Two months ago, in consultation with the Bureau of Energy Efficiency (BEE), India’s Power Ministry amended the Carbon Credit Trading Scheme (CCTS) — a gazette version of which it had notified in June last year, pursuant to new powers under an expanded Energy Conservation Act.

On account of this amendment, the CCTS now provides for an offset mechanism — in addition to its pre-existing compliance regime. Interestingly, a draft scheme released last March had also contemplated both voluntary and compliance markets. While the compliance mechanism involves mandatory implementation among ‘obligated’ entities (which have a legal obligation to reduce emissions), voluntary markets can be driven by businesses seeking to decrease their carbon footprint (without a legal mandate to do so), including by ‘offsetting’ greenhouse gas (GHG) emissions on account of corporate net-zero commitments.

Under the amended CCTS, non-obligated entities can voluntarily register projects in sectors identified by a national steering committee for securing tradable carbon credit certificates (CCCs). These CCCs will be issued after evaluative exercises conducted by a BEE-accredited agency.

Before the amendment, the CCTS did not refer to an offset mechanism — except that non-obligated entities could purchase CCCs, if they wished to. In addition, the pre-amendment CCTS made no mention of whether non-obligated entities could register their projects for generating CCCs (as opposed to only buying).

The ultimate objective of the scheme is to decarbonise the Indian economy by efficiently pricing emissions through CCC trading. It defines a ‘carbon credit’ to mean a value assigned to the reduction, removal or avoidance of GHG emissions, equivalent to one tonne of carbon dioxide (tCO2e). Thus, each CCC is a marketable certificate reflecting one tCO2e. Under the compliance regime, obligated entities will be assigned a fixed number of credits representing the amount of emissions they can make. In the context of emissions trading, such entities can purchase more credits or sell their surplus. In other words, companies with low(er) emissions can sell their extra allowance to larger emitters.

In a voluntary carbon market, businesses may trade in CCCs of their own volition to offset emissions. Such ‘offsets’ can be created when companies finance projects that reduce GHGs elsewhere, either by lowering, preventing or sequestering emissions. Offsets granted to project owners can be sold to third parties. For instance, when a non-obligated entity removes a unit of carbon from the atmosphere through reforestation, wetland restoration, use of new technologies, direct capture, waste/landfill management, and so on, it can generate an offset. Other entities may then buy that offset to reduce their own carbon footprint. Since offsets are typically traded on a voluntary market, participants can purchase them to achieve internal targets or for the purpose of reducing emissions for ethical, social or business reasons especially when climate goals have been publicly pledged. Also, by buying offsets, entities can fund projects to address climate change.

Among other benefits, a voluntary market can encourage innovation in carbon technology and financing, especially when it operates outside rigid regulatory frameworks. Market participants can therefore support more experimental approaches and flexible projects. However, some sectors find it difficult to meet GHG reduction targets. For instance, making cement or steel at industrial scale involves hard-to-abate emissions. While CCC trading can help, the BEE could re-visit its 2022 proposal on fungibility and allow energy saving (ESCerts) and renewable energy certificates (RECs) to trade as offsets.

(The writer is a lawyer with S&R Associates, a law firm)