Context
The Government of India plans to make compliance with the Carbon Credit Trading Scheme (CCTS) mandatory for companies in the steel industry. The decision is part of India’s broader strategy to reduce industrial greenhouse gas emissions and promote cleaner technologies. The scheme was introduced under the Energy Conservation (Amendment) Act, 2022, which laid the foundation for a domestic carbon market in India.
What is the Carbon Credit Trading Scheme?
- CCTS: The Carbon Credit Trading Scheme (CCTS) is a market-based mechanism introduced to regulate and trade carbon credits under the Indian Carbon Market (ICM).
- The CCTS aims to decarbonize the Indian economy by putting a price on greenhouse gas (GHG) emissions and enabling carbon trading.
- Transition from PAT to CCTS:
- The PAT (Perform, Achieve and Trade) scheme focused on improving energy efficiency in energy-intensive industries through Energy Saving Certificates (ESCerts).
- CCTS replaces PAT, shifting the focus from energy intensity to reducing GHG emission intensity, by monitoring emissions per tonne of GHG equivalent.
- It issues Carbon Credit Certificates (CCC), where each certificate represents a reduction of one tonne of CO₂ equivalent (tCO₂e).
- Mechanisms:
- CCTS introduces carbon pricing through two main mechanisms to ensure broader carbon reduction efforts.
- Compliance Mechanism:
- Requires energy-intensive industries (such as aluminium, cement, fertilizers, iron & steel) to meet sector-specific GHG reduction targets.
- Companies that exceed their targets earn CCC, while those that fail to meet targets must purchase credits.
- Offset Mechanism:
- Allows voluntary participation from entities outside the compliance framework.
- These entities can earn carbon credits by reducing emissions.
- Sectors Identified:
- CCTS initially covers energy-intensive sectors such as iron & steel, aluminium, cement, fertilizers, petroleum refineries, pulp & paper, and textiles.
- These sectors together account for about 16% of India’s total emissions.
- The power sector, which contributes around 40% of India’s GHG emissions, may be included later.
- Regulatory Oversight:
- The scheme is managed by several government bodies, including the Bureau of Energy Efficiency (BEE) and the National Steering Committee for Indian Carbon Market (NSCICM).
- Importance of CCTS in India’s Climate Goals:
- India aims to reduce its emission intensity by 45% by 2030.
- CCTS supports this goal by encouraging private sector participation, promoting clean technologies, renewable energy, and carbon capture solutions.
What is Carbon Pricing?
- About: Carbon pricing is an economic strategy that takes into account the external costs of carbon emissions (such as damage to crops, increased healthcare costs, and property losses due to extreme weather) and connects these costs to the sources that produce the emissions.
- This system puts the financial responsibility back on polluters, giving them the option to reduce emissions, continue polluting and pay for it, or invest in cleaner technologies.
- At present, global carbon pricing mechanisms cover about 12.8 gigatonnes of CO₂, which is around 25% of global emissions, across 89 countries.
- Mechanisms: Governments use three main approaches to price carbon, aiming to reduce emissions at the lowest possible cost to society.
- Emissions Trading System (ETS):
- This system allows industries to trade emission units.
- It works through two mechanisms: Cap-and-Trade and Baseline-and-Credit.
- Cap-and-Trade:
- A limit (cap) is set on total emissions.
- Companies that emit less than the cap can sell their extra allowances, while those that exceed the cap must buy additional allowances.
- Baseline-and-Credit:
- Industries that reduce emissions below a defined baseline are rewarded with credits, which they can sell to other industries.
- Carbon Tax:
- Unlike ETS, a carbon tax sets a fixed price on carbon emissions by charging a specific tax for each tonne of CO₂ emitted.
- However, it does not guarantee a fixed reduction in emissions, because industries may choose to pay the tax instead of reducing emissions.
- Crediting Mechanism:
- This mechanism allows GHG emission reductions from projects to generate carbon credits.
- These credits can then be sold domestically or internationally for regulatory compliance or voluntary climate mitigation efforts.
What are the Challenges in Effective Implementation of CCTS?
- Target Setting and Carbon Pricing:
- Setting the right emission reduction targets is very important.
- If targets are too lenient, there may be an oversupply of Carbon Credit Certificates (CCC), which can reduce their price.
- If targets are too strict, it may increase compliance costs for industries and lead to inflation.
- Compliance and Enforcement Issues:
- Under the PAT scheme, about 50% of the required ESCerts were not purchased, and no penalties were imposed.
- This shows a lack of strict compliance and enforcement mechanisms in the carbon market.
- Such issues could also affect CCTS, making it less effective.
- Risk of Double Counting and Reporting Issues:
- CCTS may face risks of double counting carbon credits or inaccurate emission reporting, which has also been seen in other global carbon markets.
- Delays in Credit Issuance:
- There have been delays in issuing credits under the PAT scheme since 2021, which has reduced confidence in the market.
- If similar delays happen in the issuance of CCTS Carbon Credit Certificates (CCC), it could discourage participation and investment in clean energy.
- Transparency:
- The lack of publicly available data on industry emissions and compliance may reduce trust in the carbon market.
How Can India Strengthen CCTS?
- Align with International Best Practices:
- India should adopt lessons from the European Union (EU) Emissions Trading System (ETS), such as gradually tightening emission caps, maintaining carbon price stability, and ensuring strict compliance systems.
- Build Capacity for MRV:
- Strengthen MRV (Monitoring, Reporting, and Verification) systems to ensure accuracy, transparency, and credibility in emission data and carbon trading.
- Robust Trading Platform:
- Develop digital registries to properly track carbon credits and prevent fraudulent activities in the market.
- Cross-Border Compatibility:
- Ensure the carbon market is compatible with international systems to avoid trade restrictions, such as the EU’s Carbon Border Adjustment Mechanism (CBAM).
- Encourage Industry Participation:
- Provide incentives for early adopters, such as tax benefits for companies that reduce emissions beyond the required compliance levels.
- Promote Green Investments:
- Encourage investment in green technologies, renewable energy, and improvements in energy efficiency.
Conclusion
The Carbon Credit Trading Scheme (CCTS) represents a significant step in strengthening India’s climate strategy by introducing a market-based mechanism to reduce greenhouse gas emissions. With effective implementation, clear emission targets, strong monitoring, reporting and verification systems, and greater transparency, the scheme can encourage industries to adopt cleaner technologies, renewable energy, and energy-efficient practices. Aligning the system with international best practices and ensuring robust regulatory oversight will also enhance credibility and participation in the carbon market. Overall, CCTS has the potential to support India in achieving its climate commitments while promoting sustainable and low-carbon economic growth.
