Next steps on carbon

Govt must move fast on emission trading

One of the final Bills passed by the Lok Sabha during the Monsoon Session of Parliament was the Energy Conservation (Amendment) Bill, 2022. To this legislation there are various aspects that are of interest, but the most important development of those in the law is perhaps the proposal for a carbon market in India that could lead to emission trading and reduction. In particular, the law would allow the Union government to delineate a mechanism for trading carbon credits as well as give it the power to issue emission or carbon certificates that might subsequently be traded. Such legal backing for a carbon market comes not a minute too soon. There are already almost three dozen emission-trading schemes in the world of very varied efficiency and reliability. There are certain big holdouts, the United States among them — which is unsurprising since that country constantly fails to agree at federal level about even very basic progressive measures. India cannot afford to be numbered among these holdouts for certain very good reasons.
 

A functional carbon market that manages to discover a price for carbon in at least a few of the sectors where emission reductions are most difficult is a crucial input into future international negotiations. Multiple efforts are underway to internationalise carbon trading in such a way that entire supply chains can be decarbonised. Even if this is not done by statute, it will be done on a voluntary basis by many large organisations, and those countries and sectors that fail to fall in line will suffer competitive disadvantages. Concern about these sectors — such as cement and steel — might also hold back broader trade agreements that are in India’s interests. That is why a major part of the agenda of the Trade and Technology Council announced in March between India and the European Union, for example, is hammering out common norms for these sectors. India certainly cannot allow China — which has expanded and unified its long-standing regional emission-trading schemes in recent times — to steal another march on its sectors. This is not about protecting the existing market share for India Inc.; it is about ensuring that Indian companies have room to grow globally in an era in which carbon content in supply chains will be a crucial determinant of competitive success.

However, there are important domestic steps that need to be taken. First, there should not be multiple mechanisms with the same purpose. The existing Perform, Achieve and Trade (PAT) mechanism needs to be subsumed into any new emission-trading system, or ETS (as should the renewable energy certificate scheme). The overall ETS must be brought into line with India’s nationally determined contributions under the Paris Agreement and as updated recently by the Union Cabinet. Regulatory principles for the carbon market — and an empowered regulator — will have to be designed so that it is both orderly from the beginning and can also slot easily into any international scheme that is subsequently designed. Finally, India must leverage its tech know-how to develop cutting-edge methods of determining whether promises of emission reduction are actually being kept by market participants. In other words, a low-cost, tech-intensive and transparent monitoring, reporting and verification scheme will have to be developed by the regulator. There is a lot to be done in this space.