Carbon market: A way to fight climate change

Earlier this month, the Lok Sabha passed the Energy Conservation (Amendment) Bill, 2022, which provides for the establishment of carbon credit markets and brings large residential buildings under the energy conservation regime. As India presses ahead with its climate commitments, Prime Minister Narendra Modi is expected to roll out a national carbon trading platform any day now. The government may also come up with guidelines where carbon trading would be obligatory for some sectors.

Carbon credits are vital to channelize funds into green projects, and their recognition as an important resource in India's journey to net zero is well appreciated. We can see many startups starting to build technology-led solutions for carbon measurement, monitoring and verification, and this move will provide an impetus for others to capitalize on the opportunity in climate tech.

The Bill mandates the use of non-fossil sources, including green hydrogen, green ammonia, biomass, and ethanol, for energy and feedstock. It also enhances the Energy Conservation Building Code and increased the members in the governing council of the Bureau of Energy Efficiency. This Bill will bring large residential buildings under the energy conservation regime.

Carbon markets are trading systems where credits are bought and sold, permitting an entity to emit a certain amount of greenhouse gases. There are generally two types of carbon market -compliance and voluntary. The Centre's move would make it a compliance market for some sectors such as cement, steel, thermal power plants and fertilizers. Mind you that India had promised to attain net zero carbon emissions by 2070 and cut the country's emissions by one million tonnes in the next 10 years, at the COP26 summit in November 2021. And establishing a carbon credit market can be the first step toward this goal.

All these developments will also have to be seen in light of a recent report by the Trade Promotion Council of India (TPCI), which says that India has generated approximately 30 million carbon credits, which is the second highest transacted volume in the world. It is one of the largest beneficiaries of total world carbon trade through CDM, claiming about 31 per cent. India is expected to gain at least $5 billion to $10 billion from carbon trading (Rs22,500 crore to Rs45,000 crore) over a period of time.

Mind you that India is no stranger to carbon credits, which it has accumulated through participation in Clean Development Mechanism (CDM) projects. The strong experience in CDM projects has helped India develop projects that qualify for Voluntary Carbon Credits. However, compared to developed markets like the US, Voluntary Carbon Credits market in India is still at its nascence. There is a need for regulatory frameworks and policy guidelines that provide clear mandates on emission reductions.

It is pertinent to mention here that carbon markets have already proven to be one of the most effective drivers of reducing emissions, offering the lowest-cost emission reductions. Incentives in the form of carbon credits against the deployment of clean technologies will lead to the private sector's involvement in climate actions. Carbon credits would certainly incentivize entities with low reduction costs to reduce emissions beyond their mandate. Trading in the carbon market could also reduce the overall cost of emission reductions at the societal level in India.