India supplies nearly 15 per cent of the global carbon credits, making it a powerhouse in the global carbon market. These credits represent payments for reducing one tonne of carbon emissions and are purchased by entities aiming to cut emissions. Today, there is growing enthusiasm about the potential of carbon markets to finance climate transitions. This has attracted numerous start-ups offering innovative solutions such as emission reduction projects, carbon credit exchanges, and blockchain-based systems to ensure credit integrity. However, regulatory uncertainties and increasing pressure to be profitable suggest that the carbon market may favour incumbents with lower overheads and diversified income streams, presenting challenges for start-ups in building sustainable business models.

India’s carbon credit market has more than halved in the last two years, in line with global trends; it generated around ₹1,000 crore in 2023. The market comprises a number of players, such as independent project developers as well as renewable energy companies. Consulting firms also operate in this space, buying and selling credits for their clients. As such incumbents are either consulting companies who do not need large amount of capital or renewable energy companies for whom carbon credit revenues are not material. Now, a growing number of start-ups are vying for a share in this market by using technology or developing projects to offer verifiable credits, or by simplifying the process of purchasing them.

Lack of clarity

Carbon markets can be either compliance markets where corporations are mandated to buy credits by governments, or voluntary markets, where companies buy credits to meet their carbon reduction targets. While compliance markets are almost ten times the size of voluntary markets, they are largely active in Europe. India was a key player in compliance carbon credit a decade back. However, when the EU restricted its credit purchases to its member-states, Indian suppliers shifted focus to voluntary markets.

The global compliance carbon market is undergoing significant changes with new rules being developed under the Paris Agreement’s Articles 6.2 and 6.4. These articles provide a framework for countries to trade carbon credits while ensuring that they retain enough credits to meet their own emission reduction targets. However, the finalisation of these rules has been delayed due to the complex negotiations involved.

Given the lack of clarity, the market for such credits is limited, and carbon credit developers must sell their credits in voluntary markets, which are also facing challenges. Even when compliance markets open, they will be dominated by sectors such as hydrogen, battery storage, bio-energy which are capital intensive and thus dominated by large players who may prefer to sell their credits directly or negotiate hard with intermediaries, leaving little profit for them.

The voluntary carbon market faces challenges, particularly concerning the quality of credits. Public trust in carbon offsets has been eroding due to doubts about the actual emissions reductions achieved. Indian credits, often derived from renewable energy projects and cook-stove initiatives, are under scrutiny, as these projects may not qualify as high-quality credits.

Climate change adds another layer of complexity, especially for agriculture-related carbon credits. Unpredictable weather, such as floods, can undermine the carbon benefits of sustainable practices, making it difficult for these projects to prove their impact. This uncertainty further exacerbates the challenges for new companies trying to generate revenue in this space.

While the potential of India’s carbon market is undeniable, the current landscape presents significant challenges for start-ups including regulatory uncertainties, high costs associated with maintaining quality standards and strong competition from established players. Carbon credit revenues may not be enough and start-ups may need to invest in asset creation to diversify revenue streams. These markets face multiple headwinds. Start-ups will require substantial capital to navigate them.

Bharti is Partner, FineTrain, and Sandeep is Advisor, Climate Change, GIZ India. Views are personal