Building a credible carbon market

Not including all hard-to-abate sectors in carbon emission intensity targets will reduce market size and impact liquidity. Offset mechanism isn't a solution

- AJAY TYAGI

The Carbon Credit Trading Scheme (CCTS) was notified by the Government of India in June 2023, and several steps have since been taken to operationalise it. Trading is expected to begin in 2026, with market stabilisation expected by 2027.

This article analyses the government's approach to developing a carbon market and highlights key challenges in making it a successful initiative. Admittedly, this is a complex and evolving subject, and several additional issues will need to be addressed going forward.

Let's begin with the basics. A genuine and fairly estimated demand is essential for the development of a market for any commodity. Suppliers then come into the picture, make their own estimations of demand and pricing, and take the necessary actions to meet that demand. This applies to carbon markets as well.

The Ministry of Environment, Forest and Climate Change (MoEF&CC) has recently notified carbon emission intensity targets for a few identified entities in certain sectors. Broadly speaking, the obligated entities will have to reduce their greenhouse gas (GHG) emission intensity and achieve those targets, or face penalties and other legal actions.

This is the basic pre-requisite for a successful carbon market to come up.

The emission intensity targets set by MOEF&CC are both sector-specific and tailored for the obligated individual entities in that sector. The overarching guiding principle for fixing the targets has been India's nationally determined contribution (NDC) commitment to reduce the emission intensity of its gross domestic product (GDP) by 45 per cent by 2030, compared to 2005 levels. For individual entities, historical emissions—with 2023-24 as the baseline—have also been taken into consideration.