Opinion Expanding the Indian economy, the green way

Carbon trade mechanism will help India balance economic needs with lowering GHG footprint

As carbon-related tariffs such as CBAM (Carbon Border Adjustment Mechanism) begin influencing trade directly, businesses would need to factor in both national and international implications.

Atanu Mukherjee

September 15, 2023 02:42 PM IST First published on: Sep 15, 2023 at 07:17 AM IST

As India develops its economy to meet the growing needs of its people, the country will confront serious challenges due to climate change consequences and the allied necessity to curb carbon emissions. With the impact of global warming becoming more severe, there is immense urgency to embrace practices that mitigate greenhouse gas (GHG) emissions.

A vibrant carbon trading network is among the numerous solutions that are being adopted or considered to tackle the emergency. One can think of carbon credits as a temporary “licence” for an organisation to emit a specific quantity of CO2 that year. This mechanism allows a company with low or no emissions to sell credits in the market via a carbon trading framework or carbon exchange. This offsets the emissions of another entity willing to pay for the credits.

With global temperatures and GHG emissions rising annually, not only governments but investors, consumers and other stakeholders have become conscious of their overall carbon footprint, and the need to control it. However, decarbonisation avenues are extremely limited for some industrial companies and hard-to-abate segments such as cement, chemicals, iron and steel production and non-ferrous metals. They are also a costly proposition for them compared to transport, power generation and some other industries. Nevertheless, as some of the biggest contributors to universal GHG emissions, these industrial firms are mandated to meet emission reduction goals, either because of local laws or their in-house policies.

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Carbon credits can assist companies in meeting sustainability targets. These outfits can purchase credits or fund programmes that create carbon credits. The Centre is planning to set up the Indian Carbon Market (ICM) by establishing a national framework that will help in decarbonising the domestic economy by pricing GHG emissions via trading in carbon credit certificates. The draft framework for the Indian Carbon Credit Scheme 2023 was recently notified by the Union government. The Bureau of Energy Efficiency functioning under the Ministry of Power has been tasked to develop the Carbon Trading Scheme in tandem with the Ministry of Environment, Forest & Climate Change.

The Centre is confident the ICM will help mobilise investments for the transition to a low-carbon ecosystem. It will also help India lower the emissions intensity of its GDP by 45 per cent by 2030 compared to the 2005 levels, thereby meeting its NDC (Nationally Determined Contribution) target related to its global climate commitments.

India does have an energy savings-linked market mechanism. However, carbon credit trading will give a fillip to energy transition due to its greater scope for covering the country’s potential energy segments. GHG emissions intensity targets and benchmarks would then be developed in sync with the domestic emissions trajectory, according to the climate goals. Consequently, carbon credit trades will be aligned as per the performance vis-à-vis the sectoral trajectories.

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One must remember, however, that the Centre’s draft notification has no provision for procedures, regulations or guidelines for the functioning of carbon markets. This responsibility would be vested with a National Steering Committee chaired by the Secretary, Ministry of Power.

Since the Centre has outlined an ambitious target of turning net zero by 2070, the ICM would help in decarbonising the commercial and industrial segments. Although the ICM would be regulated, it will offer flexibility to companies in hard-to-abate segments to augment their GHG emission efforts through carbon market credits.

The mechanism could help attract finance and technology for sustainable projects that can generate carbon credits. The ICM can be an effective channel in mobilising a major proportion of funds required for the low-carbon transition.

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The Centre’s decision will also create more awareness, change and innovation across hard-to-abate industries. Placing a price tag on carbon footprints would have a direct impact on industries. Enterprises driven by incentives and penalties would begin embedding the environmental impact as a key parameter in their strategic decisions. This, in turn, will encourage investments allowing the shifting of business and manufacturing towards practices with low carbon footprints.

As carbon-related tariffs such as CBAM (Carbon Border Adjustment Mechanism) begin influencing trade directly, businesses would need to factor in both national and international implications. Given the interdependencies and complexity of the trade, it is challenging to accurately predict and model the impact. It is imperative, therefore, that regulatory authorities closely oversee the dynamics of the carbon credit market and devise systems to ascertain its smooth functioning.

Meanwhile, as the country moves steadily towards a net-zero world, decarbonising industrial activity will be critical. It is here that industry leaders in carbon management solutions and clean energy transition can play a pivotal role in facilitating the transition towards a net-zero future by helping the nation switch from fossil fuel or legacy technologies to clean energy systems. As India tries to strike a delicate balance between economic needs and environmental concerns, a vibrant carbon trading mechanism can be crucial in creating a more sustainable future.

The writer is CEO Dastur Energy