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 CCTS is a market-based system introduced to regulate and trade carbon credits under the Indian Carbon Market (ICM).
- The CCTS aims to reduce carbon emissions in the Indian economy by putting a price on greenhouse gas (GHG) emissions and enabling carbon trading.
- Transition from PAT to CCTS:
- The PAT scheme earlier focused on improving energy efficiency in energy-intensive industries through Energy Saving Certificates (ESCerts).
- CCTS replaces PAT and shifts the focus from energy intensity to reducing GHG emission intensity by monitoring emissions per tonne of GHG equivalent.
- Under this system, Carbon Credit Certificates (CCC) are issued, where each certificate represents a reduction of one tonne of CO2 equivalent (tCO2e).
- Mechanisms:
- The CCTS introduces carbon pricing through two main mechanisms to support overall carbon reduction efforts.
- Compliance Mechanism:
- Energy-intensive industries such as aluminium, cement, fertilizers, and iron & steel are required to meet specific GHG reduction targets. Companies that exceed their targets earn CCC, while those that do not meet the targets must buy carbon credits.
- Offset Mechanism:
- This allows voluntary participation from organisations outside the compliance system. They can earn carbon credits by taking actions that reduce emissions.
- Sectors Identified:
- At the beginning, CCTS covers energy-intensive sectors including iron & steel, aluminium, cement, fertilizers, petroleum refineries, pulp & paper, and textiles, which together account for about 16% of India’s total emissions.
- The power sector, which contributes around 40% of India’s greenhouse gas emissions, may be included at a later stage.
- Regulatory Oversight:
- The system is managed by different 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. The CCTS supports this goal by encouraging private sector participation and promoting the adoption of clean technologies, renewable energy, and carbon capture solutions.
What is Carbon Pricing?
- About:
- Carbon pricing is an economic approach that accounts for the external costs of carbon emissions, such as damage to crops, higher healthcare expenses, and property losses caused by extreme weather, and links these costs to the sources responsible for the emissions.
- This system places the financial responsibility on polluters, giving them the option to reduce their emissions, continue polluting and pay for it, or invest in cleaner technologies.
- Currently, carbon pricing systems around the world cover about 12.8 gigatonnes of CO₂, which is around 25% of global emissions, across 89 countries.
- Mechanisms:
- Governments use three main methods to price carbon in order 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.
- In the Cap-and-Trade system, a limit is set on total emissions. Companies that emit less than their allowed limit can sell their extra allowances, while those that exceed the limit must buy additional allowances.
- In the Baseline-and-Credit system, industries that reduce emissions below a defined baseline are rewarded by earning credits, which they can sell to other industries.
- Carbon Tax:
- Unlike the ETS, a carbon tax directly sets a price on carbon emissions by charging a fixed tax for every ton of CO₂ emitted. However, it does not ensure a specific level of emission reduction because industries can choose either to reduce emissions or simply pay the tax.
- Crediting Mechanism:
- This mechanism allows projects that reduce greenhouse gas emissions to generate carbon credits. These credits can then be sold within the country 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 the targets are too lenient, it can lead to an oversupply of Carbon Credit Certificates (CCC), which may reduce their price. On the other hand, very strict targets can increase compliance costs for industries and may also contribute to inflation.
- Compliance and Enforcement Issues:
- Under the PAT scheme, about 50% of the required Energy Saving Certificates (ESCerts) were not purchased and no penalties were imposed. This shows weak compliance and enforcement in the carbon market, which could also affect the effectiveness of the CCTS.
- There is also a risk that CCTS could face problems such as double counting of credits or inaccurate reporting of emissions, issues that have already been seen in global carbon markets.
- Delays in Credit Issuance:
- Delays in issuing credits under the PAT scheme since 2021 have reduced confidence in the market. If similar delays occur in issuing CCTS Carbon Credit Certificates (CCC), it could discourage participation and investment in clean energy.
- Transparency:
- The absence 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 follow successful practices from the European Union (EU) Emissions Trading System, such as gradually tightening emission caps, maintaining stable carbon prices, and ensuring strong compliance systems. It is also important to build strong capacity for MRV (Monitoring, Reporting, and Verification) to maintain credibility.
- Robust Trading Platform:
- A digital registry system should be introduced to properly track carbon credits and prevent fraudulent activities. It should also ensure compatibility with international systems to avoid trade restrictions, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM).
- Encourage Industry Participation:
- Incentives should be provided to industries that adopt emission reduction measures early, such as tax benefits for companies that reduce emissions beyond the required limits.
- There should also be greater encouragement for investment in green technologies, renewable energy, and improvements in energy efficiency.
FAQ’s
1. Why is proper target setting important in the CCTS?
Setting balanced emission reduction targets is important because lenient targets may create too many carbon credits and reduce their price, while very strict targets can increase compliance costs for industries and may also contribute to inflation.
2. What compliance challenges could affect the effectiveness of the CCTS?
Past experience from the PAT scheme showed weak compliance, where about 50% of the required ESCerts were not purchased and no penalties were imposed. Similar weak enforcement in the CCTS could reduce its effectiveness.
3. What risks are associated with emissions reporting in carbon markets?
Carbon markets can face risks such as double counting of credits and inaccurate reporting of emissions, which can weaken the credibility of the system.
4. How can delays in credit issuance affect the carbon market?
Delays in issuing credits, as seen under the PAT scheme since 2021, reduce market confidence. Similar delays in issuing CCTS Carbon Credit Certificates (CCC) could discourage participation and investment in clean energy.
5. Why is transparency important in the carbon market?
Transparency is important because the absence of publicly available data on industry emissions and compliance can reduce trust and confidence in the market.
6. How can India improve the effectiveness of its carbon trading system?
India can follow international best practices such as those used in the EU Emissions Trading System, including gradually tightening emission caps, maintaining price stability, and strengthening compliance frameworks.
7. What role does MRV play in carbon markets?
MRV (Monitoring, Reporting, and Verification) ensures that emission reductions are accurately measured and verified, which strengthens the credibility of the carbon trading system.
8. Why is a robust digital trading platform necessary for carbon markets?
A digital registry helps track carbon credits, prevents fraudulent activities, and ensures transparency in the trading system.
9. How can cross-border compatibility help India’s carbon market?
Ensuring compatibility with international systems can prevent trade barriers such as the EU’s Carbon Border Adjustment Mechanism (CBAM) and support global carbon trading.
10. How can industries be encouraged to participate in carbon markets?
Governments can provide incentives such as tax benefits for companies that reduce emissions beyond the required limits and promote investment in green technologies, renewable energy, and energy efficiency.
