Charting the future of India’s carbon market

India is making strides in tackling greenhouse gas emissions by implementing the Carbon Credit Trading Scheme. In its formative phases, the scheme will prioritize the management of CO2 and industrial gases.

In August, India unveiled a detailed blueprint to guide industries toward achieving specific emission reduction targets. This foundational plan paves the way for the CCTS, which is expected to launch in the 2026-27 financial year, with carbon credits becoming tradable shortly thereafter. By emphasizing emissions intensity, or reducing emissions relative to industrial output, India seeks to balance economic growth with environmental responsibility.

The core of India's CCTS is its focus on emissions intensity, offering a flexible framework tailored to the needs of a rapidly developing economy. This innovative approach encourages industries to cut GHG emissions per unit of output, paving the way for cleaner and more efficient technologies.

The Bureau of Energy Efficiency, a key government agency dedicated to enhancing energy efficiency across multiple sectors, will spearhead this project. It will work closely with sector-specific technical committees to evaluate the GHG emissions of key players in the industry.

Industries such as cement, iron and steel, pulp and paper, and petrochemicals will be required to create comprehensive monitoring plans that outline their emissions sources and methodologies. The initial phase will concentrate on these sectors, with plans to expand to additional industries as approved by the government.

So far in 2024, India's total GHG emissions stand at 2.9 billion mtCO2e, with projections indicating a 35% increase by 2050, according to S&P Global Commodity Insights. The power generation sector stands out as a major contributor, emitting 1.4 GtCO2e in 2024, but it will not be part of the initial compliance mechanism; its inclusion is anticipated in later phases.

The industrial sector is the second-largest emitter, accounting for 600 million mtCO2e. Within this sector, the iron and steel industry plays a significant role, responsible for 45% of industrial emissions and 10% of India's total emissions in 2024, according to Commodity Insights.

Looking ahead, emissions from the industrial sector -- including those from the sectors in phase 1 of the compliance mechanism under the CCTS -- are expected to rise by 41% by 2050. India's overall emissions are projected to peak in 2047. Entities establish GHG emissions intensity targets based on verified data, encompassing both direct and indirect emissions within defined boundaries.

Direct emissions stem from the production processes, while indirect emissions result from the consumption of purchased electricity and heat. To ensure the accuracy and integrity of the emissions data, the BEE will rigorously review and approve monitoring plans and emissions calculations. Entities must also submit a performance assessment document, including a verification certificate from an accredited carbon verification agency.

Trading carbon credits

Entities that successfully reduce their GHG emissions intensity beyond the established targets will earn carbon credit certificates, which can be traded on carbon markets. This trading system incentivizes companies to invest in cleaner technologies and practices.

Conversely, entities that fail to meet their targets must purchase CCCs to offset their excess emissions, thereby creating a market-driven mechanism that promotes environmental accountability.

During stakeholder consultations for the compliance mechanism under CCTS in November 2023, draft procedures indicated that the existing Perform Achieve-Trade scheme, which encourages industries to enhance energy efficiency, is set to transition into the CCTS as companies complete their participation in the PAT. However, current guidelines lack clarity on how this transition will unfold or how companies will meet both PAT and CCTS requirements.

The CCTS excludes certain emissions sources, including biomass, renewable energy and alternative fuels, from GHG emissions intensity calculations, as they are typically considered as carbon-neutral or low-emission.

Additionally, emissions captured or utilized through carbon capture and storage technologies are not counted, as they are effectively removed from the atmosphere. Other emissions, including those from residential energy consumption and transport outside industrial boundaries, also fall outside the direct control of industrial entities.

To implement CCTS successfully, stakeholders must prioritize effective training and awareness. While the scheme initially targets specific energy intensive sectors, its expansion will hinge on government approvals, enhancing its capacity to reduce GHG emissions across a broader range of industries.

This initiative is poised to drive the adoption of innovative technologies and create a vibrant carbon credit trading market, significantly contributing to India's climate objectives.

Upcoming guidance from the BEE on CCCs issuance, validity, and pricing will be essential for stakeholders navigating this transformative landscape.

This article first appeared in the October 2024 edition of the Commodity Insights magazine.

Further reading: India releases detailed procedure for compliance mechanism under carbon credit trading scheme