India to open carbon market: What is it and how will it help in the fight against climate change

At the 2021 United Nations Climate Change Conference (COP26) summit in November 2021, India promised to reach zero carbon emissions by 2070 and reduce its emissions by one million tonnes in the next 10 years.

Establishing a carbon credit market is the first step toward this goal.

Emission reductions and removals are converted into tradable assets through a carbon market. This implies that an industrial unit that surpasses the emission criteria is eligible to receive credits. Additionally, it would allow struggling units to purchase credits and demonstrate compliance.

In simpler terms, a carbon market will create incentives to reduce emissions or improve energy efficiency.

"The creation of a robust carbon credit market in India would imply an increased demand for credits amongst India Inc," Manish Dabkara, CMD&CEO, EKI Energy Services Ltd, told CNBCTV18.com.

“The renewed focus towards controlling GHG emissions and moving towards carbon neutrality, with specific milestone/targets, is expected to encourage increased private sector participation in combating climate change. These commitments would drive demand for voluntary carbon credits in India. The annual demand for voluntary carbon credit in India is expected to touch 500+ million units by 2030,” said Dabkara.

A carbon market was set up in Japan under the United Nation’s 1997 Kyoto protocol on climate change. This carbon market technique collapsed due to concerns over environmental efficacy and corruption.

Some nations and areas already have carbon markets. For instance, European industrial facilities must conform to set emission guidelines, and based on their performance, they buy and sell credits.

In California, US imposes a limit on the volume of greenhouse gases that can be generated by a specific industry or area of the economy. The amount of metric tonnes of carbon dioxide that businesses can emit is then allowed. Businesses that pollute less than their allotted amount can sell the excess to other companies, encouraging everyone to reduce emissions more quickly.

According to Dabkara, India is no stranger to carbon credits, which it has accumulated through participation in Clean Development Mechanism (CDM) projects. The strong experience in CDM projects has helped India develop projects that qualify for Voluntary Carbon Credits.

“However, 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,” said Dabkara.

Global experience suggests that carbon pricing is initially introduced in high carbon-intensive sectors such as power, and then its scope is extended to other carbon-intensive sectors, such as cement and metals, over some time.

“Currently, India does not have a cap and trade policy or an explicit carbon price. The country has an implicit pricing structure defined by Internal Carbon Pricing (ICP). As per the Carbon Disclosure Project (CDP), ICP is a voluntarily determined price used within an organization to value the cost of one unit of CO2 emission. This reflects the carbon market price in the region where the company operates,” said Dabkara.

According to a report titled 'ESG India by Kotak Institutional Equities', companies, especially in carbon-intensive sectors, and lower emission alternative providers will see an impact.

Other than that, companies in the renewable energy sector will grow, and the revenue prospects of companies that manufacture equipment/render services which support carbon-intensive sectors and activities will also increase.

Carbon markets will also open up new horizons for companies engaged in developing/consulting/trading carbon credits. On the other hand, it will be detrimental to the prospects of coal-based power generation capacities and Coal India’s growth ambitions.

Carbon markets are one of the most effective drivers of reducing emissions, offering the lowest-cost emission reductions. A report from Deloitte Economics Institute highlights that India must act now to prevent the country from losing $35 trillion in economic potential over the next 50 years due to unmitigated climate changes.

The report also reveals how the country could gain $11 trillion in economic value over the same period by limiting rising global temperatures and realising its potential to export decarbonisation.

Indian companies have already been participating in the global carbon market. This is done through one of three modes — carbon neutrality, Renewable (RE 100), and Science Based Targets (SBT).

Companies participating in RE100 and SBT work to lower their emissions directly by reducing their reliance on harmful activities. Businesses that practise carbon neutrality invest in carbon offsets to achieve an equivalent decrease. Both domestic and foreign markets are sourced for the acquisition of these offsets.

“Though the market will largely be voluntary to begin with, once it becomes mandatory for a specific sector, the scheme will remain open for the Indian voluntary market buyer as mentioned in the Bill. This will open the market for newer avenues even as the demand for voluntary carbon credits grows exponentially in the country,” said Dabkara.