1. Carbon Markets

As India develops its economy to meet the growing needs of its people, the country will confront serious challenges due to climate change consequences and the allied necessity to curb carbon emissions.

With the impact of global warming becoming more severe, there is immense urgency to embrace practices that mitigate greenhouse gas (GHG) emissions.

A vibrant carbon trading network is among the numerous solutions that are being adopted or considered to tackle the emergency.

Carbon Markets

• About: Carbon marketsare essentially a tool for putting a price on carbon emissions— they establish trading systems where carbon credits or allowances can be bought and sold.
  • A carbon credit is a kind of tradable permit that, per United Nationsstandards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
  • Carbon allowances or caps, meanwhile, are determined by countries or governmentsaccording to their emission reduction targets.
  • Carbon trading started formally in 1997 under the United Nations'' Kyoto Protocol.
• Types:There are broadly two types of carbon markets that exist today, viz:
  • Voluntary Markets: Those markets in which emitters buy carbon credits to offset the emission of one tonne of CO2 or equivalent greenhouse gasses.
    • Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
    • In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.
      • For Instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate.
    • In voluntary markets, credits are verified by private firms as per popular standards.
  • Compliance Markets:They are set up by policies at the national, regional, and/or international level and are officially regulated.
    • Today, compliance markets mostly operate under a principle called “cap-and-trade”, most popular in the European Union (EU).

Status of the Carbon Market in India

• In India, the Centre is planning to set up the Indian Carbon Market (ICM)by establishing a national framework that will help in decarbonising the domestic economy.
  • The draft framework for the Indian Carbon Credit Scheme 2023 was recently notified by the Union government.
  • TheBureau of Energy Efficiency functioning under the Ministry of Power has been tasked to develop the Carbon Trading Scheme in tandem with the Ministry of Environment, Forest & Climate Change.
• The ICM will have following benefits:
  • It will help India lower the emissions intensity of its GDP by 45% by 2030compared to the 2005 levels, thereby meeting its NDC target related to its global climate commitments.
    • ICM would help in decarbonising the commercial and industrial segments (in line with India’s net zero by 2070).
  • It will give a fillip to energy transition due to its greater scope for covering the country’s potential energy segments.
    • GHG emissionsintensity targets and benchmarks would then be developed in sync with the domestic emissions trajectory, according to the climate goals.
  • Although the ICM would be regulated, it will offer flexibility to companies in hard-to-abate segments to augment their GHG emission effortsthrough carbon market credits. It will also create more awareness, change and innovation across hard-to-abate industries.
  • It could help attract finance and technologyfor sustainable projects that can generate carbon credits.

Benefits of Carbon Markets

• Financial Incentives:Carbon markets establish a financial incentive system where entities are allotted emission limits and can trade emission permits. This encourages companies to reduce emissions below their limits and penalizes excess emissions.
• Cost-Effective Reductions:Carbon markets prioritize cost-effective emission reductions. Companies that can reduce emissions more easily and at a lower cost are incentivized to do so, leading to overall emission reductions at a lower economic cost.
• Business Flexibility:Carbon markets provide businesses with flexibility in choosing how to reduce emissions. They can invest in cleaner technologies, improve energy efficiency, or purchase carbon credits from emission reduction projects elsewhere, allowing for a diverse range of strategies.
• Clean Tech Promotion:These markets stimulate the development and adoption of cleaner technologies and practices. Companies are motivated to innovate and invest in technologies that reduce emissions to lower their compliance costs in the carbon market.
• Support for Sustainability:Carbon markets generate funds for sustainable projects that reduce emissions, such as renewable energy, afforestation, reforestation, and energy efficiency projects. These projects earn carbon credits that can be sold in the market, attracting investments.
• Climate Goal Alignment:Carbon markets can be tailored to align with a country''s climate goals and international commitments, helping nations meet their emission reduction targets, such as those set in the Paris Agreement, by creating a mechanism for tracking and reducing emissions.
• Transparency & Accountability:Participation in carbon markets requires accurate measurement and reporting of emissions. This leads to greater transparency and accountability in tracking and reducing greenhouse gas emissions.
• Revenue Generation:Governments can generate revenue through carbon markets by auctioning emission permits or imposing carbon taxes. This revenue can be reinvested in sustainability initiatives or used for other public purposes. Additionally, companies can earn revenue by selling carbon credits.
  • For instance, Tesla, the electric car maker, sold carbon credits to legacy car manufacturers to the tune of USD 518 million in just the first quarter of 2021.

