Amidst tariff trepidations, the Indian Carbon Market (ICM) is moving rapidly and sure-footedly. Ministry of Environment, Forest and Climate Change (MoEFCC) has notified draft targets for emissions intensity to obligated entities in four industrial sectors -- Cement, Aluminium, Paper and Chlor Alkali on 16th April 2025. The sixty-day period is available for comments on targets till 14th June. Mirroring India’s Nationally Determined Contributions (NDC) commitments, obligated entities are mandated to achieve reduction in emissions intensity of greenhouse gases (GHGs) rather than absolute emissions.
Emissions intensity vs absolute emissions
Emissions intensity is a smarter regulatory intervention and harder to achieve. The European experience in absolute emissions allowances demonstrates that in some instances, emissions savings was the result of lower production. Installations reduced their production but used the emissions allowances they received to generate profits on the Emissions Trading System. By fixing binding targets of emissions intensity, MOEFCC leaves no such lee way. Whatever the production levels, GHG emissions intensities are mandated. Missing targets will entail stiff penalties on obligated entities.
The Indian carbon regulation has built on the industry-regulator experience in the Perform Achieve and Trade (PAT) scheme which mandated energy efficiency targets to designated consumers. PAT claims reduction of carbon emissions by 105 Million tonnes so far.
The PAT experience
Though there are several areas where PAT, launched in 2012, could be implemented better, it has created industry familiarity with a measurement, reporting and verification (MRV) mechanism and a good number of accredited energy auditors. The carbon credit trading scheme (CCTS) will reduce the PAT reporting frequency from three years to an annual basis thereby increasing the spend on the MRV as well as speed of emissions reduction.
Absent renewable energy, a majority of industrial emissions emerge out of energy consumption. PAT compliance has entailed over ten years of industry efforts to reduce energy consumption. The low hanging fruit of energy intensity has already been picked. Industry majors have invested in best available technology. Without further investment in technology, can the obligated entities reduce emissions further or will they simply bear the cost of purchasing carbon credits from other better performers?
Indian Carbon Market embedded in global decarbonisation
PAT was an autonomous measure to discipline industrial energy consumption. It did not function under any multilateral pressure or even context. CCTS on the other hand will have to respond to linkages and contestation with several carbon markets. CCTS will be a tool to defend Indian industry against cheap imports as well as to gain access to carbon conscious export markets. Building the trade dimension into the Indian Carbon market is imperative to create policy and business opportunities.
In no small measure, EU’s imposition of Carbon Boarder Adjustment Management (CBAM) fees on industrial imports has nudged establishment of the Indian Carbon Market. EU CBAM was designed to protect its industry from cheaper high carbon imports. It is only now realizing that expensive low carbon imports, coupled with high Emission Trading System (ETS) prices could be their death knell in export markets.
Integrate trade readiness into the ICM
The ICM must respond to global contexts and competition. Taking lessons from several carbon markets coming up globally, MoEFCC must mandate mapping of emissions at 8 HS code level. Innovations in business and manufacturing processes, investment in technology, costs born for MRV compliance must also be included in the price paid for emissions reduction. For any credit of domestic carbon price paid on exported commodities, obligated entities must be able to demonstrate the exact HS code to which the emissions reduction cost applies.
As is apparent in the above table, industry faces international competition, in imports as well as exports in the current sectors. As sectors expand and jurisdictions build their own carbon markets, the salience of the trade context of the ICM will only grow.
Balance decarbonisation and competitiveness: The Indian carbon market will cut both ways. Manufacturers would face competition from cheaper high carbon imports. Whereas exporters would confront CBAM like fees in export markets. Indian industry survives on thin margins which must not be further compressed in the current global trade and geoeconomic uncertainties. Cost of carbon emissions, sectoral decarbonization and competitiveness will be a difficult regulatory balance but must be achieved.
Finally, the current CCTS design allows revenues for government only as penalties for failing to purchase carbon credits. EU’s ETS provides huge revenues for the member states, which are then plowed back into emissions efficiency and climate change mitigation/adaptation investments. EU earned EUR 32 billion in 2023 from its ETS, becoming a key resource for EU’s funding for Green Hydrogen, energy grid, green transportation and such like. As the Indian Carbon Market matures, its design must be tweaked to generate revenues for deep decarbonisation efforts contributing to India’s mitigation and adaptation efforts.
Sangeeta Godbole is a former officer with the Indian Revenue Service (IRS)