India prepares for a domestic carbon market with release of a draft carbon trading scheme

An electric bus in Hyderabad.

  • The government of India has released a draft of the Carbon Credit Trading Scheme giving a blueprint of organisational structure.
  • With impetus from COP 26, India aims to give the domestic carbon market a concrete shape by June.
  • Experts say that the market has the potential to reduce the cost of achieving Nationally Determined Contributions and net zero goals.

India’s carbon market is gradually taking shape with the latest push from the Ministry of Power which released a draft of the Carbon Credit Trading Scheme (CCTS). The draft establishes the institutional framework and mechanisms for the functioning of the Indian carbon credit market.

The carbon trading scheme was introduced through the Energy Conservation (Amendment) Bill, 2022 which provides for empowering the central government to specify such a scheme.

The power ministry is now in the process of finalising the CCTS draft, released on March 27, and has invited comments from the public before April 14. Experts say that the release of this scheme indicates that India is keen on developing a carbon market.

While speaking at an event on February 23, the Director of the Bureau of Energy Efficiency (BEE), Saurabh Diddi, said that the government is planning to notify the Carbon Credits Trading Scheme this June. He shared the details of the government’s efforts to prepare a robust and credible domestic market. The government plans to organise 20-30 workshops nationwide for discussions on various aspects of the market. “We want to ensure that these credits generated under Indian Carbon Market (ICM) should be credible enough that no one questions it in the future,” he added. The BEE is proposed to be the administrator of the ICM.

Factories emit smoke near Mumbai.
The proposed board which will regulate the Indian Carbon Market will suggest policies, setup framework for the for voluntary carbon credit trading, and specify criteria for selling carbon credit certificates to foreign buyers. Photo by Sumaira Abdulali/Wikimedia Commons.

Though the establishment of a carbon or emission market has been part of India’s overall climate action strategy, it has gained momentum after the Conference of Parties (COP26) organised in Glasgow. The concept of emissions trading is that countries sell excess emission units – emissions that they are permitted to have but not used – to other countries which need the excess units to meet their emission targets.

The blueprint

The draft of CCTS lays out the organisational architecture needed to set up and operationalise a domestic carbon market in India. It identified the role composition of key constituents – the regulator (India Carbon Market Governing Board), the administrator, the registry (the Grid Controller of India), the trading administrator (Central Electricity Regulatory Authority), exchanges and specifications for empanelling auditors and developing methodologies.

The draft proposes a structure for the Indian Carbon Market (ICM), including a voluntary trading and compliance market. Secretaries and joint secretaries of several crucial ministries in union government, will be part of the governing board, which will administer and regulate the market. It will include secretaries of the Ministry of Environment, Forest and Climate Change, Ministry of Power, Joint Secretaries of the Ministry of Finance, New and Renewable Energy, Steel, and Coal, along with the chairperson of Central Electricity Authority, CMD, Grid Controller of India Ltd, Director General of Bureau of Energy Efficiency. According to the draft, the proposed board will suggest policies and regulations for the market, set up the framework for voluntary carbon credit trading, and specify criteria for selling carbon credit certificates to foreign buyers.

The draft says that the Bureau of Energy Efficiency will be the administrator for the Indian Carbon Market and also work as the secretariat for Indian Carbon Market Governing Board (ICMGB). It will discharge several responsibilities, from developing standards and processes for registering projects under a voluntary mechanism to developing trajectories and targets for the entities under the compliance mechanism. The Bureau will also issue carbon credit certificates (CCC) and develop market stability mechanisms for carbon credits.

The Bureau will specify the procedure, including eligibility criteria for the accreditation of agencies to function as Accredited Carbon Verifiers.

Read more: [Explainer] What is carbon pricing?

Reacting over the draft, the founder of Iora Ecological Solutions, an environmental advisory firm, Swapan Mehra says, “This is a major step forward to make the idea of a domestic market, albeit a semi-voluntary one, a reality. The government has also taken an informed step and borrowed lessons from previous experiences like Clean Development Mechanism (CDM) and the voluntary market. Bringing the overall market into action will take time. Similarly, fixing economy-wide mandatory targets will need strong economic and technical analysis. But it is a welcome beginning. The cross-sectoral composition of the governing board and strong engagement of the robust technical capacity in and outside the government should make this possible.”

