India: Learning from global experience: Building carbon markets for India

As of April this year, 68 carbon pricing instruments (CPIs) were operating around the world. These include 37 carbon taxes and 34 Emissions Trading Schemes (ETS) covering around 23% of global GHG emissions. Three more need to be implemented. Global carbon pricing revenues have increased by nearly 60% in 2021, to around $84 billion. EU carbon permits are trading at 85 euros/tonne CO2e as of August 5, 2022. China has the world’s largest ETS – three times the size of the EU carbon market, and has traded carbon to $9.29/tonne of CO2e in April 2022.

Carbon markets are increasingly the instrument of choice when it comes to market-based solutions to reduce emissions. In this context, the government’s proposed amendment to the Energy Conservation Act, the Bill was introduced in the Lok Sabha this week, to recognize greenhouse gas emissions is a welcome move. This opens the door for India to create a market to trade greenhouse gas reductions.

But the 68 CPIs did not appear overnight and without learning. Here are five things we should keep in mind as a nation and learn from others:

First, countries started trading emission reductions in 2005; businesses much earlier. The EU worked for two years to discuss, negotiate and decide on initial carbon caps with almost 11,500 companies in the EU in 2003, then launched the first phase of the EU-ETS in 2005-2007. The Chinese ETS took 7 years to launch as a full-fledged national carbon market. It took 7 regional Chinese markets to demonstrate their ability to trade before the country integrated a year ago. In India, we could leverage our own Perform Achieve and Trade (PAT) system to do this faster, but there are differences. The PAT is used to set specific energy consumption targets for individual businesses. Carbon ETS would require converting these into Scope 1 and Scope 2 GHG emissions. Second, subsequent cycles of the PAT do not give specific SEC targets to many of those included in PAT-1 and PAT-2. Carbon ETS cannot leave any entity uncovered during an ETS cycle.

Second, understand scope and coverage. There are other requirements such as the very clear definition of the carbon products to be traded in their scope (gas) and their coverage (sectors and entities). We also need to discuss and decide whether India wants to provide absolute emissions caps to entities or the GHG intensity of their annual revenues. These are to be aligned with India’s Nationally Determined Contributions (NDCs) on GHG/GDP as endorsed by the Union Cabinet this week. We also have to decide whether we are going to allocate free allowances or whether entities must buy every emission right they need through an auction. The EU started by allocating free allowances, then gradually moved to auctioning. Auction proceeds are used by the EU to promote green transitions.

Third, India needs to think about who would be allowed to trade. These could be individual issuers, corporate agglomerations and industry associations. The carbon market must not become a barrier to entry for new companies. Trading principles need to be discussed with industry and agreed before implementation, such as floor and ceiling carbon prices (Germany recently set a floor price of 60 euros/tonne), limits on real-time trading volumes, controlling carbon price volatility, withdrawing carbon from NDC commitments, hoarding carbon across trade cycles, and how to manage carbon leakage (e.g. example, the outsourcing of activities that could transfer carbon from an entity). All 34 ETS around the world can be made fungible so that carbon credits can pass through them. This will provide a bigger market for Indian emissions mitigation credits to flow around the world; global economic efficiency and a global carbon price could emerge.

Fourth, one of the important differences between the PAT and the carbon ETS would be the need to set up a carbon registry for the ETS in India. It is like a bank account where, in aggregate, carbon mitigation would enter or be traded. No carbon ETS is possible without the creation of a national carbon registration system. Any carbon saved must be linked to a robust monitoring, reporting and verification (MRV) system to authenticate each unit of carbon saved. India needs to create an MRV system for carbon. We also need to establish an institutional structure, decide on the compliance mechanism and possible sanctions in case of non-compliance of entities. We need to discuss it on open platforms, learn from the EU, China and other countries around the world that have a carbon ETS in place.

A phased implementation would be reasonable – rather than a regional focus to start an ETS, India should focus on organization. Some of the 15 Maharatna organizations could be invited to start an internal ETS among their factories. For example, 23 coal-fired power plants

could launch an in-house cap and trade system. The NTPC decides goals for everyone through a transparent and consistent internal process, and creates compliance monitoring systems. Similarly, the 8 plants of , the 9 refineries of Indian Oil Corporation Limited, and all areas and production units of Indian Railways could start their own internal carbon ETS. There could be only one carbon registry created for the whole country, to be used by each of the organizations. The exchanges would take place through this internal carbon registration platform within each organization. Once these organizational ETS systems have been tested for some time, organizational boundaries could be reduced and consistent carbon caps could be given by a national regulator across all sectors and units. A carbon price will be discovered in each organization independently, which should be decent enough to attract carbon mitigation options from individual factories. Funding for new projects could also be tied to their carbon performance.

Fifth, we need to calculate the baseline carbon emissions for each entity. This would require human resources capable of doing carbon accounting in accordance with accepted international practices, and third parties to audit them. It is high time for India to create a National GHG Inventory Management System (NIMS) which should be linked to all national GHG reporting requirements to UNFCCC, Carbon Registry and all policies and measures to implement our NDCs. This would automatically digitize our national carbon from the bottom up. Paris Agreement Article 6.2 could also be easily linked to our NIMS.

India seems to operate more by way of command and control for environmental purposes, while markets could also do a fairly decent job, if not better. Also in the markets, the regulator decides on the individual caps, thus keeping control of the market with him. But individual entities then decide, after setting their cap, whether to build or buy carbon mitigation credits. This makes ETS more efficient. India should think about creating multiple environmental markets. ESCerts and

already exist, but robust price discovery has not occurred, perhaps due to their loose targets or poor compliance. This helps no one, neither the regulator nor the regulated. Carbon and sulfur markets (FGD notifications exist anyway) could also be created simultaneously to bring more value to entities. These markets should all exist together and independently to begin with. For example, if ESCert prices are currently very low, converting it to carbon offers no certainty that its price would become high. Therefore, it is better to have fungibility at this stage thanks to the coexistence of several markets. We might take a call after the first round of testing.

Amit Garg is a professor at the Indian Institute of Management, Ahmedabad. He specializes in energy, climate change and sustainable development issues.

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