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Investing in the Future: The promise of carbon credits for India's sustainable growth

2 27
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Carbon markets allow companies to offset emissions by purchasing carbon credits, incentivising GHG reduction projects. Image: Shutterstock

The world experienced the wrath of climate breakdown in 2024. Not only was it the warmest year, but our generation witnessed extreme weather events on 93 percent of days. Despite a global consensus on the fight against climate change outlined in the Paris Agreement, the efforts have yielded a mixed bag of outcomes, at best. As the 3rd largest emitter of greenhouse gases and 5th largest economy globally, India stands at a crucial juncture of balancing economic interest with safeguarding the future of upcoming generations. To fulfil its commitment to achieving a net-zero state by 2070, India needs sustained action to decouple economic growth from emissions. However, decarbonisation efforts are dampened by hard-to-abate sectors such as steel, power & refining, and so on, due to a limited scope of reducing emissions intensity.

This necessitates a lever that could bridge the gap between economies & industries based on their emissions-offsetting potential. Carbon markets allow companies to offset emissions by purchasing carbon credits, incentivising GHG reduction projects. As per the World Bank's study, it is estimated that the adoption of carbon credits could reduce the cost of implementing countries' Nationally Determined Contributions (NDCs) by as much as $250 billion in 2030 while facilitating the removal of 50 percent more emissions by 2030 at no additional cost. Are carbon credits the anti-dote to a net zero future for India?

Understanding Carbon Credits

Carbon credits are financial instruments that quantify and trade reductions or removals of greenhouse gases. Each carbon credit represents one metric ton of carbon dioxide (CO₂) or its equivalent avoided from entering the atmosphere. They result from initiatives such as renewable energy projects, afforestation, and methane capture projects. They enable companies to compensate for emissions while encouraging investment in sustainability.

Carbon trading is conducted through the cap-and-trade system and the baseline-and-credit system. In the cap-and-trade system, there are established limits on emissions, and firms can trade excess or deficit allowances, promoting reductions at the lowest cost. The baseline-and-credit system awards credits to projects that reduce emissions beyond a defined baseline. These credits can then be traded in compliance or voluntary markets.

Carbon markets are indispensable for climate mitigation globally. Compliance markets, dominated by the European Union Emissions Trading System (EU ETS), reached €865 billion in 2022. Voluntary markets, fueled by corporate net-zero pledges, are also growing. India is the second-largest, accounting for 333 million voluntary credits. The 2022 Energy Conservation Act established a national carbon market, merging compliance and voluntary mechanisms. By utilising renewable energy, afforestation, and agriculture projects, India is moving forward with its climate goals while generating economic value. Read More

Also read: Are India's AI and sustainable energy ambitions compatible?

Current State of Carbon Credits in India

Although still evolving, India's carbon market is a key part of climate action strategy. India's history of carbon market participation dates back to 2002, when it ratified the Kyoto Protocol and became an early adopter of the CDM (Clean Development Mechanism) framework. Put simply, the CDM framework allowed developed countries to offset carbon emissions via projects in developing nations on a compliance basis. Starting with its first project in 2003, India has become 2nd largest host of CDM projects, accounting for 20 percent of total projects globally. After the global consensus during the Paris Agreement, India is actively working on transitioning credits generated under CDM to align with those under Article 6. This augments the scope for countries to voluntarily cooperate to fulfil the targets set out in their NDCs. India has instituted two domestic carbon market frameworks, not limiting itself to global carbon markets: PAT (Perform, Achieve & Trade) scheme & REC (Renewable Energy Certificates). Launched in 2012, the PAT scheme is a domestic regulatory mechanism to improve energy efficiency across energy-intensive industries. The designated industries under this scheme generate tradable Energy Saving Certificates (ESCerts) that can be bought on local power exchanges such as IEX & PXIL. Till now, the PAT scheme has successfully saved 25.77 Million Tons of Oil Equivalent (MTOE) by achieving energy-saving targets given to 1333 designated consumers spanning 13 sectors.

Additionally, India instituted RPO (Renewable Purchase Obligation) in 2011 to promote demand for renewables, under which large power procurers such as discoms (Distribution Companies) and captive consumers are mandated to fulfil a certain proportion of the energy mix through renewables by purchasing either directly or through RECs from renewable energy producers. RECs are integral in India's strategy to promote investment in renewables as they unlock additional revenue streams for green energy producers and allow obligated customers to prove compliance in areas where sourcing renewable energy is infeasible. RECs have played an instrumental role in transforming India's energy mix over the last decade, with renewables accounting for 46 percent of total installed capacity.

To further enhance net-zero efforts, GOI amended the Energy Conservation Act of 2022 to launch CCTS (Carbon Credit Trading Scheme) to establish a national framework that integrates with international carbon markets under Article 6 of the Paris Climate Agreement. With phase-wise rollout expected in 2025-26, CCTS would improve the adoption of the PAT scheme and augment the scope to nurture both........

© Forbes India