The ghost of PAT will haunt the upcoming Indian Carbon Markets

Last week I had the pleasure to attend the stakeholder consultation workshop organized by the Bureau of Energy Efficiency (BEE), the nodal government agency framing the rules for the upcoming carbon credit trading scheme that is being launched at a National level in India.

This topic has been close to my heart since the first time I heard about the concept of carbon trading in my classroom in DTU and I distinctly remember wishing how India should have a cap and trade system or at least some kind of carbon regulatory mechanism as the third largest emitter in the world. To finally have that in black and white, is nothing short of a dream come true for a young carbon market enthusiast like me.

We have been hearing about the launch of Indian Carbon Markets since 2 years now, with BEE initially coming up with the National Carbon Mission where they first indicated that the CCTS would be merged with the PAT scheme, any trickle of information since had been hard to find and even harder to verify.

Small statements by the Power Minister or the DG, BEE here and there that followed the document for months created a lot of confusion and maybe actually reflected the internal chaos of policy making on this complicated subject. Finally, now that we have some (and not complete) clarity on what would at least be the fundamental principles governing the compliance side of the Indian Carbon Market, I thought it is a good idea to take a step back and reflect on where we are going with this.

Prima facie, the compliance part of the CCTS (whether there will be a voluntary part or not is still in discussion, so lets just consider CCTS to be just the compliance mechanism for the purpose of this discussion) seems to be nothing but the previous Perform Achieve Trade (PAT) Scheme with a simple replacement of energy efficiency targets to Carbon emission equivalents.

Now this is fundamentally different from the cap and trade mechanism as is followed in the EU ETS and several other Emission Trading Schemes across the world. Under PAT the targets were not absolute, the most efficient company from the given sector was identified as the baseline and everyone else got a target comparative to this relative baseline.

There are a number of advantages of following this methodology, especially for developing economies where these schemes are newly introduced and there is stiff competition of choice between economic growth and social/environmental welfare. However as was seen with the first few cycles of PAT, generally these targets were very easy to achieve for the industries and the PAT cycles always had an oversupply of credits- making the prices of these credits (Energy Saving Certificates) plummet. This resulted in a weak incentive structure for industries to truly invest in cleaner technologies and significantly reduce their carbon footprint. While the PAT scheme was a commendable step towards encouraging energy efficiency, its integration into the upcoming carbon market structure raises serious concerns about the efficacy of India's decarbonization efforts.

One of the most glaring issues with the current approach is the absence of absolute emission reduction targets. By pegging the carbon trading system to the PAT scheme, the Indian government is inadvertently setting the stage for a failure of impact. Unlike the European Union Emissions Trading System (EU ETS), which sets clear and binding caps on emissions, the PAT scheme's relative targets do not provide a concrete trajectory in line with India's ambitious Net Zero Goals.

Furthermore, the decision to merge the PAT scheme with the carbon markets seems to lack a compelling rationale. This move neglects the potential of nature-based solutions for carbon avoidance and reduction, which should be a critical component of India's holistic decarbonization journey. Nature-based solutions, such as afforestation, reforestation, and sustainable land management, have the potential to not only sequester significant amounts of carbon but also foster biodiversity and support local communities.

The absence of a stringent regulatory framework with absolute targets in the Indian Carbon Market might lead to a continuation of the status quo, with industries merely meeting minimal requirements rather than actively striving for substantial emission reductions. This could ultimately undermine India's commitment to combatting climate change and achieving its Net Zero Goals in a timely manner.

In order to truly make a meaningful impact on the global climate crisis, it is imperative for India to reevaluate its carbon market strategy and consider implementing a more robust and comprehensive regulatory framework. This framework should include absolute emission reduction targets, effective monitoring mechanisms, and proactive support for nature-based solutions. Only through a holistic and forward-thinking approach can India ensure that its carbon market initiatives contribute significantly to the country's sustainable development goals and align with the broader global efforts to mitigate climate change.

The Indian government must recognize the shortcomings of the current integration of the PAT scheme with the carbon markets and take swift action to rectify these shortcomings. Failure to do so will not only jeopardize India's position in the global fight against climate change but also perpetuate the ghost of the PAT scheme, haunting the potential of the Indian Carbon Markets for years to come. As we move forward, it is crucial that India embraces a more ambitious and progressive approach to carbon trading, one that is firmly rooted in absolute targets and prioritizes nature-based solutions for sustainable and impactful carbon mitigation.