon credits serve as an essential tool in the Carbon Market in India, enabling industries to meet their emissions targets while incentivizing sustainable practices.

A Carbon Tax is a direct levy on the emission of greenhouse gases. Under this system, the government charges a tax based on the amount of CO2 emitted by industries, encouraging businesses to reduce their carbon footprint. Revenue generated from the Carbon Tax can be utilized to fund climate adaptation and mitigation projects, contributing to long-term Carbon Emissions Reduction.

As of August 2023, 74 carbon pricing mechanisms, either through carbon taxes or emissions trading schemes (ETS), have been implemented worldwide. In 2023, carbon pricing revenues reached a record USD 104 billion, reflecting a growing global consensus on the importance of carbon markets.

India's introduction of the Carbon Market in India signals a commitment to exploring these global trends. While India is not legally bound to make reductions under its NDCs, establishing a functional carbon market in India can significantly contribute to its Carbon Emissions Reduction goals.

India has already taken significant steps to build a foundation for its carbon market in India.

• The Carbon Credits Trading Scheme (CCTS), set to commence in 2025-26, will allow non-obligated entities to participate in carbon credit trading. This will allow a broader array of industries to contribute to Carbon Emissions Reduction by purchasing and trading carbon credits.
• The Perform, Achieve, and Trade (PAT) scheme and the Renewable Energy Certificates (REC) system are two other market-based mechanisms that encourage industries to reduce emissions.

These existing schemes can be integrated into the larger Carbon Market in India, further enhancing their effectiveness. The Bureau of Energy Efficiency (BEE) and the National Steering Committee for the Indian Carbon Market (NSCICM) will be responsible for monitoring and verifying carbon credits, ensuring their integrity in the market.

A Carbon Tax can provide several significant benefits for India:

• Incentivizing Green Innovation: By imposing a tax on carbon emissions, the government can create financial incentives for industries to innovate and adopt cleaner technologies. This can accelerate the transition to renewable energy sources and Carbon Emissions Reduction.
• Revenue Generation for Climate Adaptation: The revenue from the Carbon Tax can be used to fund climate resilience initiatives, such as flood protection infrastructure and drought-resistant agriculture, particularly in vulnerable regions of India.
• Improved Public Health: A Carbon Tax can reduce air pollution by incentivizing cleaner energy sources. This will significantly improve air quality, leading to better public health outcomes, particularly in cities with high levels of pollution.
• Raising Consumer Awareness: By increasing the price of carbon-intensive products, a Carbon Tax can influence consumer behavior, encouraging more sustainable consumption choices and further contributing to Carbon Emissions Reduction.

Despite the clear benefits, implementing a Carbon Tax in India presents several challenges:

• Economic Impact on Industries: Energy-intensive industries, such as steel, cement, and textiles, could face significant cost increases. These industries may need time to transition to cleaner technologies without facing a drastic rise in production costs.
• Regressive Nature: A Carbon Tax could disproportionately impact lower-income groups, who spend a larger share of their income on energy. This could exacerbate income inequality unless measures are taken to offset these effects.
• Limited Scope: While Carbon Taxes are effective for reducing CO2 emissions, they do not address other greenhouse gases, such as methane, which are emitted in large quantities from agriculture and other sectors. Additional policies targeting these gases are necessary for comprehensive emissions reduction.
• The Informal Sector: India’s informal sector, which constitutes about 90% of the workforce, presents difficulties in tracking and taxing emissions. A lack of formal records may limit the effectiveness of a Carbon Tax if small businesses are excluded.
• Carbon Leakage: If carbon taxes are not harmonized globally, there is a risk of carbon leakage, where industries move to countries with looser environmental regulations. India must consider measures to address this issue, such as Border Carbon Adjustments.
• Inter-State Disparities: India’s federal structure means that a uniform Carbon Tax could disproportionately affect coal-dependent states like Jharkhand and Chhattisgarh, making it challenging to implement a fair taxation system.

To ensure the successful implementation of the Carbon Market in India, several measures need to be adopted:

• Phased Implementation: Introducing a Carbon Tax at a low rate initially, with gradual increases over time, would allow industries to adjust and invest in green technologies. This approach would also enable the development of supporting infrastructure and policies.
• Border Carbon Adjustments: To prevent carbon leakage, India can implement border carbon adjustments (BCAs). By imposing a carbon price on imports based on their embedded emissions, India can protect its industries from unfair competition while ensuring global alignment with climate goals.
• Technology Transfer Incentives: The government can incentivize the transfer and adoption of clean technologies, particularly for small and medium enterprises (SMEs). A portion of the Carbon Tax revenue could be used to fund a "Clean Tech Adoption Fund."
• Green Lanes for Carbon-Conscious Industries: Industries that demonstrate significant efforts to reduce carbon emissions could benefit from expedited regulatory approvals, priority in government tenders, and access to low-interest financing for green projects.
• Carbon Credit Cooperative for SMEs: A cooperative framework could be established to help SMEs participate in the carbon market. This would allow smaller businesses to pool their emissions reduction efforts and generate carbon credits collectively.
• Green Finance Revolution: To support the Carbon Market in India, the government can establish a green finance ecosystem, including green bonds and sustainability-linked loans, to attract private investments in low-carbon projects.

India’s establishment of a Carbon Market in India is a crucial step toward achieving its climate goals while ensuring economic growth. By addressing challenges such as the regressive nature of the Carbon Tax, inter-state disparities, and ensuring technological innovation, India can create a market that fosters both sustainable development and Carbon Emissions Reduction. As the world moves toward a low-carbon future, India has the opportunity to lead the way, balancing economic growth with environmental responsibility.

What is the difference between Cap-and-Trade and Carbon Tax?

• Cap-and-Trade (Emissions Trading System, ETS): Sets a limit on emissions and allows trading of permits.
• Carbon Tax: Directly taxes carbon emissions, providing price certainty but no fixed emission limit.

What are Article 6 mechanisms under the Paris Agreement?

• Article 6.2: Allows bilateral carbon credit trading between countries.
• Article 6.4: Establishes a global carbon credit mechanism under UN supervision.
• Article 6.8: Supports non-market-based cooperation (e.g., technology transfer).

1. The adoption of electric vehicles is rapidly growing worldwide. How do electric vehicles contribute to reducing carbon emissions and what are the key benefits they offer compared to traditional combustion engine vehicles? [250 Words, 15 Marks] [2023]

2. Should the pursuit of carbon credits and clean development mechanisms set up under UNFCCC be maintained even though there has been a massive slide in the value of a carbon credit? Discuss with respect to India’s energy needs for economic growth. [200 Words, 12.5 Marks] [2014]