In a resolute stride towards addressing the climate change crisis and fostering sustainable development, the Indian government is poised to launch the country's domestic carbon market. With the legislation enacted by the parliament and the framework and rules on the brink of issuance in the coming weeks, the Indian Carbon Market (ICM) takes centre stage in the nation's pursuit of decarbonizing its economy. By pricing greenhouse gas (GHG) emissions through the trading of carbon credits, the ICM aims to unlock new mitigation opportunities and create demand for emission credits.
The ICM is being developed by the Bureau of Energy Efficiency in India and seeks to establish compliance and a voluntary mechanism for carbon credit trading. According to the press release, India's existing energy savings-based market mechanism will be expanded through the introduction of the Carbon Credit Trading Scheme. This scheme aims to enhance India's efforts in transitioning to cleaner energy sources by encompassing additional energy sectors within its scope. To facilitate this transition, benchmarks and targets for GHG emissions intensity will be established for these sectors, aligning them with India's climate goals.
Learn more about carbon credits and how they are traded here.
Unravelling the Significance of the ICM
The development of the Indian Carbon Market holds tremendous relevance due to several factors. These include:
1. Aligning the transition to a low carbon economy:
The development of the Indian Carbon Market holds immense significance particularly as India transitions towards a low-carbon economy and strives to achieve carbon neutrality by 2070. Establishing a robust carbon market is a step in the right direction to achieve these ambitious goals. A well-functioning carbon market has the potential to incentivize the adoption of low-cost, sustainable options, attract technology and finance towards green projects, and facilitate the overall transition to a low-carbon economy.
A press release on the development of Carbon Credit Trading Scheme for Decarbonisation by the Ministry of Power stated “India has been at the forefront of climate action to meet the climate goals through its ambitious Nationally Determined Contributions (NDC). To facilitate the achievement of India’s enhanced climate targets and to meet the future goals, the government is developing the ICM. By accelerating the transition to a low carbon economy, the ICM will facilitate achieve the NDC goal of reducing Emissions Intensity of the GDP by 45 percent by 2030 against 2005 levels.”
Additionally, India is highly dependent on fossil fuels and at present relies on it for nearly 70% of its energy needs. This is one of the major contributing factors that has made India the world’s third largest emitter of greenhouse gases. Anticipating future peaks in fossil fuel emissions, the establishment of a well-functioning carbon market becomes a critical catalyst in steering the nation towards cleaner energy sources.
2. Increasing Vulnerability to Climate Change
India faces profound susceptibility to the consequences of climate change. A global study which ranked 26,000 regions based on the climate vulnerability of their built-up area listed nine Indian states among the top 50 most vulnerable regions.
According to the 15th edition of the Global Climate Risk Index 2020, India experienced infrastructural losses and damages surpassing Rs 2.7 lakh crore ($37 billion) in 2018 as a result of severe climate events. This figure is nearly equivalent to India's defence budget for the same year.
Another significant economic challenge posed by climate change is the declining agricultural productivity and subsequent rise in cereal prices. According to a study, this could increase India's national poverty rate by 3.5% by 2040, translating to an additional 50 million people living in poverty compared to a scenario without warming. Such impacts on food security and livelihoods underscore the urgency for effective climate action.
In this context, carbon markets play a crucial role in driving emission reductions and offering cost-effective solutions to mitigate climate change. A well-developed carbon market has the potential to save India from incurring a staggering loss of $35 trillion due to unmitigated climate change over the next 50 years. By incentivising emission reductions and promoting the adoption of sustainable practices, carbon markets can contribute significantly to reducing the economic risks associated with climate change.
Learn more about the economic impacts of climate change on India here.
3. India's Strong Position in Carbon Credit Generation and Exports
India possesses a strong advantage in capitalising on the emerging economic space of carbon credit generation and trading. This advantage is evident from India's current position as one of the leading producers and exporters of carbon credits.
Between 2010 and 2022, India issued a remarkable 278 million credits in the voluntary carbon markets, constituting approximately 17% of the global supply.
This signifies the immense potential and future growth opportunities for India in the carbon market space. In this regard Abhay Bakre, the Director General of the Bureau of Energy Efficiency, envisions India becoming the world's largest carbon market by 2030.
Likewise, Manish Dabkara, CMD of EKI Energy Services and President of the Carbon Markets Association of India (CMAI) stated "Currently, we have done about 200 million credits and another 300 million credits are in the pipeline. Our credits are currently valued about ₹2,100 crore and that value is expected to increase to ₹6,000-₹7,000 crore within a year.” This reflects the growing momentum and economic value associated with carbon credits in India.
