Giving shape to India’s carbon credit mechanism

In Baku, Azerbaijan
| Photo Credit: REUTERS

The Conference of Parties-29, from November 11 to 22, 2024, in Baku, Azerbaijan, is about to shift focus to the heated discussion on the aspect of climate finance again. An essential component of this discussion will be the carbon credits framework and disagreements over it between developed and developing countries. India updated its Nationally Determined Contributions (NDCs) in 2023 to underline, among other things, the establishment of a domestic carbon market as a part of its climate strategy. The Energy Conservation (Amendment) Act of 2022 provided a statutory mandate for such a Carbon Credit Trading Scheme (CCTS). Through this, India aims to align its climate commitments under the Paris Agreement with broader economic goals. Yet, for the market to truly support these objectives, it must be meticulously designed to ensure credibility, efficiency, and fairness. From global experiences, India must incorporate two pivotal lessons in its carbon market framework for long-term success.

Also Read | What are carbon credits?

Upholding integrity of carbon credits

At the heart of any carbon market lies the integrity of its carbon credits. The global experience has seen the repercussions of inadequate accountability in credit generation, leading to instances of greenwashing. This issue is pronounced in the voluntary carbon market (VCM), where investigations have exposed overstatements of project benefits, especially within the forestry sector. A similar risk is feared in India’s voluntary carbon market operationalised under the Green Credit Programme (GCP). The tree plantation guidelines released by the government under the GCP were criticised for perpetuating greenwashing by encouraging non-scientific tree plantation. It is also feared that under the CCTS, projects may fail to ensure “additionality”, a critical measure ensuring that emission reductions exceed those of a business-as-usual scenario.

To navigate these challenges, India must enforce rigorous protocols to verify the authenticity of generated carbon credits. A proposed national registry would be a robust mechanism to track carbon credits and address potential double-counting issues. Additionally, independent third-party verifiers can play a crucial role in assessing the additionality and permanence of carbon reduction projects. By emulating international best practices from entities such as the IETA or Gold Standard that have greatly emphasised the generation of carbon credits, India can cultivate a high-integrity market, attracting domestic and global investors.

Also Read | Establishing a carbon market

Alignment with global standards

India’s carbon market must also harmonise with international carbon trading mechanisms, notably Article 6 of the Paris Agreement. Article 6.2 facilitates countries in achieving their climate objectives through Internationally Transferred Mitigation Outcomes (ITMOs), making compliance a critical aspect for participating nations. The Article 6 rulebook, finalised at the COP26 summit in Glasgow, outlines how countries can engage in carbon trading while upholding environmental integrity.

For India, this means incorporating mechanisms to prevent the double counting of credits, a crucial step to maintain the credibility of global emission reduction efforts. India can align its market with domestic and international standards by integrating transparent systems for accounting emissions reductions and carbon credit transfers. Such alignment and a focus on global best practices will enable India to contribute to global emissions reductions while actively safeguarding national interests.

One of the critical aspects is ensuring environmental integrity, specifically under Article 6.2, which establishes a framework for countries to cooperate on climate mitigation efforts through international carbon markets. The World Bank’s “Ensuring Environmental Integrity under Article 6 Mechanisms” report emphasised maintaining robust environmental integrity within carbon markets, especially under the Paris Agreement’s Article 6 framework. It highlights that carbon markets risk double-counting emissions reductions without stringent safeguards, which can dilute the credibility of climate commitments. The report stressed that high governance, verification, and accountability standards are necessary to avoid “low-quality” carbon credits from entering the market.

Also Read | India close to finalising industry carbon targets ahead of Baku climate meet

Focus on disclosure

Ensuring transparency is one mechanism to ensure compliance and conformance with such standards. To enhance transparency and uphold environmental integrity within India’s carbon credit system, it is imperative to have comprehensive disclosure of project details, including carbon reduction techniques, benchmarks and third-party verification reports, on a centralised, easily accessible platform. Ensuring that projects adhere to stringent additionality criteria guarantees that the credits reflect real, additional emissions reductions. Regular audits are essential for verifying the sustainability of these projects. Oversight by independent auditors approved by the Bureau of Energy Efficiency (BEE) in India is crucial, alongside real-time tracking of credit transactions to boost accountability and provide insights into the type of projects and their environmental impacts.

The Voluntary Carbon Markets Integrity Initiative (VCMI) framework introduces a tiered system for companies to assess carbon credit claims. This is to ensure the credibility of carbon offset claims, aiming to enhance market transparency. However, implementation faces challenges, especially within India’s CCTS initiatives, due to potential transparency issues and the high costs of establishing monitoring, reporting, and verification systems. These costs could deter smaller projects initially.

India’s carbon credit mechanism, albeit nascent, demands stringent enforcement and an alignment with international and domestic realities to be effective. By focusing on transparency and integrity, India has the opportunity to not only provide for a more mature carbon market but also to stimulate its climate finance aspirations, paving the way for practical, sustainable development.

Shashank Pandey is a Research Fellow at the Vidhi Centre for Legal Policy