The Aakhya Weekly #27 | One carbon credit, please!
The Aakhya Weekly #27 | One carbon credit, please!
In Focus: The Indian carbon market - beyond smoke and mirrors
The Energy Conservation (Amendment) Bill, 2022 was cleared by the Rajya Sabha earlier this week. The bill seeks to amend the Energy Conservation Act, 2001, enacted to promote energy efficiency and conservation. While the bill has various forward looking provisions, there are two features that stand out - mandating the use of non-fossil sources (including green hydrogen) for energy and feedstock via renewable purchase obligations (RPOs), and the establishment of a domestic carbon market.
Carbon markets are trading systems in which carbon credits are sold and bought. One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. One of the drivers of carbon markets is that they provide an opportunity to help mobilize resources and reduce costs to give countries and companies the space to smooth the low-carbon transition.
One of the most common ways to make a carbon market is via a cap-and-trade system, which India will be pursuing for its carbon market. In a cap-and-trade system, the government sets a cap on the maximum level of emissions and creates permits, or allowances, for each unit of emissions allowed under the cap. Emitting firms must obtain and surrender a permit for each unit of their emissions. Firms that expect not to have enough permits must either cut back on their emissions, or buy permits from another firm.
This is not the first time India has attempted to create a carbon market. Previous attempts to create a quasi carbon markets through the Renewable Energy Certificate (REC) scheme, and the Perform-Achieve-Trade (PAT) scheme, suffered from insufficient demand. Distribution companies (discoms) - the largest obligated entities for purchasing carbon credits - are severely financially distressed. They were incapable of purchasing credits, resulting in an oversupply of the same.
Another major challenge faced by India’s carbon market mechanisms, PAT and REC, is that their measurement is not stated in terms of carbon dioxide equivalent. Instead, they are expressed in terms of tonnes of oil equivalent or MWh respectively. This asynchronous and fragmented nature of the current mechanisms imposes serious limitations on their growth potential and their efficacy as a price discovery mechanism for carbon as they are neither interlinked, nor directly comparable with each other. The new carbon market will have to ensure fungibility of carbon credits to resolve this issue.
According to an draft roadmap for the development of the Indian Carbon Market (ICM) released by Bureau of Energy Efficiency (BEE), there are two proposed mechanisms under the ICM – carbon credit trading mechanism for the obligated sectors i.e., the extended PAT scheme based on carbon emissions targets instead of energy targets, and a project-based offset scheme for non-obligated and non-energy sectors. As India already has market-based mechanisms in the form of PAT and REC, the obligated sectors covered under the PAT and REC schemes would continue to remain obligatory under the ICM as well. The ICM would also allow participation from other sectors (currently not covered under PAT and REC) for the trading of offsets.
BEE will be the administrator of the scheme, and the Central Electricity Regulatory Commission (CERC) will be the market regulator for trading. Existing platforms such as Indian Energy Exchange (IEX) or Power Exchange India Limited (PXIL) will provide the platform for exchange and trade of carbon credits.
While the proposed mechanism sounds good in theory, the poor financial health of discoms looms large on its application. The bill and the draft roadmap are both silent on how the obligated entities will procure these credits. RPOs will create a demand signal, but without the demand side having the financial strength to purchase them, how will one enforce compliance? Without fixing discoms, any carbon market is unlikely to take off in India, and this challenge remains unresolved.
Eventually, this domestic market will also need to be linked to the international carbon markets. However, currently, it is envisaged that all credits produced in the country will be used to achieve India’s COP 26 Nationally Determined Contributions first, and only the surplus will be opened to international exchange. The market is many years away from such maturity, so issues regarding this international linkage remain low on the priority list of policy makers.
You can find the full text of the bill here, a summary of key provisions here, as well as a transcript of deliberations in Rajya Sabha here.
Tracking the G20
As meetings across both the finance and sherpa tracks take place across the country, Gita Gopinath, IMF’s Deputy Managing Director was part of the Central Bank Deputies Meeting in Bengaluru earlier this week. Here is a short excerpt from a wide ranging interview with the Mint highlighting India’s priorities for the G20 presidency and the IMF’s role in it:
“India is pretty much focused on ensuring that the Global South, especially the low-income countries, has sufficient access to finance. That is a priority. Also, India cares a lot about energy and food security that is critical for developing countries and more generally, around the world. That is one area we are working with India. A second major area is in the space of debt. We have around 60% of low-income countries that are either already in debt distress or in high risk of debt distress and we need to have effective debt resolution mechanisms.The G20 produced what is called the common framework to provide this kind of mechanism and while it has had some success, we really do need significant changes to make sure that it delivers much more quickly. India is very keen towards making that happen and we are working with India on that. A third area is the crypto landscape. We have seen the meltdown in that sector and we should make sure that we have regulations in place. Another area is climate finance. The risks from climate change are tremendous. Countries need to adapt and mitigate and for many developing countries, you need large scale financing to make that happen. How do we get enough financing? That is another area on which we are working with India.”
