India Carbon Market (ICM) for Net Zero Transition

Background

Creation of a domestic Carbon Market in India in compliance with the Energy Conservation (Amendment) Act, 2022, is a need of the hour. The driving factors for creation of Carbon market could be listed as – there is need of an effective mechanisms to achieve emission reductions at least cost; Proposed ICM (India Carbon Market) may increase the participation of private sector in emission reduction and attract climate finance in different sectors; to leverage learnings/success of Clean Development Mechanism (CDM), Perform, Achieve and Trade (PAT) Scheme, ?Renewable Energy Certificate (RECs) and convert to a single denomination; availing large mitigation opportunities from non-obligated and non-energy sectors apart from obligated sectors; tapping opportunities such as fuel switch, resource efficiency, cleaner production of Greenhouse Gas (GHG) reduction; and ICM can be used a medium to linkage with International markets, CBAM (Carbon Boarder Adjustment Mechanism), and CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation)

The process of establishing a Carbon Market at domestic level started in 2021.?The India’s Apex Committee for Implementation of Paris Agreement (AIPA) has directed Bureau of Energy Efficiency (BEE) to formulate Carbon trading schemes for energy sector in June 2021. Accordingly, Ministry of Power has initiated Amendments in the Energy Conservation Act 2001 for including the provisions for operationalizing carbon market in India. Eventually the amendment bill has been approved by the Parliament of India. Ministry of Environment, Forest and Climate has notified designated National authority, (NDAIPA) and Bureau of Energy Efficiency (BEE) to formulate the policy document. Ministry of Power and Ministry of New and Renewable Energy (MNRE), together has recently shared the developments in the Indian Carbon Market to the stakeholders. ?

For functioning of the Carbon Market in India a Regulatory framework like Energy Conservation Amendment Act 2022, a Trading Platform like Power Exchanges, Registry body like POSOCO/GCI and Accredited agency for Monitoring and Verification are already in place. The development of a Market stabilization instrument, Issuance/Crediting protocol, IT platform for registration and capacity building methodologies are in the process. The designated National Authority (NDAIPA) might work towards the linkages with Article 6.2/6.4 of Paris Agreement and approve the certificates or projects that can be traded Internationally.?

Proposed Governance Structure of Indian Carbon Market

Ministry of New and Renewable Energy and Bureau of Energy Efficiency has proposed that there will be an Apex Committee for the Implementation of the Paris Agreement (AIPA). The AIPA is consisted of ICM Governing Board, Designated National Authority, ICM Administrator, Market regulator, ICM Registry body and Exchange body. ?The ICM governing Board will be Co-Chaired by Additional Secretary, Ministry of Environment, Forest and Climate Change (MoEFCC) and Director General, BEE and members will be MoEFCC, Ministry of Power (MOP), Central Electricity Regulatory Commission (CERC), BEE and MNRE. The designated National Authority (NDAIPA) will evaluate, approve and authorization of projects and actions that are feasible for Article 6 mechanisms and sector specific requirements also. BEE will be the ICM Administrator and Central Electricity Regulatory Commission will be act as Market regulator. Grid Controller of India will be the ICM Registry body for Indian Market.

Functioning of India Carbon Market (ICM)

Both Compliance market and Offset Market might be under jurisdiction of ICM. In the Compliance market the obligated sectors such as Aluminium, Cement, Chlor Alkali, Commercial Buildings, Petrochemicals, Petroleum Refinery, Pulp & Paper, Textiles, Thermal Power Plants, Iron and Steel, Fertilizer may generate, sell and purchase the credit certificates. On the other hand, in the Offset Market the Non-Obligated Sectors & Non-Energy related sectors such as Afforestation and reforestation, Agriculture, Waste Handling & Disposal, Vehicle Manufacturer, Airlines, Institutes, Posts, Renewable Energy (Energy Storage/Offshore) and MSME & Other sectors may generate, sell and/or purchase credit certificates.

