By Rieshav Chakraborty
Abstract
Cap and Trade Programs are government regulatory programs designed to “cap” the total emission levels of chemicals due to industrial activity. Carbon Credit is one part of a Cap and Trade program. It is a permit which represents the right of a country or company to emit a set amount of Carbon emissions which can be traded for profit if the total limit is not used. In this system, Carbon emissions become a cost of business like other inputs, due to which companies have the incentive to produce fewer emissions.
The Lok Sabha passed the Energy Conservation (Amendment) Bill in August 2022 and by Rajya Sabha in December 2022. Among its features, it establishes a trading system where you can buy or sell credits. This blog post will discuss the economic and environmental implications it will have on the Indian economy in the future.
History of Emergence of Carbon Credits
The concept of carbon credits emerged due to the responses from many countries to climate change, which was first recognized as a global environmental issue in the 1980s. In 1997, the United Nations Framework Convention on Climate Change (UNFCCC) was established, which aimed to address the issue of climate change by promoting cooperation between countries to reduce greenhouse gas emissions.
Under the UNFCCC, the Kyoto Protocol was adopted in Kyoto, Japan on December 11, 1997, and became international law on February 16, 2005. It is aimed at reducing CO2 emissions and the presence of greenhouse gases (GHGs) in the atmosphere. The Kyoto Protocol acknowledged that the industrialized countries can be attributed to the current high levels of GHG emissions due to more than 150 years of industrial activity.
About 37 industrialized countries plus the EU were mandated to cut their GHG Emissions which made a promise to reduce their hydrocarbon emissions on average by 5.7% by 2012. At the time, more than 100 developing countries, including India and China were exempted from the Kyoto Agreement.
The Clean Development Mechanism (CDM), a system of carbon credits created by the Kyoto Protocol, enables industrialized nations to engage in emission reduction initiatives in developing nations to satisfy their emission reduction commitments. Under the CDM, developed nations could sell industrialized nations carbon credits in exchange for the greenhouse gas emissions that their supported projects prevented. An illustration of a Clean Development Mechanism (CDM) initiative is the Karnataka Renewable Energy Development Limited (KREDL) project in India. This undertaking entails the deployment of wind turbines in Karnataka, contributing to the production of electricity from renewable sources and mitigating greenhouse gas emissions. Successfully registered under the CDM, the project has acquired carbon credits eligible for sale to other developed nations. The concept was that industrialized nations would be encouraged to fund emission reduction initiatives in developing nations, and those nations would gain from the funding and knowledge transfer that came along with those initiatives.
Parties to the Kyoto Protocol met in Doha, Qatar, in December 2012, after the Protocol’s first commitment period ended, to adopt an amendment to the original Kyoto Agreement, known as the Doha Amendment. The Doha Amendment had a short life and in 2015, all the 196 UNFCC participants signed The Paris Agreement at COP21.
Energy Conservation (Amendment) Bill, 2022
During the COP26 summit in 2021, India made the following commitments that may be relevant to efforts to improve energy efficiency. (i) reducing total projected carbon emissions by one billion tonnes by 2030, (ii) reducing the economy’s carbon intensity by 45% by 2030 compared to 2005 levels, and (iii) By 2030, India wants to have 500 GW of non-fossil energy capacity and source 50% of its energy from renewable sources. Moreover, India is one of the biggest emitters of GHGs and aims to reach net zero by 2070. Due to these reasons, the Energy Conservation (Amendment) Bill, 2022 was introduced and the Lok Sabha passed it in August 2022, and the Rajya Sabha in December 2022.
Some of the key features introduced by this Bill are as follows:
- Carbon Credit Trading – The bill gives the Central Government to designate a carbon trading system, and the government can issue “carbon credit” certificates to entities compliant with the scheme.
- Composition of the governing council of BEE – The Ministry of Power, and the Ministry of Environment will be the nodal ministry for the regulation of the scheme, and the act provides to set up the Bureau of Energy Efficiency (BEE) which will assist the ministries.
- Obligation to use non-fossil sources of energy – The Bill also states that the government may mandate that certain consumers fulfil a minimum percentage of their energy needs from non-fossil sources. Some examples of designated consumers are industries such as mining, steel, cement, textile, chemicals, petrochemicals, railways, and commercial buildings.
