Abstract
Carbon dioxide (“CO2”) is a major greenhouse gas (“GHG”) instrumental in environment degradation. In order to reduce the consequences of Carbon dioxide emissions, the world community established CO2 Emission Reduction Goals. The Carbon Credit markets quickly emerged as an alternative to curb emissions. India and the USA, two of the most powerful economies, bound by international agreements such as the United Nations Sustainable Development Goals, the Kyoto Protocol, and the Paris Agreement, have customized their carbon credit schemes. India follows the polluter pays principle, in contrast to the USA which follows the pay for performance principle. The Bureau of Energy Efficiency in India heads the verification process, whereas the U.S. Department of Agriculture (USDA) is involved in decentralized procedures under the USA’s scheme.
This article endeavors to analyze their schemes and outlines strategies to enhance the appeal of India's carbon credit market for local as well as foreign investments. The carbon credit schemes of both USA and India are compared based on scope, type, pricing, quality, and impact. Further, this blog elaborates on a strategic roadmap for making the Indian carbon credit market attractive for both domestic and foreign investment. Businesses in this region are required to measure their emission levels, research the carbon credits available in the market such as RECs and ESCs, build relationships, stay up to date about the market developments, and seek legal guidance.
Introduction
Climate change is a matter of significant concern for the entire world. One of the primary causes of climate change is GHG emissions, which pose a serious threat to our environment, specifically the surroundings, as well as the habitats of both flora and fauna. With an aim to reduce and control the consequences of GHG emissions, the global community has come up with certain goals called the CO2 emission goals. In order to reduce the CO2 released in the atmosphere, carbon markets can play a vital role, wherein the entities can trade carbon just like a commodity by assigning it a price. Carbon credit is nothing but a seal of approval obtained from the government for CO2 emissions. The entities that end up with excess credits since they have emitted less than their targets are allowed to trade them off to some other entities that have surpassed their emission targets.
The United Nation Sustainable Development Goals (SDGs), the Kyoto Protocol of 1997, the Paris Agreement of 2015, all mention about the CO2 emission goals. Many of the world’s most powerful economies have ratified the above-mentioned agreements, including India and the USA. Each of these countries has developed carbon credit schemes in their respective nations with a goal of reducing the carbon emissions and creating a healthy and sustainable environment for all. This article focuses on comparing the carbon credit scheme of both the countries and identifying the ways by which we can make the Indian carbon credit market an attractive option for both domestic as well as foreign investments.
Comparison of the Carbon Credit Schemes of USA and India
Scope
India has a market-based mechanism for its carbon credit scheme which mainly targets at reducing the greenhouse gas emissions as well as promoting low carbon development. The scheme provides for sectors like power, real estate/construction, transport, agriculture, etc., which are said to be majorly responsible for GHG emissions. The scheme applies to the ‘Registered Entities’, meaning any entity, including designated consumers, registered under the carbon credit trading scheme; these entities are required to report their emission data and energy consumption to the designated authorities. The Carbon Credit Trading scheme 2023 is based on the polluter pays principle wherein the entities which emit more than their allocated targets will have to pay for their excess emissions by buying carbon credits from the entities which emit less than their targets. The scheme includes renewable energy projects, energy efficiency projects, waste management projects and forestry projects that can generate carbon credits; these projects are called as ‘Eligible Projects’ and they have to follow certain procedures in order to get their carbon credits certified and verified by the Bureau of Energy Efficiency (“BEE”). The Indian carbon credit scheme is committed to reduce India’s emission intensity by 45% by 2030 over 2005 levels, and achieving net zero emissions by 2070.
The USA has a carbon credit scheme which is a voluntary program that focuses on encouraging the farmers and forest landowners, who own at least 10 acres of land, to adopt practices that help in reducing GHG emissions. Agriculture and forestry are the sectors which account for around 24% of the USA’s total emissions and hence the scheme covers these sectors. This scheme is based on the ‘pay for performance’ scheme which means that the above-mentioned entities that implement the emission reduction projects get paid for the carbon credits which they generate. The scheme houses soil health, nutrient management, livestock management, conservation tillage and reforestation projects that can generate carbon credits. The scheme is expected to reach net zero emissions by 2050.
