Carbon Market in India: Creating a More Sustainable Future

Kartikey Sharma, December 6, 2023

In November 2023, the Bureau of Energy Efficiency (BEE), the apex governing body responsible for regulating the workings of the Indian carbon market laid out the ground rules for its operability with respect to the compliance sector. As part of its report titled ‘Detailed Procedure for Compliance Mechanism under the Indian Carbon Market’, the bureau lays down the regulatory compliances necessary for sorting out how emission allowances will be issued and traded to pave the way for the market’s official launch. Although the Indian government has previously issued draft policies and announcements, this document represents the first official policy outlining specific measures for reducing the country’s emissions through the implementation of a compliance-based emission trading mechanism. As a developing economy spearheading the Global South’s efforts towards decarbonisation, it is imperative that India develops a robust domestic carbon market to facilitate the achievement of the nation’s Nationally Determined Contribution (NDC) targets whilst providing necessary market support to new mitigation opportunities.

Intensity Based Targets

As compared to cap and trade-based target setting process where emissions are limited to some pre-specified absolute quantity, BEE has used the emission intensity-based approach for the Indian carbon market. Emission intensity measures the amount of GHGs released per unit of activity or output. This measure considers the scale of the activity or output. For instance, emissions intensity can be expressed as the amount of GHGs released per unit of electricity generated by a power plant, or in the case of the NDCs of some countries, including India.

Target Setting

As compared to The Perform, Achieve and Trade (PAT) scheme where targets for obligated entities were established every three years, the compliance carbon market will have annual GHG emission targets assigned to it. Further, any entity that fails to achieve the targeted GHG emission intensity in any compliance cycle is entitled to purchase the Carbon Credit Certificates based on the difference in the achieved GHG emission intensity and targeted GHG emission intensity for the production in the relevant compliance cycle.

Scope of Emissions Covered

Unlike other compliance markets, the Indian market has chosen to cover all seven  types of greenhouse gases as referred in the India Biennial Update Reports to UNFCCC. The document specified that a “gate-to-gate” approach will be adopted, namely accounting emissions from the reception of the raw materials to the completion of the production process.

While regulatory authorities have taken the first step towards establishing a robust market-based mechanism to enforce emission reduction practices, going forward robust enforcement activities must be undertaken for its effective execution. Ensuring fairness, avoiding market manipulation, and aligning these mechanisms with broader climate policies are essential for their success in mitigating climate change while supporting sustainable economic growth.