- Introduction
A 62 feet long climate clock in New York's Union Square showcases the milestone that the world is trying to avoid. As time runs out on the climate clock, the world is left with only 5 years to take action and limit climate change to 1.5 degrees of warming. International agreements such as the Kyoto Protocol in 1997, and the Paris Agreement in 2015 have highlighted the need to reduce greenhouse gas emissions and the need for countries to take climate action. In March 2024, it was reported that the global average concentration of carbon dioxide was 4.7 parts per million higher than in March 2023. This is the highest increase in carbon dioxide levels in one year.1
India, at the 26th session of the Conference of the Parties (COP 26) to the United Nations Framework Convention on Climate Change (UNFCC) held in November 2021 announced its five 'Panchamrit' targets including : (i) it will reach its non-fossil energy capacity to 500 GW by 2030, (ii) it will meet 50 percent of its energy requirements from renewable energy by 2030, (iii) it will reduce the total projected carbon emissions by one billion tonnes from now onwards till 2030, (iv) by 2030, it will reduce the carbon intensity of its economy by less than 45 percent, and (v) by the year 2070, it will achieve the target of Net Zero Emissions. Since then, India has promulgated several initiatives to fulfill its ambition to shift to an energy savings-based market mechanism.
- Carbon Credit Trading Scheme 2023
One such regulatory push is the notification of the Carbon Credit Trading Scheme 2023 ("CCTS") under the Energy Conservation Act, 2001 ("Act"). The CCTS, plainly put, aims to provide a regulatory framework where carbon credits can be bought and sold. Companies purchase carbon credits to reduce their greenhouse gas emissions. In December 2022, vide the Energy Conservation (Amendment) Act, 2022, the Central Government, in consultation with the Bureau of Energy Efficiency, was empowered to specify the Carbon Credit Trading Scheme. Section 14AA of the Act enables the Central Government or any agency authorized by it to issue a carbon credit certificate to any registered entity that complies with the requirements of the Scheme. Subsequently, in June 2023, pursuant to Section 14(w) of the Act, the Ministry of Power promulgated the Carbon Credit Trading Scheme 2023.
The carbon credit trading scheme was enacted to establish and define an 'Indian Carbon Market Framework', with an objective to reduce or remove or avoid greenhouse gases emissions through trading of the carbon credit certificates. Carbon Credit has been defined as "a value assigned to a reduction or removal or avoidance of greenhouse gases emissions achieved and is equivalent to one ton of carbon dioxide equivalent."
There are two types of trading that may take place, compliance-based trading and voluntary trading. Firstly, obligated entities under the Act are registered entities that shall be notified under the Act and must comply with the notified greenhouse gas emission norms. Secondly, as enabled by the CCTS, non-obligated entities under the Act may register themselves and can purchase carbon credits on their own initiative.
Generally, at first, a carbon reduction project such as reforestation or development of renewable energy etc., is developed. Secondly, an accredited carbon verification agency validates and verifies the carbon credits generated based on their quality and integrity. Thirdly, the entities obtain a carbon credit certificate to trade their generated carbon credits. Lastly, these verified carbon units are traded in the carbon credits market.2
As per the CCTS, the Bureau of Energy Efficiency ("Bureau") shall be the administrator of the Indian carbon market. The Bureau shall be responsible for issuing the carbon credits certificate, developing the process for accreditation of carbon verification agencies, determining the fees payable by the registered entity, and so on. Further, the Central Electricity Regulatory Commission has been appointed as the regulator for the trading activities including the trading of carbon credit certificates, safeguarding the interests of buyers and sellers, taking necessary actions to prevent fraud etc. With that foundation in place, the next step entailing the framing of the procedure(s) and the rules under the CCTS for identifying obligated entities, defining their obligations, tools extending to monitoring, reporting, and verification that will help implement the CCTS, pricing, validity, and criteria for issuance of carbon credit certificates etc. remains in the pipeline. The CCTS, by reference to 'meta registry's' role in providing linkages to national and international registry envisages closing the loop between the domestic and international markets. It is important to note that in November 2023, the Bureau released a draft procedure for the compliance mechanism under the CCTS which addresses most of the aforementioned aspects. However, this mechanism is yet to be implemented.
