India works on market stabilization fund details for upcoming carbon market

India's proposed carbon market stabilization fund is likely to involve contributions from overseas institutions and state funds, a government official and three market participants told S&P Global Commodity Insights.

India's national carbon market is expected to start mid-2023, with existing Renewable Energy Certificates (REC) and Energy Savings Certificates (ESCerts) transforming into Carbon Credit Certificates by 2026 for trade on power exchanges, according to a policy draft seen by S&P Global Commodity Insights.

A stabilization fund would serve to boost buy-side interest and support prices in the new market.

"[The fund] would need at least Rupees 8,000 million ($96 million)," said a consultant involved in generating Indian carbon credits for the global voluntary carbon market. "This would be approximately over a quarter of the existing market size of the Indian carbon credits."

According to the consultant, who asked not to be named, India exports approximately $200-$300 million worth of carbon credits a year.

Between 2010 to 2022 India was a significant exporter of carbon credits, issuing 278 million credits in the voluntary carbon market to end-2022 and accounting for 17% of global supply, according to a Jan. 31 Greenhouse Gas Emissions Special report by S&P Global.

A market stabilization fund would help generate investor interest in "efficient technologies and processes, and help the market take off at the required speed," said Samrat Sengupta, Vice President, New Business and Market Strategy at EKI Energy Services, a climate change and sustainability advisor.

The fund, proposed in a Dec. 16 stakeholder meeting as part of a wider draft policy on the market, could be based on contributions from "institutions such as World Bank and United Nations and government funding," a government official said on the condition of anonymity.

The draft policy notes the World Bank's Partnership for Market Readiness had announced an $8 million grant to India to prepare for and pilot the use of carbon pricing instruments.

The fund's function is being worked on, but market participants say it could act as a price guarantee mechanism, intervening with purchases when prices fall below a specific floor.

Platts, a part of S&P Global Commodity Insights, assessed the CEC price – which reflects CORSIA eligible carbon credits at $2.46/mtCO2e on Feb. 16. The Platts CNC, reflecting the most competitive nature-based carbon credits that either avoid or remove GHG emissions, was assessed at $2.45/mtCO2e.

Oversupplied market

The value of Indian RECs and ESCerts has languished on power exchanges due to oversupply, exacerbated by lax observance of purchase obligations by heavy emitters under the current Perform-Achieve-Trade (PAT) mechanism.

The proposed stabilization fund is designed as a corrective to this, boosting liquidity on exchanges and providing confidence to traders.

"Earlier there was no major provision to stabilize the price of these certificates while trading," said Shailendra Singh Rao, founder of Creduce Technologies, a carbon consultancy. "That was the reason investors faced huge losses. The government does not want the same to be repeated on the carbon credit market."

Data from the Indian Energy Exchange (IEX) shows that in January, 394,791 RECs were cleared in the trading session ended Jan. 27 as compared to 1.13 million RECs in January 2022.

The clearing price was at Rupees 1,000/REC ($12/REC), the IEX data showed. A REC represents 1 MWh of renewable electricity.

IEX is in preparedness for the upcoming carbon market. In December 2022, IEX launched a new subsidiary called International Carbon Exchange, or ICX, which will enable participants to buy and sell voluntary carbon credits at competitive prices.

SME involvement

The Dec. 16 stakeholder consultation also proposed Micro, Small and Medium Enterprises (MSMEs) can generate, sell and purchase carbon credits as part of the non-obligated sectors that will participate in the carbon markets on a voluntary basis.

The addition of MSMEs would flood the markets with even more credits, market participants said.

"The problem in India is on the demand side, not the supply side," said a leading project developer, not wishing to be named.

India's proposed carbon market is to have 12 designated compliance market groups -- the current PAT participants -- including petroleum refineries, chlor alkali producers, thermal power plants, iron and steel and fertilizers. Other sectors are to participate on a voluntary basis.

"Indications suggest aspirations towards an EU-ETS-style carbon market, but options (not an exhaustive list) available to the government toward future cap-setting include making changes to intensity reduction targets (which would adjust the volume of ESCerts and REC credits issued and available for trade); to adjusting the cap-setting methodology under the scheme (to mirror an absolute emissions cap as set out in the EU ETS)," said S&P Global's Greenhouse Gas special report.

Based on the current design of the PAT mechanism, credit supply would be insufficient to create an absolute cap large enough to cover regulated entity needs, the report said.

This might prompt consideration of inclusion of other VCM credit types in future, which if pursued, would reduce available long-term supply of credits in the global market -- particularly of REC credits, where India accounted for 44% supply between 2010-22, it said.