Nitty gritties of carbon trade in India

Shailendra Singh Rao, founder of Creduce, believes that despite being the fastest growing carbon trade market in the world, there are challenges that the country must to address to unleash the true potential of carbon trade in India. He is confident that with a better mechanism in place, India can surpass China in terms carbon credits supply and become the global leader.

There are two types of carbon markets, the compliance market and voluntary market. Compliance market is majorly the cap and trade market. One can register the project under clean development mechanism (CDM) and claim the credits by following all the processes. In the voluntary carbon credits market, there are different autonomous voluntary registries with their own guidelines and parameters. Based on these guidelines and parameters, one needs to get the project registered, audited, verified by approved third party auditors and claim the carbon credits from these registries. 

So, stakeholders can claim credits from both the compliance and voluntary registry and then sell them in the international market. One carbon credit is equal to 1000 kilogram of carbon emission reduction equivalent or CO2 emission reduction equivalent. This has been the base parameter set by UNFCCC under the CDM when the Kyoto Protocol was launched. Among the six identified greenhouse gases, CO2 has been considered as the baseline for calculating the carbon credits. 

The buyers are the obligated bodies or entities that want to take a climate friendly action voluntarily. If they want to reduce their emissions to some extent voluntarily, they will go to the market and source voluntary carbon credits against the total emission done by them. This is where the carbon traders come in. They source such projects from the market, develop carbon credits, talk to the international buyers and then set up a deal between the buyers and the sellers. They help with payment facilitation done from buyers’ side to the sellers’ side. 

Carbon Pricing Methodology

Carbon pricing is still an issue for many buyers across the world, because carbon credit has no fixed pricing mechanism and has no fixed process by which pricing can be done in the international market. Carbon credits, moreover, are the subject matter of bilateral trading. This is based on the market indicators like the total demand and supply gap of the carbon credits in the market, because for all sorts of carbon credits, the trading patterns of European Union and Emission Trading Scheme, are considered as the base for setting up the pricing of voluntary carbon credits specifically. So, it works largely as a base for voluntary carbon credits. The better the EUETS performance, the voluntary carbon credits will also be poised to perform better in the marketing. If the trading patterns of EUETS is going down, the international carbon market gets impacted. That’s how these indicators work. Then there’s the demand-supply gap. If there is more demand of carbon credits and lesser supply comparatively in the market, the carbon credit prices will likely increase & vice-versa. Mostly, the prices are set and decided between the buyer and seller mutually rather than following any particular index or exchange.

There have been some talks about proper legislation and proper framework for decisive pricing on carbon credits and all these things are just under discussions. Unless something concrete comes up, the bilateral mode of transactions and bilateral mode of price setting will remain the only way for the carbon credits pricing. But there are certain pros and cons of this pricing method as well because it largely depends on the urgency of the buyer or the seller. So, unless there is a foolproof mechanism for carbon price setting across the globe, bilateral trading is going to be the winner in the carbon trading pricing game.

Carbon Trade in India

In last two years, there has been a steep rise in carbon credit prices. Globally, in 2021 itself, a record high of US$ 1 billion worth of trading was done in voluntary carbon markets, out of which India accounted for US$ 300 million worth of trading, which is still going on and a large number of carbon credits are being exported out of India. 

Being the world’s second largest developer and supplier of carbon credits, India has a commanding position in the market where Indian projects command a very good number of inventory which fulfill the supply of carbon credits globally. It is estimated that the Indian carbon market is going to cross more than US$ 500 million by 2025 and is poised to become a US$ 10 billion worth of industry by 2030. As per a McKinsey Report, there’s going to be a 15 fold growth in the global carbon market by 2030 and a 100 fold growth by 2050. This is indicative of the massive scale of the global market. And India has its fair share in this market. 

There are several factors driving this growth. India is one of the largest generators of renewable energy and has a very vast forest cover. Above all, even local farmers and agriculturists are being made aware of agroforestry, carbon credits and carbon markets. There have been efforts for indigenous and tribal people to benefit out of the carbon credit with the help of large community development projects. The benefit of such carbon credits and carbon markets are reaching the grassroot level as well, which can give a huge boost to the Indian carbon market globally. 

India is now coming up with its own regional carbon credits market, like the state carbon market that Gujarat has recently announced. Such activities which the Indian government and state governments are doing are no doubt going to increase the supply of the carbon credits from quality projects. Apart from this, we hope for a better pricing of carbon credits because there’ll be a healthy competition between the project investors as well. The demand and supply will both be monitored by putting in regulatory mechanisms and efforts from the part of the government. 

Challenges

There have been some factors which are negatively affecting the market as well. There have been some projects which have a large number of carbon credits, but they are not priced in a better manner. Such things spread negativity about the overall market environment. Taxation is another prime concern. There has been an uncertainty about the tax on carbon credits income. There is a huge demand from a particular section of carbon credit investors that the income generated from carbon credit needs to be tax free. Further, India is still way behind in terms of climate friendly and environment friendly technologies. Access to carbon storage, carbon capture technologies and better renewable energy generation efficient technologies are lacking in India. These are some of the reasons why India is not able to harness the full potential of its carbon market. With a better mechanism in place, India can surely surpass China in terms carbon credits supply and become the global leader.