India is building a carbon market not only to achieve its climate commitments but also to strengthen the competitiveness of its exports in a global economy where carbon is becoming a trade weapon.
The India-European Union Free Trade Agreement has become catalyst in shaping India’s emerging carbon market. Negotiations on EU’s Carbon Border Adjustment Mechanism (CBAM) became major hurdle, as its implementation pose tangible cost on Indian exporters.
As mentioned in a paper by Indian Chamber of Commerce, impact would vary by sector, with Iron and steel sector facing 15%-22% price hikes.
Eventually, India did not receive an outright exemption rather agreed upon establishing formal working group to help align verification and accreditation requirements. And secured “forward-looking most-favoured nation assurance” provision that any flexibilities extended by the EU to third countries would also apply to India through the Most Favoured Nation clause.
India’s carbon market is structured around emissions intensity-based trading system rather than absolute emissions caps, allowing it to balance economic growth and climate ambitions.
These compliance markets work on cap-and-trade mechanism wherein companies are assigned GHGs emission quotas. India established its Carbon Credit Trading Scheme (CCTS) a couple of years ago in June 2023. Besides this, India has voluntary market allowing firms to offset their unavoidable emissions via buying carbon credits.
Carbon credits are often created, exchanged, and accounted for across different jurisdictions, necessitating global rules and regulatory oversight. The World Bank Group estimates if planned instruments become operational, nearly a third of the global emissions could fall under carbon pricing mechanisms by 2030.
As of now, there are about 37 emission trading schemes (ETS) operating at either national or sub-national level. There are some big players but market size remains small. Integrating ETS and carbon tax is definitely on priority. Thus far there is little alignment globally on carbon pricing.
Abhimanyu Rathi, Founder & CEO of RenewCred, said “what is genuinely converging is not price but the rules of integrity and accounting that decide whether a tonne is real.”
Global experience reveals that the effectiveness of carbon markets depends on credibility and measurability of Monitoring, Reporting and Verification (MRV) system. Market confidence rests on robust MRV design structure.
In India, Bureau of Energy Efficiency (BEE) sets emission targets and facilitates issuance of Carbon Credit Certificates. However, India lacks accredited verifiers and adequate data infrastructure for monitoring carbon emissions. Its tax rate is among the lowest in the world at just USD 1.6 per tonne of CO2 emissions.
India’s carbon market still at nascent stage compared to mature ones including EU, US and China. They had enough time to stabilize carbon pricing and test policy instruments that works for their domestic market.
Rajat Verma, Associate Professor, IMS-Ghaziabad, University Courses Campus, has argued that “India’s CCTS will also require hand-holding for at least 4 to 5 years in which the BEE needs to closely monitor the trading price and continuously evolve the process for its betterment.”
Despite India being the third-largest emitter, after China and the US, its per capita carbon emissions remain well below the global average. Without foreign support, India has to rely on its own measures and create suitable path to Net-Zero.
Carbon Markets function as green finance mechanism that incentivizes emission reduction while enhancing industrial competitiveness in increasingly carbon-conscious global economy. At this critical juncture, decisions made today will have long-term implications on market’s future trajectory.
