Overview of the Carbon Credit Trading Scheme (CCTS)

The Carbon Credit Trading Scheme (CCTS) was introduced by the Indian government in June 2023, with trading anticipated to commence in 2026. The aim is to stabilize the market by 2027. This initiative is part of India's broader strategy to establish a carbon market, although several challenges need to be addressed for its success.

Essentials of a Carbon Market

• Demand and Supply:
  • A genuine and fair demand estimation is crucial for any market, including carbon markets.
  • Suppliers assess demand and pricing to meet the market needs.
• Emission Intensity Targets:
  • The Ministry of Environment, Forest and Climate Change (MoEF&CC) has set emission intensity targets for specific sectors.
  • Entities must reduce their greenhouse gas (GHG) emission intensity to meet these targets or face penalties.

Challenges and Opportunities

• Technology and Costs:
  • Entities face varied marginal costs for lowering emissions due to differences in existing technology and upgrade needs.
  • A well-functioning carbon market enables entities with high marginal costs to purchase carbon credits to meet targets.
• Sector Exclusions:
  • Certain sectors like steel and thermal power, major GHG contributors, have been excluded from the scheme.
  • Exclusion could reduce market size and liquidity.
• Target Setting Issues:
  • Setting targets based on historical emissions lacks ambition and may not drive sufficient demand for carbon credits.
  • Proposed approach: Group similar entities within a sector and set standardized targets for enhanced benchmarking and efficiency.

Offset Mechanism

• The CCTS includes an offset mechanism allowing non-obligated entities to participate.
• Global emission trading schemes have shown that voluntary participation can lead to issues like carbon leakage and data integrity compromise.
• Robust monitoring, reporting, and verification mechanisms are essential.

Integration with the Perform, Achieve and Trade (PAT) Scheme

• The CCTS is modeled after the PAT scheme, operational since 2012 to enhance energy efficiency.
• Questions remain about the coexistence of both schemes and potential market fragmentation.
• Past criticism of the PAT scheme includes lax targets, an oversupply of certificates, and poor enforcement.
• Unresolved issues from PAT cycles III to VIII, including the conversion of ESCERTs to carbon credits, need addressing.

Overall, for a robust and credible carbon market to emerge in India, thoughtful resolution of these challenges is necessary.