On 8th August, 2022, India made revisions to its carbon credit policies to ban the export of carbon credits. A carbon credit is a permit allowing the emission of one ton of greenhouse gases per permit. They are periodically awarded to companies contributing to pollution in order to limit their emissions while allowing them to sell the extra credits to another company that needs them.

India will ban the firms from exporting their carbon credits until the nation meets its climate goals of reducing 1 BT of carbon by 2030 and achieving net-zero by 2070.  The government is planning to increase its share of green energy up to 50% from the current 42% by the end of the decade and become a net exporter of energy in the coming years.

Shri Raj Kumar Singh, Hon’ble Cabinet Minister (Power, New & Renewable Energy) in a recent discussion said, “Carbon credits are not going to be exported. No question. These credits will have to be generated by domestic companies, bought by domestic companies.”

The government is all set to launch a domestic carbon market, however the timeline for initiation and launch remains ambiguous. The Lok Sabha passed the Energy Conservation (Amendment) Bill, 2022 on 8th August, clearing the way for establishing carbon credit markets.

“With time, and in the context of the energy transition with special focus on the promotion of new and renewable energy and National Green Hydrogen Mission, a need has arisen to amend the said act further,” the bill’s statement of objects and reasons reads in respect to the amendment of the Act in 2010.

The domestic carbon market will enable the domestic companies to trade carbon credits efficiently and help push through energy transition goals of the government in an effort to combat climate change. The new law will prepare Indian companies for the looming carbon taxes in export markets. 

Carbon markets are one of the most effective drivers of reducing emissions, offering the lowest-cost emission reductions and enabling India to avert a loss of $35 tn owing to unmitigated climate change over the next 50 years. In an interview with CNBCTV18, Manish Dabkara, CMD&CEO, EKI Energy Services Ltd. said, “The creation of a robust carbon credit market in India would imply an increased demand for credits among India Inc.”

He added, “The renewed focus towards controlling GHG emissions and moving towards carbon neutrality, with specific milestones, is expected to encourage increased private sector participation in combating climate change. These commitments would drive demand for voluntary carbon credits in India. The annual demand for voluntary carbon credit in India is expected to touch 500+ mn units by 2030.” 

The country has been no stranger to carbon credits and the formation of the carbon market will only add value to the market size in the future. According to Kotak Institutional Equities’ Report titled ESG India, carbon-intensive sectors, renewable energy sector and lower alternative providers will witness a highly positive impact.

Carbon markets will also open up new horizons for companies engaged in developing, consulting and trading carbon credits, while being detrimental to the prospects of coal-based power generation capacities and Coal India’s growth ambitions.

However, in the case of developing countries like India, carbon credits can be highly beneficial as they ensure that economic activities are carried out while considering the carbon-related targets.  This, backed by favorable legislation and a business environment, shall ensure that this could be an area of significant opportunities in the next couple of decades. This is why the global markets for carbon credits increased by almost 164% in the previous year, and the total size of the sector is expected to breach the $100 bn mark by 2030. 

The government is working to bring more clarity in the implementation of the ban for the companies to ensure non-generalization of the policy frameworks with respect to carbon credits for different sectors. In order to avoid issues associated with previous policies in this sector like PAT, the government is working to build a supportive framework in the sectors where government intervention and engagements are reduced in order to incentivize large investment flow for mitigating GHG emissions from these sectors. 

This article was authored by Bhavya Tyagi and Tushar Mittal