India lays ground rules for its upcoming compliance carbon market

India has laid ground rules to operationalize its compliance carbon market, sorting out how emission allowances will be issued and traded to pave the way for the market's official launch, the country's Bureau of Energy Efficiency (BEE) said in a document titled "Detailed Procedure for Compliance Mechanism under the Indian Carbon Market" on Nov. 8.

India is the second largest greenhouse gas emitter and energy consumer in Asia, ranked after China. In 2021, Prime Minister Narendra Modi announced that the country will reach net zero by 2070.

Despite the Indian government releasing some draft policies and announcements in the past, this document is the first policy that concretely states how the country plans to curb its emissions using the compliance emission trading mechanism.

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India has planned to implement its compliance mechanism around 2026(opens in a new tab), with 11 sectors(opens in a new tab) expected to be covered gradually, including petroleum refineries, cement, steel, chlor-alkali, aluminum, thermal power plants and fertilizers, S&P Global Commodity Insights reported earlier.

Intensity-based approach

According to the document, India is expected to allocate its emission allowances, called Carbon Credit Certificates or CCCs, based on an intensity-based approach. Similar to China, the government will set annual targets for greenhouse gas or GHG emission intensities, namely the maximum amount of GHG emission allowed per unit of output.

This approach is different from EU's compliance market that directly sets a cap for the absolute volume of emissions, and it is more commonly used among developing countries with growing energy demand and industrial production.

India's market follows a one-year compliance cycle, requiring companies in the compliance markets, called obligated entities, to report their performance annually. Obligated entities will receive CCCs if they manage to keep emission intensities below the target and have to buy CCCs if their intensities exceed the targets.

The targets will be set based on India's Nationally Determined Contributions or NDCs, namely climate targets committed under the Paris Agreement, availability of alternative fuels and decarbonization technologies in the sectors, and costs for implementation, BEE said.

Specific targets will be assigned to each obligated entity, considering both sector-wide emission reduction trajectory as well as its average rate of historical emission reductions, the document showed.

Despite the one-year compliance cycle, the GHG intensity targets will be announced once every three years, which enable obligated entities to make longer-term plan for decarbonization.

Scope of covered emissions

Compared with China's national compliance market that currently only covers CO2, India's market is expected to cover more types of GHG, including Methane, Nitrous Oxide, CF4, C2F6, C6F10, and C6F14. The emissions for all GHGs will be converted to CO2 equivalents, according to the document.

The document specified that a "gate-to-gate" approach will be adopted, namely accounting emissions from the reception of the raw materials to the completion of the production process.

As such, the scope of emissions to be covered include direct emissions from fuel combustion and industrial processes, as well as indirect emissions from electricity and heat consumption.

Motivating decarbonization

The document clarified ways that can be adopted by obligated entities to reduce their liable emissions under this compliance regime, which is expected to motivate the adoption of clean fuels and frontier decarbonization technologies.

BEE said the compliance mechanism will not cover GHG emissions from renewable energy sources, biomass or biogenic source of energy. Besides, it will not cover emissions that are properly treated through carbon capture, utilization and storage or CCUS technologies.

Nevertheless, the purchase of Renewable Energy Certificates will not be considered as a valid claim toward renewable energy consumption under the compliance mechanism, which means obligated entities cannot use this way to waive liable emissions, according to the document.

Notably, obligated entities will be allowed to bank their surplus CCCs from the current compliance period and use them for the next period, BEE said. Like what has been observed in China and Australia's markets, such arrangement is likely to trigger hoarding activities and may negatively impact market liquidity.

Governance Structure

The compliance emission trading mechanism will be jointly managed by BEE and its parent government body India's Ministry of Power, as well as the country's Ministry of Environment, Forest and Climate Change (MoEFCC).

The GHG emission intensity targets will be recommended by the Ministry of Power, after duly considering recommendations from its BEE and a designated National Steering Committee for Indian carbon market. MoEFCC will review and notify obligated entities for the finalized targets.

The CCCs will be issued from a national registry, called Indian Carbon Market or ICM registry. For obligated entities, they need to buy and sell CCCs through designated power exchanges.

Nowadays, other environmental commodities like Renewable Energy Certificates and Energy Saving Certificates have already been listed on power exchanges in the country.

Related feature: Insight from New Delhi: Navigating India's carbon markets(opens in a new tab)