Type
The Indian carbon credit scheme is a mandatory scheme, meaning that the registered entities have to strictly adhere to their emission reduction targets and submit their performance report to the concerned authority which is the Bureau of Energy Efficiency (“BEE”). The entities may face penalties and sanctions if they fail to adhere to the targets as given under the scheme unlike the United States which has a voluntary carbon credit scheme where the producers are at their own discretion to enroll themselves into the emission reduction projects. It is not mandatory and hence no penalty or sanctions are to be faced by them, however, they can get the benefit from the payments which they receive for their carbon credit.
Price
India does not have a fixed carbon price. Carbon pricing helps in reducing GHG emissions by placing a price on emissions. A report by the World Bank in 2017 recommended a carbon price of at least $40 per tonne of carbon. The USA too does not have a fixed carbon price, it is more variable and diverse in terms of pricing. However, it has few state level initiatives that set the carbon price but these prices depend on the supply and demand of the carbon allowances. For instance, on December 2021, the Regional Greenhouse Gas Initiative allowance price was USD 13 per tonne of carbon dioxide equivalent.
Quality
The BEE in India and the third-party entities verify the energy consumption and emission data of registered entities and eligible projects. The Ministry of Power (“MoP”) on the basis of the recommendations made by the BEE and the National Steering Committee for Indian Carbon Market (NSCICM), will decide the sectors and entities that will be required to record and maintain the GHG emissions intensity data. After which the MoP will recommend the GHG emission intensity targets for the entities to the the Ministry of Environment, Forest and Climate Change for notification under the Environment Protection Act, 1986. The entities which surpass the set targets will be issued carbon credit certificates and the entities which fall short of the target will have to purchase carbon credit certificates from the ICM. A single carbon credit certificate will be equivalent to one tonne of CO2.
It is the duty of BEE to monitor the performance of the registered entities and eligible projects. In the USA the verification and validation process are more on the decentralized side and are looked after by the U.S. Department of Agriculture (USDA), which is the federal agency that oversees the program. Technical Assistance Providers (“TAPs”) assist producers in implementing and documenting their emission reduction projects. TAPs may be either public or private entities. The USDA issues the carbon bank credits (CBCs), after the submission of documentation and data by the producers which are also verified by the TAPs. CBC is a certificate which gives right to entities to emit one tonne of carbon dioxide or an equivalent of another greenhouse gas.
Impact
The emission reduction targets of both the USA and India have significant differences wherein India is aiming to achieve net zero emissions by 2070 and also to reduce its emissions intensity by 33% to 35% by 2030 from 2005 levels. The Indian carbon credit scheme is committed to reduce the carbon emissions as well as enhance the renewable energy capacity of the nation. This scheme looks forward to incentivize the low carbon investments and generating revenue for the Indian government.
Whereas the USA has an aim to achieve net zero emissions by 2050 and also to reduce the greenhouse emissions by 50% to 52% by 2030 from 2005 levels. The carbon credit scheme in the USA strives to reduce the carbon emissions, generate revenue for the states, improve the air quality, and support various social programs like Emission reductions payment agreements (ERPA) where the developing countries can sell their carbon credits to the World Bank’s trust funds and then use that revenue for sustainable development, climate-action projects, conservation projects etc. Both India and the USA have developed carbon credit schemes which cater to their unique interests.
How to make the Indian Carbon Credit Market a Desirable Option for Investment?
The Indian Carbon Credit market is cardinal in making the Indian carbon credit scheme’s goal of reducing the carbon emissions a reality and also to contribute in combating climate change. In order to make the Indian Carbon Credit market an attractive and vibrant option for investment there are certain pertinent things which businesses need to follow such as:
1. One of the first steps could be by starting with assessing the current emission levels of the businesses and then developing plans accordingly to reduce the emissions. These plans can be according to their historical and projected performances and their potential to reduce the happening of any undesirable events. As such, as and when the Indian government prescribes limits under Indian Carbon Credit market, the concerned business will have to comply with the same.
2. The second way could be of researching the different types of carbon credits which are already available on the Indian Carbon Credit market and then identifying the ones which are most relevant to their respective business. For this there are two main types of carbon credits available:
a. Renewable Energy Certificates (“REC”) and
b. Energy Savings Certificates (“ESC”)
With a view of incentivizing all the renewable energy producers, the Indian government has come up with Renewable Energy Certificates. These certificates are issued when businesses generate electricity from any of the renewable sources and are also tradable.
