The draft carbon credit trading scheme has suggested structural changes to address these issues by Firstly, introducing a uniform metric for issuance of carbon credit certificates (CCCs) in terms of tonnes of CO2 equivalent, instead of tonnes of oil equivalent and megawatt-hours, to bring them at par with international market; Secondly, enabling voluntary participation by non-obligated entities to purchase CCCs, to deal with oversupply; and Thirdly, conversion of existing RECs and ESCs in to universally accepted CCCs over a period. In parallel, it also proposes implementation of an offset scheme applicable to all non-obligated entities, development of monitoring, reporting and verification guidelines, identifying a central registry and a central regulator, for smooth operationalization of the carbon market.

While these are laudable proposals, there are still a lot of wrinkles to be ironed out. Providing value to companies with an unsold inventory of ESCs and RECs is critical, but involving these in a carbon market by converting them in CCCs could be complex and may create confusion for the stakeholders. As an alternative, providing a greater share of free allowances in an energy trading scheme or settling CERs and ESCerts from the revenue proceeds from government auctioning, can be worth considering.

Sufficient time should be provided to all the stakeholders to understand the operational nature of the issues in the Indian carbon market through a ‘pilot phase’, which will not be a First. Case in point is world’s first Emission Trading Scheme (ETS) implemented in Surat in 2019. Under the ETS scheme, the government sets a cap on the quantum of pollution that industries may emit. The participating industries can comply either by installing technology that limits pollution, or by purchasing ‘emission permits’ to emit more than their limit.

Industries that have installed emissions-reducing technology and have surplus permits left over, can sell these to the industries that find it costlier to install such technology. ETS in Surat was launched with a fanfare and has been touted to have resulted in pollution reduction by 24 per cent and projected plant savings of 36 per cent, since the launch. However, these data points are not updated since 2020 and have been monitored for suspended particulate matter (SPM), as against more prevalent PM10 and PM2.5.

This emphasises on the need of a robust monitoring, reporting and verification system with symmetry in the information assimilation. On the lines of Surat ETS, in 2021, the government also announced the launch of ETS in Ludhiana and Ahmedabad. Nothing further is heard on the matter since then, questioning the reproducibility and scalability of ETS and underlying the importance of a true pilot phase testing.

To conclude, the draft policy on ICM has broad contours to bring it in uniformity with international standards, keeping in mind India’s target to achieve net zero emissions. However, it’s a first step, which must be followed by a granular approach towards ultimate transitioning to the domestic ICM, drawing from India’s own experience (Surat ETS, PAT and RPO etc.) and the experience abroad (EU-ETS, Korean ETS etc.). India needs to play this prudently to move closer to its net zero emission target and to claim a bigger pie of the 63 billion dollar global ETS market.

This article was originally published in The Economic Times on 11 July 2023 Co-written by: Anurag Dwivedi, Partner; Shruti Paras, Senior Associate. Click here for original article

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