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India consults on launch of compliance/offset carbon market in 2023

Highlights

Compliance, voluntary segments

Fungibility of ESCerts, RECs

Sectoral targets based on NDC

  • Author
  • Ruchira Singh    Agamoni Ghosh
  • Editor
  • Henry Edwardes-Evans
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A compliance carbon market in India is due to commence in earnest in 2026 after a transition period starting next year, according to draft plans from the Power Ministry seen by S&P Global Commodity Insights.

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A compliance market would open to 12 sectors such as steel, cement and power generation, while a parallel voluntary market would open to sectors such as agriculture, aviation and vehicle manufacturing, according to a recent presentation by the Power Ministry to stakeholders.

In a first phase to end-2025, the trading of energy saving certificates from India's Perform, Achieve, Trade (PAT) scheme would take place in the compliance market, with optional conversion of ESCerts (Energy Saving Certificates) to the new Carbon Credit Certificates (CCCs). From 2026, trading would be focused on CCCs.

At the same time, a parallel voluntary offset market would open to carbon reduction/removal projects and for the conversion of Renewable Energy Certificates (RECs) and Clean Development Mechanism credits (CERs).

Enabling fungibility between the various existing certificates and the new Carbon Credit Certificates "can result in trading of these existing ESCerts and RECs in the voluntary market", the ministry said.

"Allowing offset credits within the compliance scheme could eventually create substantial demand," said Jatin Kapoor, head of consulting firm Climate Transactions at Emergent Ventures India.

"Moreover, any kind of demand coming into the market would be beneficial for entities outside the obligated scheme," he said.

India's first draft National Carbon Market policy was issued in October 2021. It is now in a stakeholder consultation phase.

Among responses, market actors have suggested India's carbon credits registry be linked to existing global registries so that "the wheel is not reinvented" for monitoring, verification and reporting of credits.

"From 2014, a lot of money has come (from the VCM)," said Samrat Sengupta, Vice President, New Business and Market Strategy at EKI Energy Services, a climate change and sustainability advisor.

"If the Indian government makes the VCM market fungible, then an additional layer of audit will effectively get attached," he said.

Platts, a part of S&P Global Commodity Insights, assessed the CEC price, reflecting bids, offers and trades for CORSIA-compliant credits, at $3.25/mtCO2e Nov. 15, while the Platts CNC, which reflects the most competitive nature-based carbon credits that either avoid or remove GHG emissions, stood at $5.40/mtCO2e.

Market structure

As noted, India's PAT and REC schemes are to be rolled into the new carbon market, in part to drum up new demand for the current surplus in certificate supply.

The PAT scheme was launched in 2008 to enhance the energy efficiency of 13 obligated sectors (known as Designated Consumers) that as a group account for 50% of India's primary energy consumption.

The REC scheme, launched in 2011, sets Renewable Purchase Obligations on power distributors, open access consumers and power generators. The trade of RECs on exchanges was designed to offer a small, incremental revenue stream for renewable energy assets.

The new market would have three types of Carbon Credit Certificates -- converted CCCs, offset CCCs and mandatory CCCs - with a uniform metric of one tonne of CO2e.

Converted CCCs would exist during Phase 1 of the compliance market, for converted ESCerts and RECs (with conversion based on certain criteria being met via a quality check).

Offset CCCs would come from projects feeding into the voluntary Offset Mechanism market, while mandatory CCCs would relate to Phase 2 of the compliance market from 2026.

State body Power System Operation Corporation would act as the registry body for all CCCs, with Indian Energy Exchange and Power Exchange India acting as trading platforms.

As for target setting and performance, greenhouse gas intensity trajectories are to be developed for each compliance sector based on India's national climate targets enshrined in its NDC, according to the ministry's draft proposals.

These would be defined and proposed for differing compliance periods, for instance of three years, with reviews ahead of the next period to reflect any change in India's NDC commitments.

Inter-ministerial consultations will follow the current public consultation on the dossier.

Amendments to the Environment (Protection) Act and the Energy Conservation Act are also required to underpin the new market. The winter session of parliament will be held in December.

INDIA: PROPOSED CARBON MARKET STRUCTURE

Compliance market
Sectors (can generate/sell/purchase)
Present (2022)
Perform-Achieve-Trade Scheme
Phase 1 (2023-2025)
PAT Scheme Transition to Energy Compliance market - ESCert trade with optional conversion to CCCs
Thermal power stations, iron and steel, aluminum, fertilizer, cement, chlor alkali, petroleum refineries, petchems, pulp and paper, commercial buildings, railways, textiles
Phase 2 (2026 onwards)
Carbon Credit Trading Mechanism - trade in CCCs
Offset market
Sectors (can generate/sell)
2023 onwards
Project-based Offset Mechanism - carbon reduction/removal projects and conversion of RECs, CERs
Afforestation & reforestation, agriculture, waste handling and disposal, vehicle manufacture, aviation, institutes, ports, renewable energy generators, other

GHGs to be covered: CO2, CH4, N2O, HFC, PFC, SF6

Source: Bureau of Energy Efficiency, Ministry of Power, Oct. 19, 2022, S&P Global Commodity Insights