India holds significant potential for carbon sequestration due to several factors, including its expansive forest cover, rich biodiversity, and diverse ecosystems. These natural assets possess remarkable capabilities for capturing and storing carbon, making them valuable resources for the development of carbon market in the country.
India’s vast agricultural sector is another key factor. Being the second-largest food producer in the world (in terms of calorie count and fourth by the total value of production), the agricultural sector is a major contributor to climate change, accounting for approximately 22.9% GHG emissions (in 2019).
However, carbon farming initiatives are emerging as integral solutions to address this challenge. These programs aim to leverage agriculture's role in climate mitigation by supporting offset production through soil carbon sequestration and facilitating the trade of carbon offsets. For instance, farmland, when managed using appropriate techniques and technologies, has the potential to store up to 1.2 billion tons of carbon , holding the potential to offset 4% of average annual GHG emissions.
While carbon credit systems in agriculture have primarily been implemented on large-scale holdings in developed economies, where farmers have better access to information, technology, and resources, the potential for impact in the developing world is enormous, considering the vast number of small-acreage farmers. By establishing a formal structure and providing support to farmers and developers, the Indian government can tap into this colossal potential and drive substantial progress in carbon sequestration within the agricultural sector.
Related: Read our blog to learn more about Nature-based Solutions, and why are they gaining prominence.
Promoting the ICM with Credibility
While the carbon market has immense potential, one of the biggest hindrances to it is the trust deficit in the market. This challenge mainly stems from the limitations in the traditional Measurement, Reporting, and Verification (MRV) methods employed, leading to various issues, including a lack of transparency in the market. The absence of transparency raises concerns about the environmental integrity of offset projects and allows scam credits to infiltrate the market as well as affecting the pricing of carbon credits.
Further, the traditional MRV methods used today are not only expensive and time-intensive , but are also not conducive to Exchange-Traded Markets. This is due to factors such as high transaction costs, lack of standardisation, verification challenges, and limited scalability. In addition, the lack of standardisation can make it difficult to compare results across projects and can lead to inconsistencies in data collection and reporting. Further, ensuring that data used for the MRV process is accurate, complete and transparent is challenging due to the lack of accessibility to credible and high-quality data. .
Learn more about the challenges plaguing the carbon market in our blog “Introduction to Voluntary Carbon Markets.”
Digital MRV to the Rescue
Digital MRV has emerged as a promising solution to address these challenges. It leverages digital technologies, such as satellites, sensors, internet of things (IoT) devices, data analytics, and blockchain, to monitor, report, and verify the outcomes of GHG emissions reduction or mitigation efforts. By utilising these tools, Digital MRV enables the collection and analysis of data on GHG emissions, improving accuracy and transparency in tracking emissions and ensuring the integrity of carbon reduction projects.
Satellite technology especially plays a crucial role in Digital MRV systems as they can provide independent, high-resolution data that can be used to monitor and track the implementation of emissions reduction measures. By making up for the shortcomings of traditional MRV methods, satellites in conjunction with Artificial Intelligence is revolutionising MRV processes in the carbon market as they can track carbon restoration across temporal and spatial scales at high levels of accuracy. Satellite-based remote sensing thus provides valuable data which can be used to estimate changes in vegetation cover, biomass, and other ecosystem indicators, that are important for evaluating carbon stocks and assessing the health and productivity of carbon ecosystems.
Read our blog “Bridging the Trust Deficit in the Carbon Market through Satellite based Monitoring” to learn more.
By addressing the trust deficit through transparent, standardized, and reliable mechanisms, digital MRV can instil confidence among market participants, including buyers, sellers, and investors. This increased trust can promote greater participation, liquidity, and growth in the Indian carbon market.
From Emissions to Solutions: Digital MRV Approaches for Sustainable Development
While the potential for sustainable development through offset program is immense, ensuring the efficiency and credibility of carbon markets remains a challenge. This is where companies providing Digital MRV solutions step in, playing a pivotal role in boosting project credibility and addressing existing issues.
By enhancing the transparency and reliability of carbon credits, Digital MRV solutions can attract greater investment into the market and accelerate decarbonisation efforts. Moreover, the availability of high-integrity carbon credits is expected to attract increased investment in technology and nature-based climate solutions in India. With these advancements, the ICM has the potential to become a key driver of sustainable development and a powerful tool in achieving climate goals.
