Toward a greener world: Seizing India’s Carbon Markets Moment

By Varad Pande, Anant Sudarshan

India has been an emerging leader in shaping the climate agenda to help the world get closer to achieving the ‘1.5 degrees Celsius’ target. As evidenced in India’s ‘Panchamrita’ or five-fold strategy announced at the COP26 in Glasgow, India will:

1. Get its non-fossil energy capacity to 500 gigawatts by 2030
2. Meet 50 per cent of its energy requirements till 2030 with renewable energy
3. Reduce its projected carbon emission by one billion tonnes by 2030
4. Reduce the carbon intensity of its economy by 45 percent by 2030
5. Achieve net zero by 2070

A critical piece for achieving this is Climate Finance. We need to be investing trillions every year, but are currently talking billions. Public finance is critical, but will only go so far, and we will need to unlock private capital in spades.

As an early-stage impact investor, with a growing portfolio in sustainable living, which includes climate-tech businesses, Varad sees several start-ups working toward better measurement of emissions, and using technology to reduce costs of bringing innovative models to the carbon markets. He also sees start-ups that are leveraging carbon markets to create enhanced livelihood plays for farmers (such as by moving from traditional to regenerative practices) and helping the ‘next half billion’ improve access to improved cookstoves and cleaner drinking water, which also have carbon mitigation potential.

So we believe carbon markets can be an important part of the solution to the climate crisis. If well implemented, they create the right long term price signals required for a massive climate transition. Recent developments in India, such as the amendments to the Energy Conservation Act (ECA) enabling a national carbon market, and Gujarat’s intent to create a state-level carbon market, are steps in the right direction.

Whether the benefits of carbon markets can be realized depends on whether they are properly designed. The good news here is that India can learn a lot from two home-grown experiences of its own as it shapes its journey.

1. The first, is the Emissions Trading Scheme (ETS) implemented by the Gujarat Pollution Control Board (GPCB) in Surat to control PM 2.5, the dominant ambient pollutant in India. (something Varad was privileged to help start a discussion on in 2010 at India’s Ministry for Environment & Forests)
   a. Since its launch, the Surat pollution market has reduced particulate emissions by about 24 percent without any measured increase in industry operating costs.
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2. The second, is the Perform Achieve & Trade (PAT) Scheme implemented under the aegis of the Bureau of Energy Efficiency (BEE) since 2014, that aimed at creating market-based incentives to increase energy efficiency.
   a. Between 2017-2020 the PAT saved 86.95 Mt of CO2 (>7% percent of India’s estimated emissions from industry in 2018)

So, what can one learn from these experiments, and what are the fundamental ingredients needed to get India’s carbon markets right? We argue that there are 4Cs we must get right: (i) Credibility, (ii) Coherence, (iii) Consensus (iv) Capacity

• Credibility: Credibility in measurement process. Taking the Gujarat model as an example, carbon permits being bought and sold are backed by a robust and internationally credible measurement system. The GPCB introduced new technology called the continuous emission monitoring system (CEMS) as a basis for measuring emissions. India has done a tremendous job over the last decade on setting up DPIs (Digital Public Infrastructure) and this prowess can be harnessed to create a rigorous and scalable measurement infrastructure.
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• Coherence: In a single market, it is important to that the sources of emissions are comparable and consistent. For example, market regulating factories and power-plants should not be integrated with, say, agricultural sources, at least when being launched, because the quality of measurement in the two markets are very different. While it’s important to have greater sector coverage, it is also important to have comparability in place. The PAT scheme has done a great job at this, in that, they allowed only certain ‘designated consumers’ to start out who had good quality comparable data. Similarly the Gujarat ETS focuses only on factories where CEMS was being used, sacrificing some breadth in exchange for credibility and coherence.
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• Consensus: Taking into consideration different players in the market is critical - this means co-creating with market participants, building trust by keeping penalties low and tightening initially loose capital over time, while also gradually expanding on the number of covered entities.
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• Capacity: Regulating emissions, by their very nature, cuts across many government Ministries and agencies. A National Carbon Market needs a standalone regulator that can take a cross-sectoral view, is professionally staffed, digitally born, and connected to the global discourse. The regulator should be accountable to the parliament, submitting annual reports and putting aggregate data online in real time.

As India has long said about climate change, “we didn’t cause the problem, but we will be part of the solution”. A well-designed carbon market can be another key pillar of India’s climate solution leadership.

* Professor Anant Sudarshan is a faculty member at the Department of Economics at the University of Warwick and a Senior Fellow at the Energy Policy Institute at the University of Chicago (EPIC). Views and opinions expressed are solely those of the original authors.