• As India develops its economy to meet the growing needs of its people, it will confront major challenges due to climate change consequences and the allied necessity to curb carbon emissions.
• The impact of global warming is becoming more severe, and there is an urgency to embrace practices that mitigate greenhouse gas (GHG) emissions.
• Establishing a vibrant carbon trading network is one of the solutions that are being adopted or considered to tackle the emergency.

What are carbon credits?

• Carbon credits can be considered like a temporary licence for an organisation to emit a specific quantity of CO2 in a particular year.
• This mechanism allows a company with low or no emissions to sell credits in the market via a carbon trading framework or carbon exchange.
• This offsets the emissions of another company willing to pay for the credits.

What is the need for a carbon credit mechanism?

• With global temperatures and GHG emissions rising annually, there is an increased awareness amongst governments, investors, consumers and other stakeholders of their overall carbon footprint, and the need to control it.
• Decarbonisation avenues are very limited for some industrial companies and hard-to-abate segments such as cement, chemicals, iron and steel production and non-ferrous metals.
• Those avenues are also a costly proposition for them compared to transport, power generation and some other industries.
• These companies are some of the biggest contributors to universal GHG emissions, hence they are mandated to meet emission reduction goals, because of either local laws or their in-house policies.

How will carbon credits help?

• Carbon credits can assist companies in meeting sustainability targets.
• Companies can purchase credits or fund programmes that create carbon credits.

What are steps taken by Government?

• The Government is planning to set up the Indian Carbon Market (ICM) by establishing a national framework that will help in decarbonising the domestic economy by pricing GHG emissions via trading in carbon credit certificates.
• India already has an energy savings-linked market mechanism.
• However, carbon credit trading will give a fillip to energy transition due to its greater scope for covering the country’s potential energy segments.

Draft Framework for the Indian Carbon Credit Scheme 2023:

• The draft framework for the Indian Carbon Credit Scheme 2023 was notified by the Union government.
• The Bureau of Energy Efficiency functioning under the Ministry of Power has been tasked to develop the Carbon Trading Scheme in collaboration with the Ministry of Environment, Forest & Climate Change.

Working of ICM:

• GHG emissions intensity targets and benchmarks would be developed in sync with the domestic emissions trajectory, according to the climate goals.
• Consequently, carbon credit trades will be aligned as per the performance vis-à-vis the sectoral trajectories.
• The draft notification has no provision for procedures, regulations or guidelines for the functioning of carbon markets.
• This responsibility will be vested with a National Steering Committee chaired by the Secretary, Ministry of Power.

International Implications

• It is essential to recognize that as carbon-related tariffs like CBAM (Carbon Border Adjustment Mechanism) begin to influence trade, businesses would need to factor in both national and international implications.
• Given the interdependencies and complexity of the trade, it is challenging to accurately predict and model the impact.
• Regulatory authorities must closely oversee the dynamics of the carbon credit market and devise systems to ascertain its smooth functioning on a global scale.

How will ICM help?

• ICM will help mobilise investments for the transition to a low-carbon ecosystem.
• It will help India lower the emissions intensity of its GDP by 45% by 2030 compared to the 2005 levels, thereby meeting its NDC (Nationally Determined Contribution) target related to its global climate commitments.
• It will help in decarbonising the commercial and industrial segments and assist in meeting the ambitious target of turning net zero by 2070 set by the government.
• It will offer flexibility to companies in hard-to-abate segments to augment their GHG emission efforts through carbon market credits.
• The mechanism could help attract finance and technology for sustainable projects that can generate carbon credits.
• It can be an effective channel in mobilising a major proportion of funds required for the low-carbon transition.

Impact of Introducing ICM

• The Centre’s decision will create more awareness, change and innovation across hard-to-abate industries.
• Enterprises driven by incentives and penalties would begin embedding the environmental impact as a key parameter in their strategic decisions.
• This will encourage investments allowing the shifting of business and manufacturing towards practices with low carbon footprints.

As the country moves steadily towards a net-zero world, 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 technologies to clean energy systems. As India tries to strike a balance between economic needs and environmental concerns, a vibrant carbon trading mechanism can be crucial in creating a more sustainable future.