India stands to gain from the trading of carbon credits

India stands to gain from the trading of carbon credits
India stands to gain from the trading of carbon credits


The establishment of a global carbon market could significantly impact India's domestic carbon market, but a standardized system within a global carbon market could address this imbalance and benefit developing countries

At the CoP26 summit in Glasgow, Prime Minister Narendra Modi emphasized the need for collective action and cooperation to combat climate change. Article 6 of the Paris Agreement, while being reflective of this spirit, allows countries to collaborate to achieve emission reduction targets set in their Nationally Determined Contributions (NDC). Among these provisions, Article 6.4 is similar to the Clean Development Mechanism previously constituted under the Kyoto Protocol and establishes a mechanism for trading green house gas (GHG) emission reductions between countries under the supervision of the Conference of Parties.

India’s NDC, unveiled in 2015, aims to reduce the GHG emission intensity of its GDP by 33-35% from 2005 levels. Updated in CoP27, the target has now been raised to 45% by 2030. In line with its five-point action plan (Panchamrit), India is committed to achieving carbon neutrality by 2070. Despite being home to 17% of the world’s population, India has the lowest per capita emissions among major economies, contributing only 5% of the global total. However, projections by the World Resources Institute indicate that India’s emissions could surpass 4 billion tonnes annually by 2030, emphasizing the need for a transition to a low-carbon economy. To support this transition, India calls on developed nations to fulfil their promise of providing $100 billion in annual climate finance.

Also, recognizing the importance of carbon credits in meeting our NDC goals, the ministry for new and renewable energy is taking measures to establish a carbon credit market. Carbon credits are based on the “cap-and-trade" model that was used to reduce sulphur pollution in the 90s. The country already has mechanisms such as renewable energy certificates and energy-saving certificates under the ongoing scheme called Perform Achieve and Trade (PAT) , which can be combined with a unified carbon credit system. Initially, carbon credits generated in India are expected to be used to fulfil the country’s NDC commitments, with any surplus to be sold globally.

While India aims to achieve its NDCs, the excess credits can be sold worldwide, opening up possibilities for other countries to obtain substantial quantities of carbon credits from India. The revenue so generated can be used to finance climate change mitigation projects, such as the development of renewable energy infrastructure, afforestation, and reforestation projects, thereby aiding its transition to a low-carbon economy.

In 2021, the global carbon credits market rose by 164 % and is expected to cross $100 billion by 2030. In light of this, the establishment of a global carbon market could significantly impact India’s domestic carbon market. Increased competition for carbon credits may raise prices domestically. Importantly, the Paris Agreement promotes international cooperation, making a “race to the bottom" in pricing unlikely. Instead, a global carbon market could level the playing field, benefitting developing countries like India. Currently, developed nations hold an advantage due to their technical and financial capabilities, allowing them to generate and sell carbon credits at a lower cost. A standardized system within a global carbon market could address this imbalance.

The global carbon market overseen by a UN entity would simplify international carbon trading. Currently, trading carbon credits between countries (Under Article 6.2) involves complex bilateral agreements, additional reporting requirements, and country authorizations. A centralized registry and regulatory body would facilitate smoother international trading for India, reducing administrative burdens.

A recent flurry of media attention has labelled carbon credits as bad news but the argument lacks nuance. Carbon offsetting projects come with their flaws, but high quality credits are crucial for limiting global warming to below 1.5 C.

India’s transition to a low-carbon economy necessitates significant investment in renewable energy. Building on its target of 175GW of installed renewable energy capacity by 2022, India aims to increase this to 450GW by 2030. A study by the Council on Energy, Environment and Water (CEEW) reveals that India would need to increase its total installed solar power capacity to over 5,600GW to attain net-zero by 2070. Further, to achieve this mammoth goal, the use of coal, particularly in power generation, would have to decrease by 99% by 2060. Similarly, consumption of crude oil across different sectors would need to reach its peak by 2050 and then significantly decrease by 90% between 2050 and 2070. The industrial sector, in this regard, could potentially meet 19% of its total energy requirements through the use of green hydrogen. India’s demand for climate finance, therefore, is substantial, and securing foreign capital on concessional terms is crucial. The global carbon market under Article 6.4 presents an opportunity for India.

By following the 5 Es formula—Enhancing carbon reduction efforts, Establishing robust monitoring and reporting systems, Encouraging international cooperation, Exploring technology and Innovation, and Empowering local stakeholders—India can position itself as a key player in the global carbon market and achieve its climate goals while promoting sustainable development.

Fauzia Khan & Kaviraj Singh are, respectively, member of Parliament, Rajya Sabha, and founder and managing director, Earthood

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