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Should India Ban The Export Of Carbon Credits To International Markets?

Recently, Energy Minister RK Singh during the discussion in the Lok Sabha on the proposed amendments to the Energy Conservation Act stated that India will ban the export of carbon credits to international markets until the country’s commitment of reduction of 45 per cent emission intensity of GDP is met

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If you are an active climate action crusader, by now you must have heard or read about the recent statement by Cabinet Minister Shri RK Singh during the discussions in the Lok Sabha on the proposed amendments to the Energy Conservation Act 2022 wherein he stated that India will ban the export of carbon credits to international markets until the country’s commitment of reduction of 45 per cent emission intensity of GDP is met.  

Before we decipher this statement, let’s briefly ponder on India’s climate action journey thus far. 

India’s Carbon Credits Market

India is the third largest GHG emitter in the world, after China and the US, accounting for approximately 8 per cent of annual global emission. However, per capita basis, India is well below global average. Per capita GHG emissions by India is estimated to be 1.96 tons of CO2 eq, as against a global average of 6.55.

At the COP 26, India committed a net-zero carbon target by 2070. India reiterated on its climate change commitment, building upon the aggressive goals set during the Paris round of talks. In line with this, the country has made reasonable progress for a massive transformation of its energy systems that is not only futuristic but also enables strong compliances for achieving global climate change goals. One of the most strategic mechanisms that can enable this transition for India into a carbon neutral economy is a robust carbon credit market. 

Though globally carbon trading started formally in 1997 under the United Nations' Kyoto Protocol on climate change with 150+ nations as signatories, India still does not have a formal carbon market. That said, the country is no stranger to carbon credits which it has accumulated through Clean Development Mechanism (CDM) projects.

India is an active participant in the global CDM market, with the first such project getting off ground as early as 2005. So far over 1,500 CDM projects have been registered in India, making it the second largest destination after China. This represents little more than 21 per cent of the total CDM projects that has been registered across the world. The abundance of CDM projects mean India has been one of the largest recipients of tradable Certified Emission Reduction (CER) credits. The CDM and CER together has helped India in laying the groundwork for the development of a Voluntary Carbon Credit Market (VCM). 

The Amendments to the Energy Conservation Act 2022 

The Act was first enacted in 2001 and provides a legal framework and regulatory guidelines at the Central and State level for the efficient use of energy and its conservation. The proposed amendments to the Act that has been passed in Lok Sabha will empower the country to increasingly strive towards its net-zero commitment of 2070 with the further implementation of NDCs in a timely manner. It will also facilitate the development of India’s carbon market that will in turn enable the country to transition into a low carbon economy. 

With the proposed amendments, the current trading schemes in India – Energy Saving Certificates (ESCerts) and Renewable Energy Certificates (RECs) will be merged into one single commodity that will be called Carbon Credits Certificate (CCC) and will operate under Cap & Trade system under the National ETS.  

Though the market will largely be voluntary in nature to begin with, once it becomes mandatory for specific sector(s), the scheme will remain open for the Indian Voluntary Market buyer as mentioned in the EC Act 2022. This will open the market for newer avenues and is expected to unleash a new era of environmental activism in India even as the demand for Voluntary Carbon Credits grows exponentially in the country.

The ban of Carbon Credits export

One of the important outcomes of COP26 is the operationalisation of Article 6 of the Paris Agreement was that it paved the way for countries to work with each other and reduce the overall cost of emission reduction. Under this, India could now engage with developed nations and tap foreign funds for its emission reduction projects. This enabled a further enhanced ecosystem for the trade of India’s carbon credits in the International markets.

This along with the export of carbon credits from India to International markets under the Voluntary market scheme, ensures a strong influx of climate finance to India which the country can add back for carbon reduction projects and interventions. Article 6 and domestic/regional emission trading schemes have not led to many changes in the International Voluntary Markets. Additionally, the trade of credits in the International Voluntary Market does not need a sign-off from host nations since no corresponding adjustments are required.