Neha Khanna, a manager at Climate Policy Initiative (CPI), also termed it a positive sign on India’s part. Along with setting ambitious goals of decarbonisation, India is rapidly moving towards a market mechanism that has the potential to solve many finance-related challenges. Mobilising capital from the developed world to transition towards a low carbon economy is difficult. It is clear so far. Though the country still needs global capital, the local carbon market can solve its financial need up to some extent, she added. CPI is a global think tank working towards a low carbon economy.

Evolving carbon market

The carbon market has fundamentally changed since the Kyoto Protocol, which created instruments based on the market, like the CDM. Operational since 2006, CDM is part of the global action to create a cleaner and more equitable future by financing emission reduction activities in developing countries. Under this concept, countries without emission reduction targets received CDM funding assistance for their emission reduction initiatives. The CDM projects produced Certified Emission Reductions (CERs), which nations with certain emission reduction targets (mostly developed nations) purchased to achieve their emission-reduction targets. However, it has its share of criticism. As per a study published in Plos Climate Journal in August 2022, the financing outcomes under CDM do not appear equitable.

A foldable solar unit. Along with rapid decarbonisation India is also acting on a market mechanism that has the potential to solve climate-finance related problems. Photo by Manish Kumar.

Under the Paris Agreement, the concept of a carbon market evolved as every country was supposed to have its Nationally Determined Contributions (NDCs). Parties negotiated rules of Article 6 of the agreement and agreed upon during COP26 in Glasgow. It outlines the mechanism of the voluntary carbon market. To avoid double counting of carbon credits, the article has a provision for ‘corresponding adjustment.’ This adjustment, explained by the Minister of Power R.K. Singh in December 2022 in the Lok Sabha, means that carbon credit that is sold outside the country, cannot be used for meeting the NDCs of the originating country. Thus, India banned carbon trading internationally. Carbon credit will, on priority, be used within the country to meet India’s NDCs, he added, saying that it may be permitted in specific cases where high technology expensive assets create carbon credits.

Moving forward, under the Article 6.2 mechanism, India listed 12 GHG mitigation activities for trading carbon credits in February 2023. It includes the storage component of renewable energy storage, solar thermal power, off-shore wind, green hydrogen, compressed biogas, emerging mobility solutions, high-end technology for energy efficiency, etc.

Now the country is planning to prepare the complete blueprint of its local carbon market by June 2023.

A potential solution to mobilise finance

Stakeholders including academia, civil society and market players have questions how this carbon market will develop and whether India is looking at the carbon market as a means of financing low carbon growth or simply reducing emissions. They are also curious whether it will be entirely domestic or it should be internationally linked.

These questions were put in front of Saurabh Diddi by R.R. Rashmi, a distinguished fellow at TERI, during an event organised by World Bank and TERI in March. Responding to these queries, he indicated that policymakers are considering both domestic and international segments while planning the market structure. He said, “We should not restrict it (carbon market) to a domestic market because eventually, it is going to have a link with international trading as well. Tomorrow if we achieve more than our NDC goals, this market will be linked to the international market. Right at the beginning, when we are in the process of developing the infrastructure, we are considering our registry as a meta registry that would be in sync with all the international markets. It will also be in sync with the voluntary carbon markets.”

Experts believe that the carbon market could help bring down the cost of NDCs and Net Zero goals. Photo by Neil Palmer/Flickr.

However, Neha Khanna from CPI feels that the evolving carbon market can potentially fill the existing financial gap for the energy transition. She said that India is the third biggest emitter even though the per capita emission is still one of the lowest. It is because of the sheer size of the economy that India needs to transition to a low-carbon economy. “We know India is on the path of a low carbon economy. We know the government is serious about it, but where do you get the money? We are nowhere near the amount required to enable this transition. We were at roughly 25-27% of the total requirements, that too without factoring in new NDCs and a ‘just’ transition. The carbon markets can be used for financing this transition,” she added. She was referring to a report published by CPI in 2022.

Mehra says that the key premise of the carbon market is that the trade will result in the most efficient pathway to emission reduction. It promises to incentivise sectors and players whose cost of mitigation is higher and also to transfer finances to those who can do it more cost-effectively. It leads to an overall gradual move to efficiency across all sectors and players. The Indian carbon market, well implemented, can do the same – reducing the cost of achieving our NDCs and net zero goals while still driving innovation and technology advancements.


Banner image: An electric bus in Hyderabad. Experts say that given the size of India’s economy, the country must aim to transition to a low-carbon economy and the carbon market can be used to help financing this progression. Photo by LoveofZ/Wikimedia Commons.

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