Carbon credits could boom in the age of net zero

The carbon credit market in India is set for accelerated growth, especially with the commitment made at the COP 26 climate action summit to achieve ‘net zero’ emissions by 2070. The government is pushing for a uniform carbon trading market through policy changes and legislation.

Says Deepto Roy, Partner at consultancy Shardul Amarchand Mangaldas & Co, “India’s carbon credit market is going to rise steadily. It is the largest exporter of carbon credits, and the government is considering changes in legislation for implementing a carbon trading scheme that will subsume the present tradeable certificates.”

The proposed legislation is aimed at creating a robust domestic market for clean certificates. India is also well placed to pioneer agriculture-related carbon credit trading. An Indian startup has already sold 20,000 carbon units from agricultural waste, says Roy. The carbon credit trade could help generate funds for green energy projects. It is estimated that, between 2020 and 2070, India would need about $10.1 trillion investment in the power, hydrogen and mobility sectors.

In terms of challenges, Roy says that after nearly three decades of policy efforts, carbon pricing remains a mere footnote in international climate negotiations. He feels that a regulatory framework for carbon pricing can play a key role in increasing the uptake by businesses in India.

Fragmented market

Currently, there is no single market for carbon credits. Apart from sovereign markets, there is also the voluntary market. Private companies prefer the voluntary market, where the prices vary significantly, from as low as 10 cents to $80.

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Article 6 of the Paris Agreement provided a framework for international cooperation on emission reductions. One of the major achievements of COP 26 was the finalisation of the Paris Rulebook, a set of decisions detailing the implementation of the agreement. This is expected to unlock the potential of international emissions trading and contribute to the exponentially growing $1-billion market of voluntary carbon credits.

Says Roy, “McKinsey estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Given the demand for carbon credits that could ensue from global efforts to reduce greenhouse gas emissions, the world will need a voluntary carbon market that is large, transparent, verifiable, and environmentally robust. Today’s market is fragmented and complex.”

The Renewable Energy Certificate (REC) mechanism, a market-based instrument introduced in November 2010, provides a platform to address the dispersed availability of renewable energy sources across various states in the country.

One REC represents one MWh of energy generated from renewable sources. A decade later, 59.5 million RECs have been sold on the power exchanges at a net value of ₹9,266 crore ($1.24 billion). This sizeable trade volume underscores its potential to play a key balancing role in India’s renewables market.

Domestic demand

Says Niroj Mohanty, Managing Director and CEO, Core CarbonX, “India has the potential to be one of the largest carbon credit markets globally, as the government pushes for a uniform carbon trading market. In March 2022, the Ministry of Environment, Forest and Climate Change (MOEFCC) advised the Bureau of Energy Efficiency (BEE) to develop a carbon trading scheme for the energy sector by broadening the scope of the existing energy-saving trading mechanism.”

According to Mohanty, this initiative will create a uniform market policy and regulatory framework based on demand generation. “Today, there is little demand for carbon credits in the domestic market on a voluntary basis. The major share of carbon credits from the voluntary market in India is being sold internationally. But the appetite for this will evolve over the next two to three years, as global demand and pressure for net zero commitments from various industries grows,” he says.

With the carbon market under BEE, most of the energy-intensive industries will be part of the domestic carbon market, where there will be greater focus on harmonising with PAT (perform, achieve and trade) parameters. It will kickstart both the voluntary and compliance markets. 

PAT and REC will be aligned with the anticipated carbon market proposed under BEE.

According to Refinitiv, a data analytics company, the value of traded global markets for carbon dioxide permits increased by 164 per cent last year to a record €760 billion ($851 billion). The voluntary carbon markets touched a record high of S$1 billion in 2021. In India, carbon trading was worth approximately $300 million last year. It is expected to touch $100 billion by 2030.

Manish Dabkara, CMD and CEO of EKI Energy Services Ltd, concludes, “The growth of carbon credit trade depends on a national legislation by Parliament to pave the path for the formation of requisite market systems and legitimisation of National Carbon Registry and National Carbon Market to meet the country’s commitments under Nationally Determined Contribution (NDC).”