Though the current proposal to ban the export of carbon credits from India, is solely been for the National ETS, a compliance Cap & Trade national market to ensure effective compliance of India’s NDC; in line with similar such National and Regional ETS been successfully in operation around the world, e.g. EU ETS, Korean ETS etc.; will not affect the Voluntary carbon market. It is important that the industry is clarified that this will have no impact on the current sale of carbon credits developed in India to International global markets. This is only a proposal for the National ETS whenever it comes effect. 

Since the ban will not affect the current Voluntary Market dynamics in India, the industry will continue to empower the country its transition into a carbon neutral economy. A National ETS will further accelerate this journey since more trade of carbon credits would imply more carbon reduction in the country. The Energy Conservation (Amendment) Bill will also bring fair play and increased transparency, enabling all stakeholders with equal opportunities. The amendment act will unlock new market potentials for both the sellers and buyers of credits in India.

Indian Government empowering the domestic Carbon Market

The government has been instrumental in the growth of the market in India. The Bureau of Energy Efficiency (BEE), which is a part of the Power Ministry in India, is developing a new voluntary national carbon market mechanism that has the potential to get converted into a mandatory program soon in India as well. The increased focus of the Govt. to establish a well structured National ETS is expected to enable the market to flourish further. 

Government can implement some important measures to establish a transparent and vibrant carbon market, which will help provide indexing facility that can be leveraged for green / carbon finance instruments, facilitating India’s carbon neutral growth path and help in attaining its NDC goal.

  1. A national legislation by Parliament to pave the path for formation of requisite market systems and legitimisation of National Carbon Registry & National Carbon Market to meet the country’s commitments under Nationally Determined Contribution (NDC)
  2. Respective line ministries, which may include MOEFCC, MoP, MoF, Ministry of Commerce and Industry, etc, to effectively form the national policy for formation of National carbon market.
  3. Regulation to be brought in on urgent basis to formulate the rules for operation of such carbon market. The market should be effectively sink with National Carbon Registry
  4. Effective level playing field to support private sector participation in origination of carbon emission reductions (projects) and country endorsement to participate in International Voluntary Carbon trading, bringing the requisite FDIs in India
  5. In recent future, with the advent of operational modalities under Article 6 Supervisory Body of UNFCCC and its administered International Carbon Registry, the Indian National Carbon Registry should effectively be linked on real-time basis with International Carbon Registry

While the country works towards this, come important questions need to be answered first – 

(i) which kind of new carbon credit projects will be allowed to get registered under Article 6.4 and what will be the timelines?
(ii) which kind of CDM projects will be allowed to be migrated under Article 6.4 and what will be the timelines?
(iii) will India need to sign MOUs with other nations under Article 6.2 since this will open new avenues for Indian investors to invest abroad and procure economical credits similar to Sweden, Japan and Switzerland to trade to Nations / Companies for Compliances or Voluntary mitigation.
And yes, more importantly, will the recent statement by Minister on the export ban of carbon credits impact the international voluntary markets that do not need corresponding adjustments discussed during COP26 & potential Article 6.2/6.4 credits?

Pondering on these questions and clearly stating the measures is indisputable for the industry and the country as a whole. 

Heading towards a low Carbon future

Carbon markets have been successful in controlling GHG emissions by enabling their trading to achieve the emission limits.   With the implementation of the National ETS, the domestic carbon credits market will enable the development higher quality sources of carbon credits, benefitting both buyers and sellers and ultimately, supporting progress toward a low-carbon future.

In conjunction with the International Carbon Markets, India’s domestic market can play a key role in reducing global greenhouse gas emissions and enabling the larger goal for rehabilitating the entire planet. 

(About the author: Manish Dabkara is CMD & CEO of EKI Energy Services)

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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carbon credit energy conservation amendments

Manish Dabkara

The author is CMD & CEO of EKI Energy Services Ltd.

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