18-March-2025-Editorial

CARBON CREDIT TRADING SCHEME (CCTS), 2023

The Carbon Credit Trading Scheme (CCTS), 2023 was introduced under the Energy Conservation (Amendment) Act, 2022 to establish the Indian Carbon Market (ICM). This scheme replaces the Perform, Achieve, and Trade (PAT) scheme and aligns with India’s commitments under the Paris Agreement to reduce greenhouse gas (GHG) emissions.

What is the Carbon Credit Trading Scheme?

• Market-based Mechanism: The CCTS is a system that allows businesses to trade carbon credits, which are permits representing reduced carbon emissions.
• Objective: It aims to lower India’s GHG emission intensity by assigning a cost to emissions and enabling carbon trading.
• Transition from PAT to CCTS:

• The PAT scheme focused on improving energy efficiency in industries through Energy Saving Certificates (ESCerts).
• The CCTS shifts the focus to reducing GHG emissions per unit of output, issuing Carbon Credit Certificates (CCC) for every tonne of CO₂ equivalent (tCO₂e) reduced.

Mechanisms of CCTS

The CCTS introduces carbon pricing through two primary methods:

Compliance Mechanism:

• Applicable to energy-intensive industries such as Aluminium, Cement, Fertilizers, Iron & Steel.
• Industries meeting or exceeding GHG reduction targets earn CCC.
• Those failing to meet targets must purchase CCCs from other industries.

Offset Mechanism:

• Allows voluntary participation by companies not covered under the compliance mechanism.
• Such entities can earn carbon credits by implementing emission reduction measures.

Sectors Covered

The CCTS initially covers industries with high energy consumption, including:

• Iron & Steel, Aluminium, Cement, Fertilizers, Petroleum Refineries, Pulp & Paper, Textiles.
• These sectors contribute to 16% of India’s total emissions.

The Power sector (40% of India’s emissions) may be included later.

Regulatory Oversight

The CCTS is governed by multiple agencies, including:

• Bureau of Energy Efficiency (BEE).
• National Steering Committee for Indian Carbon Market (NSCICM).

Importance of CCTS in India’s Climate Goals

• India aims to reduce emission intensity by 45% by 2030.
• Encourages private sector participation in clean technology, renewable energy, and carbon capture projects.

What is Carbon Pricing?

Carbon pricing is a financial strategy that makes companies pay for their carbon emissions.

Purpose: It shifts the responsibility of pollution to the polluters, encouraging them to either:

• Reduce emissions.
• Pay for their carbon output.
• Invest in clean technology.

Global Coverage: Carbon pricing currently applies to 25% of global emissions, covering 12.8 gigatonnes of CO₂ across 89 countries.

Carbon Pricing Mechanisms

Governments use three main approaches to impose carbon costs:

Emissions Trading System (ETS):

A cap is set on emissions, allowing companies to trade allowances.

Two mechanisms:

• Cap-and-Trade: Companies emitting less can sell excess allowances; those exceeding limits must buy credits.
• Baseline-and-Credit: Businesses reducing emissions below a baseline earn credits for trade.

Carbon Tax:

• Instead of trading, a fixed price is charged per tonne of CO₂ emitted.
• It provides cost certainty but does not guarantee specific emission reductions.

Crediting Mechanism:

• Allows projects that reduce GHGs to generate carbon credits.
• These credits can be sold domestically or internationally for compliance or voluntary offsetting.

Challenges in Implementing CCTS

Balancing Carbon Pricing and Targets:

• If targets are too lenient, excess credits lower their value.
• If too strict, business costs rise, causing inflation.

Weak Compliance and Enforcement:

• Under PAT, 50% of Energy Saving Certificates remained unsold.
• Weak enforcement could make CCTS ineffective.
• Risk of double counting and inaccurate emissions reporting.

Delays in Credit Issuance:

• ESCerts under PAT have faced delays since 2021.
• Slow issuance of CCCs under CCTS could reduce participation and investment.

Lack of Transparency:

• Limited public data on industry emissions may lower trust in the market.

How India Can Strengthen CCTS

Adopt International Best Practices:

• Learn from the EU Emissions Trading System (ETS) by implementing gradual cap tightening and price stability measures.
• Strengthen Monitoring, Reporting, and Verification (MRV)

Develop a Robust Trading Platform:

• Introduce digital registries to track credits and prevent fraud.
• Ensure compatibility with global markets to avoid trade barriers like the EU’s Carbon Border Adjustment Mechanism (CBAM).

Encourage Industry Participation:

• Offer tax benefits and incentives for industries that cut emissions beyond compliance.
• Promote investments in green technology, renewable energy, and energy efficiency.

Conclusion

The Carbon Credit Trading Scheme (CCTS), 2023 is a crucial step toward India’s climate commitments. By creating a carbon market, it encourages industries to reduce emissions while also providing economic incentives. However, its success depends on effective enforcement, transparent operations, and industry participation. If implemented well, it can significantly contribute to India’s goal of reducing emission intensity by 45% by 2030.