Even though India has neither been a historically high carbon emitter nor are its per capita emissions high, if emissions were to increase at the same pace as the economy, it will result in poorer progress than we aspire to.
Growth is non-negotiable, but what can and must be negotiated is the link between growth and emissions. An Indian carbon market is essential to this exercise.
It will create a mechanism for accountability and incentives, and help raise domestic finance for the national goal of a fast and fair energy transition.
An Indian carbon market would be a carbon-credit trading system for specified units and industries. Emission targets mandated for individual units will initially be based on their prevailing emission profiles (also the technology in use, age, etc.) and will get progressively tighter.
As evidence from the EU’s carbon market indicates, such credits can generate substantial revenues for companies that invest in green measures and innovate to reduce emissions, as well as for governments.
In her budget speech, finance minister Nirmala Sitharaman called for India’s ‘hard to abate’ industries to transition from energy efficiency to emission reduction goals. Implementing this entails evolving from the ‘Perform, Achieve and Trade’ (PAT) scheme to a carbon market.
If both operate under the ministry of power’s Bureau of Energy Efficiency (BEE), foundational elements of PAT can be built upon by companies familiar with existing concepts and trading provisions. A careful transition could ensure that positive aspects of PAT are adopted by the Indian carbon market as well.
The big achievement of BEE on PAT was to establish that regulatory imperatives and business objectives are not in mutual conflict, but can even complement each other.
Every company has a motive to pursue energy efficiency: with environmental benefits come economic benefits. Likewise, BEE required the tracking and reporting of energy use.
While this was aimed at energy efficiency, the basic principles and processes of accountability that have been established can work for the upcoming carbon market.
While PAT was a domestic scheme, an Indian carbon market could be leveraged for global strategies by Indian companies. Businesses that are under pressure to meet net-zero commitments or reduce/offset carbon emissions will look closely at this mechanism as a strategic lever for export market access, especially as international trade policies begin taking carbon into account.
From a national perspective, showcasing a high-quality carbon market could attract manufacturing investments and aid trade negotiations on cross-border carbon taxes.
Increased interest will bring increased scrutiny. The Indian carbon market must ensure it has the required rigour, transparency and carbon-credit liquidity to win confidence in its health and ability to find the right price.
The starting point is what it takes to earn a credit. Under PAT, achieving set targets resulted in tradable Energy Saving Certificates (ESCert). In the carbon market, the equivalent would be Carbon Credit Certificates.
The supply of PAT’s ESCerts exceeded demand and prices were consequently low. This was likely because targets were less challenging than anticipated, a flaw that haunts many such systems. Even the EU’s ETS, the world’s largest carbon market, was oversupplied for much of its first decade.
We need ambitious but achievable targets that progressively get stiffer. Some industries may resist steep targets, but India’s broader economic development and climate goals would require them. Also, Indian industry’s ability to innovate, especially when there is a clear business case for it, should not be underestimated.
Learning from low ESCert prices, the carbon market proposes floor and forbearance prices. Floor prices maintain a minimum credit value, while the latter act as a maximum penalty level.
This penalty must not be so low that it gets absorbed as another “cost of doing business” instead of encouraging investments in decarbonization.
Regular and rigorous reviews of prices and market dynamics will be essential to ensure market health. Floor prices could progressively increase, for example, or forbearance prices could be gradually phased out as the market matures.
Neither PAT nor the currently envisaged carbon market features the auction of carbon allowances, which are permissible emission levels that reduce over time.
As the auctioning of allowances has been a significant revenue generator for governments wherever this idea has been tried, India could consider these for its carbon market.
Among the immediate challenges will be the significant capacity that needs to be built for the market to function well. The stakes for companies and the country are high and it is important that companies are assured of transparent target setting, credible accreditation and verification, adequate redressal mechanisms and sufficient institutional space for systemic course corrections.
The promise at the other end is mouth-watering—for India to become the world’s first major economy to industrialize without carbonizing.
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