First off, the government must be lauded for formally kicking off an Indian carbon market. The Carbon Credit and Trading Scheme (CCTS) notified on June 28, 2023, effectively creates a whole system of mechanisms that would govern the Indian carbon and GHG emissions scenario in the coming few years.

It speaks to two global disciplines — climate change and carbon taxes. Some credit for the quick notification of the CCTS must go to EU for pushing unilateral carbon taxes aka CBAM on its exporting partners. CBAM is an external mirror of the EU’s Emissions Trading System (ETS).

It is important to note that the EU’s ETS evolved slowly and gently over a period of 20 years. Establishing an ETS which is fundamental to carbon pricing has taken EU a time period of two decades, large financial resources, and a consistent capacity building and monitoring exercise.

Given the composition of the steering committee, the Indian CCTS appears to include only those sectors that are currently covered by CBAM. Without a shadow of doubt CBAM will expand. Therefore a more comprehensive view of emissions should be in the offing.

Lowering emissions

It should include those sectors where India is likely to be emissions-competitive and also where India needs to seriously to lower emissions, irrespective of emissions priorities of EU or others. Consumer end-use products may be a good place to start since they would not affect Indian participation in GVCs even if they attract import tariffs. That should help India to support the global cause of lowering emissions, without affecting its industry adversely.

The ETS evolved over two decades beginning from a green paper published in March 2000 which essentially set out the reasons for an emissions trading system and its benefits for tackling climate change and EU’s commitments under the Kyoto Protocol. The CCTS on the other hand gives no clue as to the ‘why’ of its coming into existence.

Clearly putting out the philosophy and thought behind the CCTS in the public domain by various means would be key in the immediate future. The Indian carbon action is not and should not be seen as a pure retaliatory or compliance measure.

The significance of the CCTS in India’s overall climate action and engagement must be brought out succinctly. The CCTS should be projected from the lens of India’s Nationally Determined Contributions (NDCs) as committed under the Paris Agreement.

This is fantastic opportunity to build in the climate change related concept of Common But Differentiated Responsibility (CBDR) into Indian regulation. Enunciating CBDR as a principle provides no succour until it is hard-coded in regulation. Should Indian products have the same emissions reduction burden as those manufactured by the heavy historical emitters? Polluter pays principle must apply not only today but with a perspective of the entire climate mess. Crowd-sourcing can provide ample ideas on how to do it — legally, ethically, and practically.

Further, industry support must be garnered and must be placed out there in the public eye. Emissions reduction can only be a collaborative effort. With climate change knocking at our doorsteps violently, industry would be happy to contribute, if its support is appropriately nurtured. Industry captains must state their support for a CCTS clearly and unambiguously.

Industry subsidy

EU’s ETS was a gentle affair, slowly cajoling, coaxing and incentivising industry into reducing emissions. Industry benefited to the extent of billions of Euros due to free allowances under the ETS. One recent estimate puts the subsidy received by EU heavy industry in terms of free allowances at €238 billion, to be added with an additional €400 billion to be disbursed till 2030.

In addition to free allowances to industry perceived to be at the risk of ‘carbon leakage’, EU authorises state aid to installations that have high electricity costs and face significant international competition. Average prices of the European Union Allowance remained below €20 till 2019 and hovered around €30 till 2021. There has been a dramatic increase in the carbon prices from have moved up from 2022 and now range between €80- €100 per tonne of carbon.

Come January 2026, developing country industry is expected to compete in the EU carbon market at these or higher prices. Taking Indian industry on board is paramount at this stage. Any setting of caps that is not aligned with industry capability to absorb and adopt emissions-lowering technology, will only invite domestic and international trouble.

EU industry acceptance has come from huge financial incentives. Although such massive incentives and funding will not be possible in India, a top-down, you-better-comply bureaucratic approach could spell avoidable pain, contestation, and litigation.

The CCTS notification in its current form mandates little industry consultation. The steering committee has no place for industry members. That should be an integral feature of the carbon action. A carbon trading scheme must convince and incentivise industry to become interested stakeholders. Iterative close coordination, intensive consultations and huge capacity building exercises should be built into it.

The writer is a former IRS officer and has negotiated the India-EU and India-EFTA FTAs in the Department of Commerce. She studies the trade-environment intersection at the Geneva Graduate Institute.