Never has a climate subject been as contentious as the issue of assigning a value to emission reductions and trading them like prized cards (or, perhaps more accurately, shares on the stock market). And, while carbon credits and carbon markets are hardly new concepts, the Indian government attempting to wrangle the bull is.

Even as the government announced its intentions to establish the Indian Carbon Market (ICM) in 2022 and announced the Carbon Credit and Trading Scheme (CCTS) in the summer of 2023, more details have since been emerging. On a positive note, India’s attempt to harness the power of the market comes at a time when it can learn from the examples of China, Korea and the European Union. However, India’s own previous attempt at using market forces, also known as the Perform, Achieve and Trade Scheme (PAT), meant to increase energy efficiency, delivered minimal, if any, results.

Emission trading

In theory, emission trading is seen as an excellent tool to assign a monetary value to sustainable development, ostensibly because it “penalises” polluting entities, requiring them to buy carbon credits to offset their emissions; and, as a result, injects much-needed resources into developing countries yet to peak in their economic development, all the while incentivising investments into low-carbon technologies.

In a way, India’s PAT scheme was developed under a similar premise, however faulty its design may have been. Unfortunately, India’s latest venture into emission trading is being built on the same foundation.

In a recent analysis, “The Indian Carbon Market: Pathway Towards an Effective Mechanism”, meant to deliver a roadmap for the proposed scheme, the Centre for Science and Environment (CSE) identified “the dependence of CCTS on the existing PAT Scheme” as one of the biggest challenges, not least because two presumably market-linked schemes, ostensibly aimed at the same target, would be operational simultaneously. Not to mention that the predecessor, according to the analysis, has failed to achieve its target.

If designed carefully, the PAT scheme is full of cautionary tales for the new CCTS. For instance, the rather unambitious targets that were set under the PAT scheme for polluting industries, which were easily achieved, if not exceeded. This, in turn, resulted in the market being flooded with ESCerts (Energy saving certificate issued under PAT), causing low pricing for the credits and, as a result, low activity and liquidity in the market.

And most importantly, the analysis by CSE shows that the decrease in CO2 levels, which could be attributed to the PAT scheme, from 2012 until now, was in the rather abysmal range of less than one per cent (in the cement sector) to about 2.3 per cent in the thermal power industry.

If the Indian carbon markets were to become a success story, ambitions must be raised. While listing out the number of possible and preventable pitfalls, such as the lack of a revenue generation model in the proposed structure, or the low carbon price, and the lack of market stability, among other concerns, Parth Kumar of the CSE once again highlighted the issue of ambition. “Unambitious target setting shouldn’t be there… it should go beyond what the companies and the existing policies have said.”

Unfortunately, nowhere is this low ambition more obvious than in the determination of the “obligated sectors”. And to much surprise, as far as the latest update goes, the power sector is not included in this list.

Obligated sectors/entities refer to the industrial sectors/entities that would be given emission intensity targets that they would need to achieve, failing which they could buy carbon credits from the ICM; or, on the flip side, should they overachieve their target they could sell said credits.

Key challenges

“While most of the carbon markets around the world had chosen to begin with the power sector, it seems Indian carbon market plans to exclude the power sector from the market for the time being. However, there are compelling reasons why excluding the power sector from CCTS could pose problems,” the CSE report notes.

Not least of these compelling reasons should be that keeping the power sector out would be the best way to fail the objective of reducing emissions, given that nearly 40 per cent of India’s emissions could be attributed to the power sector, according to India’s own admission. 

(The writer is a Fulbright scholar and an independent Delhi-based journalist)