Challenges Before Carbon Markets

• Double Counting of Emissions Reductions:This occurs when the same emission reduction is claimed by more than one entity or under more than one system. This can undermine the environmental integrity and credibility of carbon markets.
• Quality and Authenticity of Climate Projects:Ensuring the credibility and genuineness of climate projects poses the challenge of determining their level of additionality, measurability, verifiability, permanence, and the prevention of emissions shifting.
• Poor Market Transparency:This relates to the ambiguity about the availability and accessibility of information on the supply and demand of carbon credits or offsets, as well as their prices, transactions, and impacts.
• Greenwashing:This is the practice of using carbon credits or offsets to create a false or misleading impression of environmental responsibility, without actually reducing emissions or changing business practices. This can erode public trust and divert resources from more effective climate actions.
• Regulatory Uncertainty:This involves the lack of clarity or stability of the policies and regulations that govern carbon markets, both at the national and international levels. This can create risks and barriers for market participants and investors.
  • For instance, in India, there is a question of whether the Ministry of Power is the appropriate Ministry to regulate the carbon credits trading schemeor whether it should be the Ministry of Environment.

Steps to Overcome the Challenges of Carbon Markets

• Developing a common taxonomy and terminologyfor carbon credits and offsets, as well as a consistent accounting framework to avoid double counting of emissions reductions.
• Establishing clear and credible quality criteriaand verification mechanisms for climate projects that generate carbon credits or offsets, based on principles such as additionality, measurability, permanence and avoidance of leakage.
• Enhancing market transparency and disclosureby providing reliable and timely data and reporting on the supply and demand of carbon credits or offsets, as well as their prices, transactions and impacts.
• Preventing and penalizing Greenwashingby setting clear and enforceable rules and guidelines for making claims and communicating about carbon credits or offsets, as well as ensuring public awareness and scrutiny.
• Harmonizing and integrating different carbon market systemsat the national, regional and international levels, as well as creating linkages and synergies with other policy instruments and initiatives.

As the country moves steadily towards a net-zeroworld, decarbonising industrial activity will be critical. It is here that industry leaders in carbon management solutions and clean energy transition can play a pivotal role in facilitating the transition towards a net-zero future by helping the nation switch from fossil fuel or legacy technologies to clean energy systems. As India tries to strike a delicate balance between economic needs and environmental concerns, a vibrant carbon trading mechanism can be crucial in creating a more sustainable future.

2. CBAM

India recently flagged concerns relating to sensitive and confidential trade data of its exporters getting compromised while complying with the European Union’s Carbon Border Adjustment Mechanism (CBAM).

• CBAM is a proposed European Union (EU) tariff on carbon-intensive products.
• Purpose: To put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU and to encourage cleaner industrial production in non-EU countries.
• It was adopted on May 17, 2023, and the CBAM transitional period started October 1, 2023.
• It is designed to counter the risk of carbon leakage and operates by imposing a charge on the embedded carbon content of certain imports that is equal to the carbon price of domestic production.
• How does it Work? 
• If implemented as planned, EU importers will have to buy carbon certificates corresponding to the carbon price that would have been paid in the EU if the goods had been produced locally.
• The price of the certificates would be calculated according to the auction prices in the EU carbon credit market.
• The amount of certificates required would be defined yearly by the quantity of goods and the embedded emissions in those goods imported into the EU.
• Companies in countries with a domestic carbon pricing regime equivalent to the EU’s will be able to export to the EU without buying CBAM certificates.
• The CBAM will initially affect goods imported from non-EU countries that are particularly carbon-intensive, namely specified goods within the cement, electricity, fertilisers, aluminium, iron, steel, and hydrogen sectors, as well as some upstream and downstream products (mainly iron, steel, and aluminium). 
• Transition Period:
• In the transitional phase of the implementation of the CBAM, from October 1, 2023, to December 31, 2025, affected companies are subject to a reporting obligation without financial obligations.
• During this period, importers must determine and document direct and indirect emissions that occur in the course of the production process of the imported goods.
• In addition, affected EU importers are obliged to prepare a quarterly CBAM report that provides information on the imported quantity of CBAM goods, the direct and indirect embedded emissions contained therein (reporting on indirect embedded emissions is initially only for cement, electric power, and fertiliser), as well as any carbon taxes effectively paid in the country of production.
• With the start of certificate trading from January 1, 2026, importers are obliged to purchase sufficient emission allowances for imported embedded emissions during the year.

