Overview of Carbon Credit Trading

India is vehemently working towards its commitment of achieving a Net Zero status by 2070 with the release of 2 Credit-based Schemes. These schemes, namely the Carbon Credit Trading Scheme and the Green Credit Scheme that were launched in June 2023, will promote acceptance of green energy and encourage the private sector to shift to sustainable energy sources. First, the Green Credit Scheme 2023 was introduced to incentivis voluntary green actions by individuals and corporations. The Carbon Credit Trading Scheme (CCTS), 2023 was notified by the "Ministry of Power, on June 28, 2023, under the Energy Conservation Act, 2001.The provisions of CCTS were introduced through an amendment to the Energy Conservation Bill, which introduced section 14 AA (Energy Conservation (Amendment) Bill, 2023, has laid the foundation stone for a carbon trading market in India. Under the new scheme, the Central government or an authorised agency on its behalf can now issue carbon credit certificates to business entities or even to individuals registered and compliant with the scheme. The National Steering Committee for the Indian carbon market and other authorities have been tasked with coming up with a detailed procedure for operationalising the Indian carbon market in accordance with this scheme.

According to the government, CCTS will enable the setting up of a carbon credit market (Indian Carbon Market) and help establish India's domestic carbon market.In the words of Shri Abhay Bakre, DG, BEE, ICMwillspur the mobilisation of investments for transition to low-carbon pathways.This write-up will highlight how theCarbon Credit Trading ecosystem will unfold in India and the key takeaways for the private sector from the introduction of CCTS. But before understanding how this credit market will function, we must understand some key terms related to this carbon offset-based platform.

What is Carbon Credit Trading?

Carbon Trading, aka Carbon Emissions Trading, is a market-type approach to slowing global warming. It refers to buying and selling permits and credits allowing holders to emit carbon dioxide while meeting compliance requirements. Trading of Carbon credits started after the Kyoto Protocol in 2005. Today,carbon credit trading has been devised as a market-oriented mechanism for trading Carbon Credits globally. Companies get a set number of credits that they can sell any excess to another company, highlighting how this practice can significantly benefit private entities operating in the country and reduce GHG emissions.

“Carbon credit" means a value assigned to a reduction or removal or avoidance of greenhouse gas emissions achieved and is equivalent to one ton of carbon dioxide equivalent (tCO2e). Carbon Credit or Carbon Offsetsis a permit that allows anentity (company/ individual) that holds the credit to emit a certain amount of CO2 or other greenhouse gases. One credit permits the emission of 1 tonne of CO2.In other words, if an entity emits CO2 below a certain level or performs sequestration of CO2 from the atmosphere, it will receive a carbon credit. Therefore, 1 ton of CO2 or CO2 equivalent, either reduced or removed, will equal 1 Carbon Credit.

The government determines carbon allowances or caps according to their emission reduction targets.Under the CCTS, Indian Carbon trading will be done based on the Cap and trade mechanism.

Carbon markets: The implementation of CCTS will lead to the forming of a virtual market-like platform for trading (sale and purchase) of carbon credits.Such markets have existed in India. However, with the introduction of CCTS, this proposed new platform will lead to the development of a government-backed regional and global trading framework. This will allow entities from the public and private domain to trade in carbon credits to bring down CO2 emissions. This platform will also create new incentives for the private sector to reduce emissions and improve energy efficiency.

Carbon Trading Company: A Carbon trading Company aids in the carbon trading between credit generators and purchasers. They look for any projects that can generate Carbon Credits and are eligible to trade them under the Carbon credit scheme. Subsequently, they can assist in trading between the parties according to the defined regulations. A carbon trading company are also required to arrange for energy auditing of the projects by third-party auditors.

Carbon Credit Accounting

Carbon accounting allows organisations to quantify their GHG emissions, understand their environmental impact and set goals to reduce their emissions while being financially rewarded at the same time.

Carbon credit accounting allows for reducing the carbon dioxide emission of one ton. The credit is given to companies with lower carbon emission rates than the standard carbon emission quota. DMRC is the best example of the use of carbon credit. Using regenerative braking, Delhi Metro earned ₹19.5 crore and sold 3.55 million carbon credits between 2012 to 2018.

Benefits of Carbon Trading Mechanism for Private Entities in India

Agricultural or industrial chemical processes, together, account for over 25% of GHG emissions today. Therefore, any plausible strategy for addressing climate change must include removing GHG emissions from the atmosphere with the participation of private entities. As envisioned by the government, the Carbon Credit Trading market will lead to the following benefits.

Financial Incentives: Private entities can generate additional revenue streams by participating in carbon credit trading. Selling the surplus credits will allow companies to monetise their efforts towards emission reductions by providing a financial incentive for implementing sustainable business practices and investing in clean technologies. This will significantly enhance the businesses, making them more economically resilient.

Competitive Advantage: Engaging in carbon credit trading can give India’s private entities a competitive edge in the domestic as well as international markets. As sustainability will become an important criterion for consumers and investors, in the near future, companies that actively participate in emissions reduction and carbon trading can differentiate themselves from their competitors as responsible, forward-thinking and eco-friendly. This can enhance their brand reputation and attract environmentally conscious customers and investors.

Compliance with Regulations: India has made significant commitments to combat global warming and climate change. India has pledged to reduce greenhouse gas emissions intensity by 45 % of its present levels by 2030 and become a Net Zero emitter by 2070. The carbon credit trading ecosystem will encourage private entities by providing them with viable pathways to achieve and supplement emission reduction targets while ensuring compliance with environmental regulations. By trading credits, companies can bridge the gap between their CO2 emission reduction goals and the actual emissions they generate.

Technology Adoption and Innovation: Engaging in carbon credit trading will encourage private entities to adopt clean technologies and innovative solutions. Today, companies often need to adopt energy-efficient practices, renewable energy sources, and advanced emission reduction technologies under various environment-related laws to maximise emission reductions and generate more credits. This fosters technological progress and innovation, driving the growth of a sustainable and low-carbon economy.

International Collaboration: Carbon credit trading will allow private entities in India to collaborate with international partners. With the global carbon market expansion, businesses will be ableto connect with foreign buyers and sellers as well, fostering knowledge exchange and enhanced cooperation. This opens doors to new markets, foreign direct investment, sustainable practices and technology transfer.

The Bureau of Energy Efficiency (BEE) will do the registration of the Carbon Verification Agency with the prior approval of the Central Government. The Accredited Carbon Verification Agency will determine the accreditation process, including the eligibility criteria of any agency to function as an accredited carbon verification agency, based on the recommendation of the Steering Committee for the Indian carbon market.

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