Carbon credit trading scheme: Waiting to exhale

Source: The post is based on the article “Carbon credit trading scheme: Waiting to exhale” published in “Business Standard” on 5th July 2023.

Syllabus: GS 3 – Environment pollution and degradation

News: India is starting a Carbon Credit Trading Scheme (CCTS), to help local businesses adjust to the European Carbon Adjustment Mechanism (CBAM). The CBAM, which begins this October, sets stricter standards for the export of carbon-heavy goods such as cement, steel, aluminium, and fertilisers.

What is India’s Carbon Credit Trading Scheme (CCTS)?

India’s CCTS is a program designed to allow companies to trade carbon credits. These credits represent a reduction in greenhouse gas emissions. If a company emits less than its allowable limit, it can sell its surplus credits to a company that exceeds its limit. This scheme helps India manage and reduce its overall carbon emissions.

What is the regulatory structure of India’s CCTS?

The regulatory structure of the CCTS is overseen by a National Steering Committee. This committee is made up of 18 ministries and departments, providing comprehensive oversight over the scheme.

The Central Electricity Regulatory Commission (CERC) is identified as the only regulator in the scheme.

Additionally, the Bureau of Energy Efficiency acts as the market’s administrator, with the Grid Controller of India handling registrations of market players.

Despite traditionally being overseen by the Securities and Exchange Board of India (Sebi), the carbon credit market’s regulation falls under the CERC in this scheme.

What are the various challenges?

Regulatory challenges: In October 2021, the Supreme Court stated that the Central Electricity Regulatory Commission (CERC) would regulate the spot market for power, but only for immediate deliveries up to eleven days. Securities and Exchange Board of India (SEBI) would oversee the futures and options market. However, the CCTS is to be regulated by CERC. However, carbon credit is essentially a financial market, so as per the SC order SEBI should be the regulator.

Complexity in market structure: The market structure of CCTS is complex, involving multiple agencies and oversight bodies. Companies might struggle with compliance due to the complicated structure, potentially increasing the cost of obtaining carbon credits.

Unclear validity of international certificates: The framework does not clearly indicate if international carbon abatement certificates will be accepted alongside domestic ones in the new scheme. This could cause confusion and difficulties for companies looking to comply with emission norms.

Fungibility of Carbon Certificates: There are concerns about whether the carbon certificates should be interchangeable across different platforms and tenors. While financial markets often benefit from subdividing certificates to create more value, the carbon market might be more efficient with a standard, fungible product. The current notification is silent on this matter, causing uncertainty among market players.