- Standards for vehicles and vessels – The Act allows for the specification of energy consumption criteria for machinery and appliances that use, produce, transfer, or supply energy. The Motor Vehicles Act of 1988’s definition of a vehicle and a vessel (including ships and boats) are included in the Bill’s expanded definition.
In 2023, the Union Government finalized a list of activities that can be considered for trading in carbon credits in the international market under Article 6 of The Paris Agreement. According to Article 6 of the Paris Agreement, nations may voluntarily work together to meet the carbon reduction goals outlined in their nationally defined contributions. A nation will be entitled to transmit carbon credits obtained through the reduction of greenhouse gas emissions under Article 6 to assist one or more nations in achieving their climate goals. According to the World Bank, Article 6’s Section 6.2 establishes the framework for international trade in GHG emission reductions.
The finalized list contains activities such as carbon capture, solar thermal power, offshore wind, green hydrogen, compressed biogas, sustainable aviation fuel, tidal energy, green ammonia, ocean energy, and high voltage direct current transmission in conjunction with renewable energy projects.
Perform, Achieve, and Trade (PAT), a BEE programme under the National Mission for Enhanced Energy Efficiency, is a regulatory instrument to decrease specific energy consumption in energy-intensive industries, which would be transitioned into the compliance market (a market for carbon offsets created by the need to comply with a regulatory act).
The trading platform for carbon credits is expected to be the same power exchanges that allow the trade of energy-saving certificates (ESCerts) created from surplus energy savings. Moreover, the Indian Energy Exchange announced setting up the International Carbon Exchange Pvt Ltd to explore opportunities in the voluntary carbon market as well. It was recommended to establish a voluntary carbon market to get over the limitations of “ESCerts” and to motivate voluntary entities to contribute to India’s Nationally Determined Contributions.
Indian Players Availing Carbon Market Benefits
- Delhi Metro Rail Corporation (DMRC) – In 2007, DMRC was the first Railway project to be registered under the Clean Development Mechanism (CDMs) by the UN, thus enabling it to claim carbon credits for its Regenerative Braking Project. This is due to reducing GHG Emissions and contributing to a 6.3 lakh tonne annual reduction in pollution levels in the city. Delhi Metro earned INR 19.5 Crore from selling 3.55 million carbon credits, collected from 2012-2018.
- Jindal Steel – In light of India’s commitment to reduce carbon emissions intensity to GDP by 35% by 2030, JSW Steel has worked out its numbers and is committed to reducing its carbon emissions by 42%. Moreover, they have earmarked INR 10,000 Crore to reduce carbon emissions through various initiatives. Jindal Vijaynagar Steel is ready to sell about $225 Million worth of saved carbon which is only with the help of blast furnace and Corex furnace technology. This prevents 15 million tons of carbon from being discharged into the atmosphere.
Carbon Trading in the Indian Agricultural Sector
Agriculture in India accounts for about 20% of its total emissions of which the majority is sourced to crop residue burning or agricultural biomass burning. Moreover, it has the ability to emit and sequester carbon. Processing such as tilling, fertilizer use, and livestock production releases GHGs while practices such as agroforestry, and conservation tillage can remove carbon from the atmosphere and store it in soil. Thus, a reduction of emissions in this sector would have a significant impact on India’s total emissions yet still, very few projects have been registered so far.
Farmers can enjoy additional revenue through the sale of carbon credits and their participation can be within collectives such as Farmer Producer Organizations (FPOs). A few agricultural technology firms, such as “Boomitra” and “Nurture.Farm,” organize farmers through middlemen to make it easier for them to participate in voluntary carbon markets. Adopting practices to sequester carbon in the soil will reduce emissions of GHGs, help mitigate the effects of climate change, and help India reach its goal of net zero by 2070.
Conclusion
India is one of the largest emitters of GHGs and thus has a significant role in mitigating climate change. The Carbon Credit Market has immense potential to contribute towards a sustainable future and the introduction of The Energy Conservation (Amendment) Act in 2022 has provided the necessary framework to reduce carbon emissions and set up a voluntary and compliant carbon market. In the process, it’s necessary to address the challenges in the way, such as lack of awareness and the need for a robust regulatory framework. While the Carbon Credit Market in India is still at a very nascent stage, there is a huge potential for growth in the coming future.
Author’s Bio
Rieshav Chakrabortyis a 2nd -year student at the Jindal School of Government and Public Policy, pursuing BA (Hons) Economics. His research interests include Behavioral Economics, Environmental Economics, and Development Economics.
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