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India's Regulatory Framework for Compliance Carbon Market

Writer: Krishnan SRINIVASAN, Dongqi YANG

Social Media Team: Irina LIN

India is the second largest greenhouse gas emitter and energy consumer in Asia, which comes after China and Prime Minister Narendra Modi declared in 2021 that the nation would achieve net zero by 2070. To tackle climate change, India has announced draft guidelines for the issuance and trading of carbon credits as part of the operationalization of its compliance carbon market.

Governance Structure:

The Bureau of Energy Efficiency (BEE) under the Ministry of Power will be the administrator of this scheme, and the Central Electricity Regulatory Commission (CERC) will act as a market regulator for trading activities. The Ministry of Environment, Forest and Climate Change (MoEFCC) will be announcing greenhouse emission intensity targets for the obligated entities based on India's Nationally Determined Contributions (NDCs). The Carbon Credit Certificates (CCCs) will be issued from a national registry, called the Indian Carbon Market or ICM registry. For obligated entities, they need to buy and sell CCCs through designated power exchanges.

Figure 1: Governance Structure of Indian Carbon Market

GHGs covered under this mechanism:

India’s Carbon market is anticipated to encompass a broader range of greenhouse gases (GHGs), such as Methane, Nitrous Oxide, Tetrafluoromethane, Hexafluoroethane, and Perfluorocarbons. As per the draft, emissions for all GHGs will be expressed in terms of CO2 equivalents.

Intensity-based Approach:

BEE’s draft states that India will follow an Intensity-based approach. The government will set annual targets for greenhouse gas or GHG emission intensities, i.e. maximum amount of GHG emission (tCO2e) allowed per unit of product/output (tons).

Compliance Mechanism:

India's carbon market is expected to follow a one-year compliance cycle, requiring obligated entities, to report their performance annually based on an Intensity-based approach. Obligated entities will receive CCCs if they manage to keep emissions below the target and have to purchase CCCs if their intensities exceed the targets. India has planned to implement its compliance mechanism around 2026, with 11 sectors expected to be covered initially, including Refineries, Cement plants, Iron and Steel, Chlor-alkali, Aluminum, Thermal power stations, and Fertilizers etc.

Although the compliance cycle is one year, the greenhouse gas (GHG) intensity targets will be announced once every three years. This approach allows obligated entities to formulate longer-term plans for decarbonization, and they will also be allowed to bank their surplus CCCs from the current compliance period and use them for the next period. Each obligated entity will be allocated specific targets based on the sector-wide emission reduction trajectory as well as its average rate of historical emission reductions.

The basic elements of the cycle – baselining, implementation, monitoring, and verification – are common to all organizations that must comply with laws and regulations.

Figure 2: Compliance Mechanism Cycle

  • The Baseline Year is first fixed before starting the compliance cycle based on which the Obligated Entities perform.

  • Compliance Period: The Financial Year in India starts on 01st April 20XX (current year) and ends on 30th March 20XY. (next year)

  • After the end of the Compliance period, the entities will have to move forward to the verification. Every obligated entity, within three months of the conclusion of the Financial year from the baseline year, shall submit the performance assessment document to the verifiers.

  • Next will be the Issuance process which has to be completed within six months of the completion of the financial year and demonstrate compliance within nine months of the completion of the financial year.

The draft outlines the adoption of a "gate-to-gate" approach, which entails accounting for emissions from the raw materials to the completion of the production process.

As per the draft, BEE excludes the monitoring of greenhouse gas (GHG) emissions arising from renewable energy sources, biomass, or biogenic energy sources. Additionally, the purchase of Renewable Energy Certificates (RECs) will not be acknowledged as a valid measure for claiming renewable energy consumption within the compliance framework. Therefore, obligated entities cannot use RECs to waive liable emissions.



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