Meanwhile, G20 Sherpa Amitabh Kant, during the Development Working Group meeting in Mumbai this week, pitched for the dissemination of data by the government in a granular form and expressed his disapproval for sharing of aggregated information.
Top Stories of the Week
National interest programmes on TV might be made voluntary soon
The Ministry of Information and Broadcasting (MIB) has apparently hinted that it may roll back the mandate to TV channels to broadcast public service content on TV for 30 minutes daily. The directive will likely be made voluntary instead, in a major relief for broadcasters. During a meeting on Friday between representatives of the Indian Broadcasting and Digital Foundation (IBDF) and ministry officials, such an affirmation was offered to broadcasters. On 9 November 2022, MIB had issued an order mandating channels to broadcast public service content. The directive was incorporated into the MIB's revised uplinking and downlinking guidelines.
More recently, MIB has asked TV channels to furnish proof of airing programmes of national interest in accordance with MIB’s directive of 9 November 2022. Channels are to submit proof by this week, following which MIB is expected to come up with an advisory.
India’s First Carbon Neutral Farm
On December 10th, Kerala’s Chief Minister, Pinarayi Vijayan declared a seed farm located in Thuruthu, Aluva as the first carbon neutral farm in the country. Last year, carbon emissions from the farm amounted to a total 43 tons against an overall procurement of 213 tons, leading to a surplus of 170 tons of more carbon procured. The state now aims to set up carbon neutral farms in all of its 140 assembly constituencies, with efforts being made actively towards 13 such farms. Women’s groups and the tribal population will be at the centre of the implementation of carbon neutral agricultural practices and interventions in the state.
Owing to almost 30 percent of greenhouse gas emissions coming from agriculture, this seems like a promise of maintaining the country’s ecological equilibrium. At a time where climate concerns dominate the globe, this appears to be a necessary step. However, its viability for replication at a larger scale remains doubtful.
This Week in Policy
Economy and Taxation
For the first time this year, retail inflation has fallen below RBI’s tolerance band of 2-6%. Inflation dropped to 5.88% in the month of November, from 6.77% in the month of October.
Industrial production in India contracted by 4% year-on-year in the month of October, as per Index of Industrial Production (IIP) data. Our IIP shrunk from 133.5 in September to 129.6 in October.
The RBI is looking to tech-based solutions to ensure anonymity in CBDC transactions. By doing so, it is hoped, the CBDC will function like cash, a fundamental feature of which is the anonymity it provides.
Labour
As part of its push to become the skills capital of the world, India is pushing for easy labour mobility across borders as part of its G20 agenda. In this regard, it is reportedly working on a framework to assess skill gaps and harmonise skills qualifications across countries.
Agriculture and FMCG
India's wheat stocks fall to a six year low in December as prices jump to record high. Lower state reserves could hobble the government's efforts to release stocks to cool wheat prices.
Healthcare
The Government is upgrading the CoWIN app to track the vaccination status of all beneficiaries against all preventable diseases. It will focus on tracking ‘zero dose children’, to help them get vaccinated under India’s Universal Immunisation Program.
Foreign affairs
The Ministry of External Affairs this week presided over two High Level Ministerial signature events - New Orientation for Reformed Multilateralism (NORM) and Global Approach to Counter Terrorism - Challenges and Way Forward under India’s presidency of the UN Security Council.
External Affairs Minister Mr. S. Jaishankar met with UN Secretary General Mr. Antonio Guterres in New York and discussed the possibility of collaboration during India’s presidency of the G-20.
Technology, Media and Telecommunications
The Department of Telecommunications (DoT) reportedly plans to release a revised telecom bill within a month or so, which will clearly indicate its intention to regulate only OTT communication apps that provide the same services as telecom operators, and will leave out content platforms and other types of OTT services.