It is pertinent to note that this is not the first attempt by India to reduce its carbon footprint. In 2012, the Perform, Achieve, and Trade ("PAT") scheme was implemented by the Bureau to reduce Specific Energy Consumption in energy-intensive industries. Designated consumers who exceed the energy savings targets assigned to them are issued Energy Saving Certificates ("ESCerts") which can be traded through the designated power exchanges. The implementation of the PAT scheme has faltered due to lenient targets, delayed compliance, and excess ESCerts. In 2021, a report by the Centre for Science and environment reported that the thermal plants had merely reduced 1-2% of the total carbon dioxide emissions generated by them.3 Further, while the PAT scheme focuses on energy savings, the CCTS focuses on the reduction of greenhouse gas emissions. At the same time, the overlap between the PAT and CCTS begs the question of whether CCTS will eventually replace the PAT scheme.
Outside this framework of the carbon credit trading, another obligation which rests on certain category of listed Indian entities relates to disclosure requirements. In July 2023, the Securities and Exchange Board of India ("SEBI") prescribed the Business Responsibility and Sustainability Report ("BRSR") under the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The BRSR mandates listed entities to make disclosures on their compliance with the PAT scheme, applicable environment laws, water and energy footprint, greenhouse emissions, effective waste management, etc. It is evident that listed companies have a duty towards their stakeholders to reduce their carbon footprint and fulfill their environmental obligations. However, these disclosure requirements must be supplemented with comprehensive, compliance obligations.
- International Carbon Credit Market
In contrast, the European Union's Emissions Trading System ("EU ETS") dates back to 2005, and it is currently in its fourth phase of implementation. EU member states have pledged to become climate neutral by 2050. The EU ETS works on a 'cap and trade' system, where a cap is set on the emissions of greenhouse gases. The companies must adhere to the cap and can purchase and sell their carbon credits on the EU carbon market. In April 2024, it has been reported that EU ETS has been instrumental in decarbonization, and the emissions have reduced 47% below the 2005 levels. Apart from EU, carbon markets are already operating in Canada, China, Japan etc.4
However, all carbon credit markets have been plagued by ingenuine carbon reductions, commonly known as 'phantom credits'. More than 90% of the carbon credits verified by Verra, the world's leading carbon verification agency have been proved to be worthless. An investigation conducted into the rainforest projects verified by Verra, proved that 94% of the carbon credits generated in these projects did not benefit the climate.5
- Conclusion
Tackling the issue of clarity and comprehensiveness in regulations, transparency and efficiency in the carbon markets is vital for its effective implementation. While India has taken an important step towards net neutrality, it is pertinent to note that its effective implementation will depend on the rules and the procedure framed under the Carbon Credit Trading Scheme. One mechanism to ensure that the infrastructure of the carbon credit market is robust is to integrate digital mechanisms for verification and validation of the carbon units. The reliance upon blockchain to maintain the integrity of the carbon units may prove to be integral to reduce greenhouse emissions. The blockchain may be relied upon in the 'meta registry' to contain a record of the carbon credit projects, the carbon units generated, the methodology used to verify the carbon credits, as well as facilitate the trading of the verified carbon units. Another measure may be to address the gap between international and domestic carbon markets as well as to open the Indian Carbon Market to larger number of participants. Once implemented, the CCTS framework is poised to provide the impetus needed to ensure the achievement of India's 'Panchamrit' targets including net zero emissions targets announced during the COP 26.
Footnotes
3 PAT: Centre's decarbonisation scheme not effective enough, says new CSE report (downtoearth.org.in)
4 What is the EU ETS? - European Commission (europa.eu)
5 Supra note 2.
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