3. INDIA's GREEN CREDIT PROGRAMME

• Prime Minister Narendra Modi launched an initiative focusing on generating Green Credits through plantation on degraded wasteland.
• During a high-level event at the ongoing climate talks - COP28 in Dubai (UAE), he highlighted that the Green Credits Initiative surpasses the commercial nature of carbon credits.

Carbon Credits

• Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases.
• One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gases.
• Companies that pollute are awarded credits that allow them to continue to pollute up to a certain limit, which is reduced periodically.
• Meanwhile, the company may sell any unneeded credits to another company that needs them.
• Private companies are thus doubly incentivized to reduce greenhouse emissions:
• First, they must spend money on extra credits if their emissions exceed the cap.
• Second, they can make money by reducing their emissions and selling their excess allowances.

Green Credits Initiative

• In a landmark announcement at the COP28 (1st December 2023), the Indian PM launched the 'Green Credit Initiative,' a pathbreaking program aimed at reshaping global environmental policies.
• He also launched the official portal of the Green Credit Initiative at COP28.

Features of Green Credits Initiative:

• This initiative involves creating an inventory of degraded wastelands, which can be utilised for planting by individuals and organisations.
• Participants undertaking environmentally positive actions will receive tradable green credits.
• The entire process, from registration to plantation, verification, and issuance of green credits, will be digitised.
• The portal will collect ideas, knowledge, and experiences related to tree planting and environmental conservation.
• This platform aims to influence global policies, practices, and the demand for green credits.
• The Green Credits Initiative mirrors the Green Credit Programme launched by the Union government in October, 2023.

Green Credit Programme

• To take ahead the 'LiFE' - 'Lifestyle for Environment' movement announced by the Prime Minister in 2021, the Ministry of Environment, Forest and Climate Change introduced Green Credit Programme (GCP) in 2023.
• GCP is an innovative market-based mechanism designed to incentivize voluntary environmental actions across diverse sectors, by various stakeholders like individuals, communities, private sector industries, and companies.
• The GCP's governance framework is supported by an inter-ministerial Steering Committee.
• The Indian Council of Forestry Research and Education (ICFRE) serves as the GCP Administrator, responsible for program implementation, management, monitoring, and operation.
• The GCP will cover 8 types of activities:
• Tree plantation which is meant to promote activities for increasing the green cover across the country.
• Water management is meant to promote water conservation, water harvesting, and water use efficiency or water savings, including treatment and reuse of wastewater.
• Sustainable agriculture is meant to promote natural and regenerative agricultural practices and land restoration to improve productivity, soil health, and nutritional value of food produced.
• Waste management is meant to promote circularity, sustainable and improved practices for waste management, including collection, segregation, and environmentally sound management.
• Air pollution reduction is meant to promote measures for reducing air pollution and other pollution abatement activities.
• Mangrove conservation and restoration, which is meant to promote measures for conservation and restoration of mangroves.
• In its initial phase, the GCP focuses on two key activities:
• Water conservation and
• Afforestation
• Draft methodologies for awarding Green Credits have been developed and will be notified for stakeholder consultation.
• The Green Credit Registry and trading platform, being developed by ICFRE along with experts, would facilitate the registration and thereafter, the buying and selling of Green Credits.