The Delhi High Court has asked the Telecom Regulatory Authority of India (TRAI) to speed up consultation with stakeholders on the framework for regulation of OTT communication apps.
International trade and commerce
UK Trade Secretary Kemi Badenoch is in New Delhi for the 6th round of talks on the proposed India-UK free trade agreement. The talks this round are aimed at cutting of tariffs and opening the Indian market for financial, legal, and other such services from the UK.
India is insisting on duty-free access for textile exports in its FTAs, according to Commerce and Industry Minister Piyush Goyal.
Banking, Finance and Insurance
RBI lifts informal restrictions placed on banks for trading in the non-deliverable forward market to curb the impact of international volatility on the Rupee.
Sebi is considering reducing the size of real estate investment trusts (REITs), allowing them to hold just a single asset or a diversified portfolio, to increase supply and flexibility for investors. As of now, REITs in India must now have a minimum asset value of 5 billion rupees ($60 million).
Manufacturing
Approvals to 717 applications have been accorded under the recently notified Production Linked Incentive (PLI) schemes for 14 sectors through relevant ministries to enhance India’s manufacturing capabilities and exports.
The government has issued letter of awards to three successful bidders for setting up 8.737 Gigawatt of fully integrated solar PV module manufacturing units under tranche I of its PLI scheme.
The government is likely to finalise the second edition of the production-linked incentive scheme (PLI) for garments, madeups and home textiles early next year, with a focus on promoting small and medium entities.
Retail and e-commerce
The Bureau of Indian Standards (BIS) is set to engage stakeholders in the e-commerce space to establish standards with the objective of self-regulation, allow parties to transact qualified commodities and services at any location and time.
Logistics and Infrastructure
The government is reworking the terms of the public private partnership (PPP) model for assorted railway projects, to make it more attractive to private investors and bridge a viability gap perceived by sections of investors.
On 11th December, PM Modi laid the foundation stone and dedicated to the nation various projects worth more than 75,000 crores in Maharashtra including national rail projects worth more than 1500 crores.
MoRTH has set a target of constructing 12,200 kilometres of national highways during 2022-23, against which 4,766 kilometres have been constructed till November, 2022.
Sustainability
Energy Conservation (Amendment) Bill, 2022, gets approval from the Rajya Sabha. The bill mandates the government to set up a national carbon market and set renewable purchase obligations for certain consumers.
Green bonds likely to be issued in Jan-March 2023, reveals a parliamentary question in the winter session.
Upcoming Events
The Making and Unmaking of Environmental Law in India
December 19 | Virtual
The Centre for Policy Research is hosting a panel discussion on “The Making and Unmaking of Environmental Law in India” on 19th December in a virtual format. The panel aims to explore questions of design, interpretation and implementation of environmental law in India. Shyam Divan, senior advocate at the Supreme Court and one of the authors of “Environmental Law and Policy in India: Cases and Materials” will be among the panelists. More Information | Registration Link
Reshaping Nature's Future: Ecology, policy and society in independent India
December 16 | Hybrid
Indian Institute of Human Settlements, Bengaluru, is organising a webinar on “Reshaping Nature's Future: Ecology, policy and society in independent India” by Dr. Mahesh Rangarajan on 16th December in a hybrid format. The webinar aims to critically examine how measures for forest and wildlife, as well as air and water contamination have developed over the past 100 years in India, and if there are lessons we can learn for the future. As urban and rural India, the coast and hinterland, plains and mountains are seeing epochal changes, are these changes for the better? What are the implications for the Indian Ocean region and the world at large? Registration Link
A Few Good Reads
A sea change is coming for American capital markets, believes Howard Marks.
Jason Crawford writes a terrific piece on how technology, industry and culture have interacted in the last century, the vestiges of which we continue to see today.
How do we ensure that our experiments with AI do not result in a catastrophe for humanity? Benjamin Hilton explores.
Since 2020, China has consistently ratcheted up tensions on its border with India. The result? A loss of all support from India, whether internationally or domestically, writes Tanvi Madan.
Last year, Foxconn saw widespread protests against the terrible conditions meted out to workers. One year hence, many of its problems have been resolved. N Madhavan traces the story of this transformation.
Tweets of the Week
As the Mahatma finds his place at the UN headquarters, a tweet by Secretary General Guterres:
Hukum details events during the clash at the Arunachal border:
What went on behind the removal of Donald Trump from Twitter? Check out Part 5 of the Twitter Files, courtesy Bari Weiss:
