Trading for a greener tomorrow- The way forward to meet the nationally determined contributions is a well-regulated domestic emission trading mechanism

Source: The post is based on the article “Trading for a greener tomorrow- The way forward to meet the nationally determined contributions is a well-regulated domestic emission trading mechanism” published in “Business standard” on 10th October 2023.

Syllabus: GS3- Environment- climate change

News: The article discusses India’s new Carbon Credit Trading Scheme (CCTS). This scheme lets companies earn credits for reducing greenhouse gas emissions beyond set targets, which they can sell to other businesses that fail to meet targets. It aims to encourage a market-driven approach to reducing the country’s overall emissions, aligning with international environmental commitments.

What is the Carbon Credit Trading Scheme (CCTS)?

Introduction: India introduced the CCTS under the Energy Conservation Act, 2001, to manage greenhouse gas emissions.

Functioning:

Companies exceeding their emission reduction targets earn credits.

Each credit represents a reduction of one tonne of carbon dioxide equivalent (CO2e).

Companies that don’t meet targets can buy these credits from others.

Goal:

To develop a transparent domestic carbon credit market.

Align with India’s aim to fulfill its NDCs by 2030 and be net-zero by 2070.

Administration:

Oversight by Ministry of Power (MoP) and Ministry of Environment, Forests and Climate Change (MoEF&CC).

Managed by agencies like the Bureau of Energy Efficiency (Bee) and the Central Electricity Regulatory Commission (Cerc).

Relevance: The CCTS encourages a market-driven approach, helping India achieve its environmental commitments.

How is the CCTS different from past international agreements?

Kyoto Protocol:

Only developed countries (Annex-1) had strict emission reduction targets from 2008 to 2020.

Developing countries participated but without specific targets.

Paris Agreement (from 2020):

All countries, both developed and developing, declare their intended NDCs every five years.

No legally binding targets, but a “naming and shaming” principle encourages adherence.

NDC commitments can be revised but only upwards.

Emission Trading After Kyoto Protocol:

Emission trading picked up in the EU and some developed areas but not much in the developing world.

Some projects in developing countries, including India, participated in the voluntary global carbon credit market.

CCTS in India:

Launched in June, operating under the Energy Conservation Act, 2001.

Aims to create a regulated, domestic carbon credit trading market.

Entities reducing emissions beyond targets earn carbon credits, which they can sell.

Intends to align with India’s NDCs for 2030 and net-zero ambition by 2070.

What challenges and details need addressing in the CCTS?

Identifying Sectors and Entities: It’s unclear which sectors and entities are obligated under the CCTS.

Defining Target Methodology: More information is needed on how the overall national-level NDC greenhouse gas emission targets will be disaggregated at sectoral and entity levels.

Ensuring Effective Monitoring: The mechanism for monitoring, reporting, and verifying greenhouse gas emissions is not elaborated upon.

Determining Certificate Criteria: Criteria for issuing carbon credit certificates and their validity period remain unspecified.

Addressing Potential Market Fragmentation: Additional targets, such as the use of non-fossil-based energy, might fragment the carbon market, a situation considered undesirable.

Maintaining Measurement Consistency: It is imperative to use a uniform measurement unit, specifically in terms of tonnes of CO2e, to prevent discrepancies.

How could the CCTS be improved moving forward?

Increase Participant Categories: Allow more entities like financial institutions and traders to provide liquidity and aid in better price discovery.

Introduce Futures Trading: Permit futures trading in carbon credits on regulated commodity derivatives trading exchanges.

Expand Scope Gradually: The scheme could eventually cover more GHG emissions sources like agriculture and waste management.

Limit Foreign Participation Initially: Restrict foreign entities’ participation and carbon credits export until India is on track with its NDC commitments.

Avoid Participation in Global Carbon Credit Market: Projects in India should initially not participate in the voluntary global carbon credit market to prioritize local needs.