Energy Savings Certificates (ESCerts) are certificates which are issued to businesses that save more energy than their set targets under the Perform, Achieve and Trade (PAT) scheme.
3. Another alternative could be of starting to build relationships with other businesses and organizations that are interested in participating in the Indian Credit Market by identifying relevant stakeholders and networks and communicating the business’s value propositions and goals to them. Businesses can build such relationships with other businesses whose objectives align with their goals of reducing GHG emissions, thereby being able to identify potential carbon credit buyers and sellers as well as partners for joint projects or initiatives.
4. Staying up-to-date on the latest developments in the Indian Credit Market and being prepared to act quickly when it is launched. By this the businesses will not only be able to gain a competitive edge but also it will help in considerably reducing the cost and risks associated with the Carbon Credit market. The Indian Carbon Market is expected to start as a voluntary market in 2023, and become a regulated market by 2025. The market will operate through an online platform where carbon credits can be traded. The businesses can act instantly and thus plan accordingly to these changes. However, the Indian market has not turned voluntary; instead the Indian government is planning to launch a domestic carbon market which will enable the domestic companies to trade carbon credits. Also, carbon credit market plans for online trading platform.
5. The businesses can seek proper legal advice regarding the contracts, agreements, Intellectual Property Rights (IPR), compliances, etc. to avoid pitfalls and stay well-advised and informed for making the best of the opportunity. The Indian Carbon Market will have rules and regulations that need to be followed by the participants, such as registration, verification, monitoring, reporting, etc.
6. Government should provide tax exemptions, subsidies etc., to businesses who participate in the emission reduction projects and trade carbon credits. This would provide incentive to businesses to involve in the Indian Carbon Credit market and trade carbon credits.
Conclusion
The problem of carbon emissions, that is, the leading component in the greenhouse effect, has seen exponential increase in the previous few years, owing to the rapid paced development, industrial and commercial activities. The alarming rate of increasing carbon emissions warrant immediate and effective legislative actions with environment-centric policy making. The major countries whose policies have been analysed and compared, are also countries leading the market in the global trade scenario- The United States of America, and India. Both the countries, although active participants in the mentioned industrial as well as commercial activities, have different levels of emission, and therefore, different approaches, and further very different policies. When one examines the American approach, it can be perceived to be a voluntary programme. It specifically recognises important stakeholders, such as farmers, persons owning forest lands, and encourages them to implement emission reduction practices. The programme is carried out in consonance with their goal of achieving the net-zero emissions by the year 2050, and further aligns with its focus on improving air quality, as well as, fostering diverse social and conservation initiatives. On the other hand, whilst analyzing the Indian approach, it may be duly noted that the approach is very well anchored upon the principle of ‘Polluter Pays’. It has been implemented in order to meet the Indian objective of reducing emission intensity by 45% by 2030 and further achieving net zero emissions by the year 2070.
Both the schemes are key tools to counter climate change and make a sustainable future. The article highlights an alternative solution to reduce the carbon emission by using carbon markets, this is done by trading carbon just like a commodity by assigning it with price. It will help a developing nation like that of India to transition into a low carbon economy. India’s lack of fixed carbon pricing gives us an idea about the prospect of flexible pricing scheme and its conformity to the global legal norms, it not only encourages adaptability but also innovation. Whereas USA’s variable pricing system makes the market scenario complex.
The Indian Carbon Credit market offers great opportunity to businesses to reduce their carbon emissions, save energy and generate revenue by trading their excessive carbon credits. The strategic planning, involving with stakeholders, staying up to date with the carbon credit market developments and seeking legal advice, all these steps can aid in making the Indian Carbon Credit market an attractive option for investments. Given the transition of the market from voluntary to regulated trading, businesses should be quick to seize the opportunities. In gist, the comparison provides us with a view on how the two nations are customizing their carbon credit schemes according to their requirements and objectives and how can we make appeal investments in the Indian Carbon Credit market in order to combat climate change worldwide.
Disclaimer
The views are personal and for general informational purposes only, and may not reflect the current law in your jurisdiction. It should not be construed as legal advice.
About the Authors
Mr. Kunal Sharma is a Partner (General Corporate) at Singhania and Co. LLP.
Debashri Chowdhury is a 4 th Year Student at UWSL, Karnavati University, Gandhinagar
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Editors-in-Chief: Abeer Tiwari & Muskaan Singh
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