With the global focus increasingly shifting towards carbon pricing as a tool to combat climate change, India’s efforts to design and implement an effective carbon market could have profound implications not only for its domestic climate goals but also for the global carbon trading landscape.
Carbon pricing is globally recognized as a cost-effective mechanism to internalize the environmental costs of greenhouse gas (GHG) emissions. In its essence, carbon pricing assigns a monetary value to GHG emissions, thereby incentivizing reductions and promoting investments in low-carbon technologies. The two primary forms of carbon pricing are carbon taxes and emission trading systems (ETS), also known as cap-and-trade systems. The former imposes a direct cost on emissions, while the latter allows for the trading of emission permits, letting market forces determine the price of carbon.
Globally, nearly a quarter of all GHG emissions are now covered by carbon pricing initiatives, with the G20 countries—responsible for about 80 per cent of global emissions—playing a significant role. Among these nations, a majority have implemented either carbon taxes or ETS, reflecting a growing recognition of carbon pricing as a crucial tool in climate policy.
India’s unique position and the evolution of its carbon market
India’s carbon market evolution is rooted in the country’s specific socio-economic and developmental context. The nation’s first significant step towards market-based emission reductions came with the launch of the Perform, Achieve, and Trade (PAT) scheme in 2012. This initiative aimed at enhancing energy efficiency in energy-intensive sectors, incentivizing industries to adopt more efficient technologies and practices.
The PAT scheme was, however, just the beginning. Recognizing the need for a more comprehensive approach, India is now in the process of formulating a National Carbon Market. This market is expected to transition from focusing solely on energy efficiency to a broader goal of reducing carbon emissions across various sectors. The Ministry of Power’s notification of the Carbon Credit Trading Scheme (CCTS) in June 2023 under the Energy Conservation Amendment Act, 2021, marked a significant milestone in this journey. The CCTS aims to establish a full-fledged compliance market by 2030, positioning India among the top three global carbon markets.
One of the primary challenges facing India’s carbon market is the need to balance economic growth with environmental sustainability. Unlike developed countries where carbon markets primarily aim to reduce total emissions, India’s short to medium-term goal is to reduce emissions intensity—emissions per unit of economic output—while continuing to drive economic expansion. This approach acknowledges that India’s total energy consumption will increase as it continues to develop, necessitating a focus on more efficient and cleaner energy use.
Technology and Finance: The Twin Pillars of Success
For India’s carbon market to succeed, significant advancements in technology and finance are imperative. The country needs to expand its clean energy capacity beyond its current focus on solar and onshore wind. Technologies such as nuclear power, solar thermal, green hydrogen, and offshore wind are still underdeveloped in India, and there is limited use of energy storage technologies, which are critical for the effective functioning of a carbon market.
Global cooperation and support, particularly in terms of technology transfer and international finance, will be crucial. For instance, the domestic manufacturing of key components, such as polysilicon for solar cells, is almost non-existent, making the country heavily reliant on imports.
Power sector reforms
India’s power sector, characterized by its inefficiencies, poses another significant challenge to the successful implementation of a carbon market. Approximately 50 per cent of electricity consumption in India is not subject to proper pricing mechanisms, with large portions of electricity being heavily subsidized, particularly in agriculture and residential sectors. Addressing these inefficiencies is critical to ensuring that carbon pricing can effectively drive emissions reductions and energy efficiency improvements.
Designing India’s Carbon Market: Key Considerations
The design of India’s carbon market needs to consider several critical factors to ensure its effectiveness and sustainability. Emission targets or allowances should be dynamically adjusted to reflect fluctuations in demand and supply, thus preventing issues like the oversupply of certificates experienced in the PAT scheme. Additionally, revenues generated from carbon pricing should be strategically reinvested in priority sectors and communities to address economic disparities and promote equitable growth. Stability in carbon prices is crucial for maintaining market confidence and fostering long-term investments in low-carbon technologies. Furthermore, the market should prioritize sectors that are prepared for carbon trading, incorporating sector-specific obligations and incentives to accelerate the adoption of clean technologies.
A key consideration in the design of India’s carbon market is ensuring that it is inclusive and equitable. The potential impact of carbon pricing on energy affordability, particularly for vulnerable communities, must be carefully managed. Moreover, the informal nature of much of India’s economy could hinder broad-based participation in the carbon market, necessitating strategies to include a wider range of stakeholders.
India can draw valuable lessons from the experiences of other countries with established carbon markets, such as the European Union’s ETS and China’s provincial and national ETS. One potential approach could be the development of sub-national ETS pilots in different regions of India, allowing for the testing and refinement of emissions trading mechanisms tailored to the specific needs and dynamics of each region.
While India’s carbon market will need to be tailored to its unique context, it should also consider integration with global carbon markets. This would facilitate international trade of carbon credits, providing Indian industries with access to larger markets and potentially higher returns on their investments in emissions reductions.
India’s carbon market, still in its formative stages, holds significant potential to contribute to the country’s climate goals and economic development. However, its success will depend on carefully balancing the need for economic growth with environmental sustainability, ensuring equity and inclusivity, and fostering technological and financial innovation. As India continues to chart its path towards a lower-carbon future, the development of a robust and dynamic carbon market will be a critical component of its strategy. By leveraging global experiences, embracing innovation, and fostering international collaboration, India can position itself as a leader in the global carbon market arena.
For further reading, refer to the source “Charting Pathways for India’s Carbon Market” by the Observer Research Foundation.