India’s Carbon Market: A New Lever for Industrial Decarbonization
In this edition of the India Energy and Climate Pulse, we focus on the India’s new carbon credit trading scheme and its role to reduce emissions from industrial sector.
By: Tarun Sharma(IIT Roorkee), Solveig Aamodt(CICERO)
India’s Climate Targets and the Emerging Carbon Market Framework
In April this year, India submitted its third Nationally Determined Contribution(NDC) under the Paris Agreement. The NDC sets out targets of reducing the emission intensity of India’s GDP by 47% relative to the 2005 baseline, and having 60% of installed electricity generation capacity from non-fossil resources, both by 2035. The NDC further confirms India’s target of reaching net-zero by 2070. It is unlikely that these targets can be achieved without regulatory and policy action. At the same time, India’s targets for 2030 represent a relatively modest increase in ambition compared with its previous NDC commitments. To better understand the interlink between policies and emissions, we ask what role the new carbon market can play in India’s net-zero trajectory.
India’s Carbon Market Takes Shape
Following other jurisdictions which have had carbon markets for some time, India has initiated its Carbon Credit Trading Scheme (CCTS). India has had a market based scheme for energy efficiency for more than a decade. The CCTS is based on and will replace the Perform, Achieve, and Trade (PAT) scheme for energy efficiency that was launched by India’s Bureau of Energy Efficiency in 2012, but while PAT was targeted at reducing energy use, CCTS aims to reduce greenhouse gas (GHG) emissions. The CCTS is envisaged as a robust framework with the objective of transitioning to a low-carbon economy by pricing the GHG emissions through trading of carbon credit certificates. The sectors included in the CCTS are: Aluminium, Cement, Chlor Alkali, Pulp & Paper, Textiles, Iron and Steel, Petrochemical, and Oil Refining. Facility-wise emission-intensity targets – based on the baseline intensity - have been announced, initially till 2026-27, in a phased manner over the preceding year, with an annual compliance cycle. Roughly 20%(~800 MtCO2e) of the total GHG emissions in India are covered under the scheme. The figure above shows the composition of the sectors covered under the scheme.
How the CCTS Works
As shown in above figure, the CCTS is expected to reduce emissions with almost 43 million tonnes of CO2 equivalents in 2026-2027 compared to a business-as usual (BAU) calculation of emissions. The obligated facilities can meet their targets by mitigation actions and/or by buying Carbon Credit Certificates. These credits will be issued to the qualifying facilities – i.e., the facilities that exceed their emission intensity target – after the audit verification at the end of the compliance year. One credit equates to 1 tonne CO2e. These credits can then be traded. Trading in the Indian market is expected to commence in late 2026.
Unlike the European ETS but similar to the Chinese carbon market, the Indian CCTS uses emission-intensity targets, with the denominator being physical product output. This differs from the the NDC target which is expressed in units of emission intensity of GDP. The Indian Carbon Market is thus not a cap-and-trade system, but an intensity-based baseline-and-credit system. This means that there is no fixed emissions ceiling, and emissions can continue to grow with increased economic output, reflecting the economic growth aspirations and uncertainties embedded in all Indian climate change mitigation policies. This aim to reduce growth in emissions, as opposed to high-income country schemes that aim to reduce absolute emissions, is also in line with what can reasonably be expected from a lower-middle-income economy like India in light of the principle of Common But Differentiated Responsibilities (CBDR) under UN Framework Convention on Climate Change. Nevertheless, with the system’s possibilities to tighten benchmarks over time, it can be an efficient measure for earlier uptake of new technologies and significant emissions reductions over time.
The EU ETS has been operating for more than two decades. Through the EU's new Carbon Border Adjustment Mechanism (CBAM), goods entering Europe have to meet the emissions benchmark as applicable to domestic production. These modalities could impact bilateral trade between Europe and India. How might this interaction unfold? Responses from the Indian firms exporting to Europe and the resulting supply chain adjustments have been reported, with high-emissions Indian steel producers having significantly lower exports to Europe, while low-emissions producers have continued exports at the same level.
Energy is by far India’s largest emission source, and some emissions, like industrial combustion, are included in the CCTS, but electricity generation, which is the largest absolute emission source, is not. These are scope 2 emissions for most of the facilities in the CCTS. However, driven by policy support and technological developments across the preceding decades, renewable electricity generation can now compete in the marketplace on its own. Increasing electrification of energy end-uses and increasing renewable electrification are dominant strategies for reducing emissions. The remaining significant process emissions from sectors such as cement, and energy-related emissions from sectors such as steel, are hard to electrify. The menu of potential solutions in these cases, including biomass, hydrogen, and carbon capture are at different stages of development and are not market-ready on their own. By pricing carbon emissions, the CCTS is expected to support their viability and stimulate their adoption. With adoption and the ensuing learning, the costs are expected to be reduced.
Conclusion
The stringency of the CCTS targets will reflect the climate mitigation ambition. The implications for the obligated facilities and the carbon price will indicate the likely distributional impacts. Careful navigation will be needed to balance emission mitigation ambition and the distributional impacts. How this plays out will in part be determined by the response of the mitigation technology markets, both supplier and buyers, to the evolving CCTS conditions. In light of the new trade agreements between India and the EU, and India and EFTA, increased India-Europe trade is expected, and successful implementation of both emissions intensity reductions and carbon market trade in India will impact the price and attractiveness of Indian products in the European market.