It may possible, in the Compliance market the RPOs or ESCerts holders under PAT Scheme can opt for conversion to Carbon Credit Certificate by achieving the targets or obligations given to those entities. On the other hand, the Offset mechanism might be mostly focus on incentivising carbon reduction projects like Renewable Energy Projects

Existing Compliance Market in India

PAT Scheme

·??????Energy efficiency-based obligation

·??????Coverage-13 sectors (Thermal Powe, Iron & Steel, Cement, Textile, etc.)

·??????Energy Consumption-350 million TOE (50% of India’s PEC)

·??????GHG Emissions-1100 million t CO2+ (approx.) (39% of India’s Gross GHG emission)

·??????ESCerts (1toe) ~ 3.5 TCO2

·??????Targets based on NDC trajectory

REC/RPO Scheme

·??????Renewable Energy Consumption (electrical) obligation

·??????Coverage: REC Grid connected power generator or obligated entities procuring excess RE than their obligation

·??????As on November 2022-1095 project totalling to 4733 MW registered

·??????1RECs (MWh) ~?0.9 TCO2

RPO till 2030 has been notified and new amendments also undertaken??

Existing Voluntary Action (CDM)

·??????Globally, as of 2020, ~2.1bn CERs issued -0.95bn unused CERs

·??????India has second largest number of CDM projects

·??????Other VCM also being used by Indian players (23.1 million t CO2 credits/annual)

·??????Over 1672 projects registered from India-Including RE, EE, Fuel Switch

·??????Cut-off period 01st January 2013-15 million unused CERs

The proposed scheme of transition of the existing compliance market in India like PAT Scheme and REC/RPO into new Indian Carbon market may follow two pathways. In one pathway the existing mechanism can be continued as it has been practiced and in the second pathway conversion of excess ESCerts and RECs will be considered for generation of Carbon Credit Certificates (CCCs) to the Carbon-based Compliance Market (CCTS) and Offset market, respectively.

Characteristics of Carbon Credit Certificates

?For any kind of Certificates other than the Mandatory carbon credit Certificates, for example converted CCCs or Offset Carbon Credit certificates have to carry out the following characteristics-

• Additionality
• Based on a realistic and credible baseline
• Quantified, monitored, reported, and verified
• Transparent chain of custody
• Represent permanent emissions reductions
• Are only counted once towards a mitigation obligation
• No negative externalities on environment

The components of Offset scheme of ICM namely Registry, Carbon Credits, Methodology adopted, Sustainable development framework, Crediting Period and Authorization Approval have linkages with the Article 6.2, Article 6.4 and Article 6.8.

Key Challenges

?There are few key challenges exist while implementing the domestic Carbon market.?Challenges like conversion of existing RECs into CCCs, certificate multiplier, double counting, Issuance to obligated entities, e.g. DISCOM could arise while registering under Offset market mechanisms.

Other challenges to be pondered over are:

• Imposing penalties for non-compliance of the obligations under the Compliance market mechanism
• Criteria based on which penalties can be imposed
• Who will be the governing bodies in case of penalty
• How many carbon permits are going to be printed each year
• Deciding the timeline for the project registry

These are some of the promising challenges when implementing the domestic carbon market in India. ??

Net Zero Think Solutions for?Carbon Credit

NZT has been involved in providing Carbon Credit solution with 10+ years of experienced experts in this domain. ?Our company are delivering solutions with the following scope of work-

• Methodology Finalization & Preparation of project design documents (PDD)
• Approval from authorized bodies
• Validation
• Monitoring & Verification
• Certification & Issuance of Credits
• Optimized valuation & Buyer

To know more about Net Zero Think's Carbon Credit solution, send an enquiry to [email protected] or visit to www.netzerothink.com

Authors:

1.??????Dr. Pranamika Bhuyan (Lead Consultant)

2.??????Mr. Manoj Kumar Singh (CEO)?