Overall recommendation of Council in Energy, Environment and Water (CEEW) report (unedited – full report below, some emphasis added, clarification):

India should align the early phase of the transition process as proposed by the Bureau of Energy Efficiency (BEE) with the development of an ETS that is similar to various other ETS systems prevalent in Asia and around the world, like the EU-ETS and the Korean ETS.

Additionally, while learning from the experiences of other ETS systems around the world, the Indian ETS [from 2026] should be designed to reflect its national circumstances and economic structure.

(And this curated by Josh Margolis from Emergent on Linked In): The Indian government should not intervene in the voluntary offset carbon market and let it function efficiently and independently.

However, India’s compliance market, i.e., the ETS should reflect its national circumstances and economic structure while learning from the experiences of other ETS systems around the world.

Indian stakeholders should view the domestic ETS as an instrument for decarbonisation and domestic climate finance rather than international climate finance.

Ideally, the process for setting up the same should be a clean and simple process and avoid the pitfalls of fungibility-related issues that could confuse market participants.

There should be enough time given to market participants and regulators to understand the operational nature of the ETS through a pilot phase.

To achieve success, it is imperative that we start by clarifying all necessary concepts and bring all the stakeholders to par with an evolved understanding of alternative forms of the market, which is also the motivation behind this issue brief.

The key takeaways from the stakeholder discussion are:

• The Indian experience is entirely about the offset/ project-based approach and there is limited understanding of the ETS approach;

• There is a need for a sustained and deep engagement on the cap-and-trade or ETS approach; • An India-specific taxonomy is required for various types of carbon credits;

• There is scope for clarifying the meaning of ‘voluntary’ in the carbon markets discourse;

• Exploring alternative approaches for providing value for unsold energy saving certificates (ESCerts) and renewable energy certificates (RECs), rather than making these fungible with carbon credits, would help provide greater clarity;

• The domestic carbon offset market might not be a channel for international finance unless it is linked with other similar international ETS programmes, although it can be a significant source of domestic finance; and

• All three alternative forms of carbon markets—those based on the United Nations Framework Convention on Climate Change (UNFCCC), voluntary, and India’s domestic ETS—could eventually co-exist in the long term.

Nishtha Singh, and Vaibhav Chaturvedi

Singh, Nishtha and Vaibhav Chaturvedi. 2023. Understanding Carbon Markets: Prospects for India and Stakeholder Perspectives. New Delhi: Council on Energy, Environment and Water.

Fundamental Structure

The India Carbon Market will comprise carbon credits certificates (CCC) as a tradeable commodity, with each CCC equal to one tonne of CO2e.

CCC can further be divided into Converted CCC (C-CCC), Mandatory CCC (M-CCC), and Offset CCC (O-CCC). The ESCerts, RECs and surplus Clean Development Mechanism credits [from the UN Kyoto Protocol through 2020] will be converted to carbon credits or offsets as C-CCC.

The obligated entities under the ETS mechanism will generate and trade M-CCC, and the O-CCC will be generated as part of the offset scheme under the ICM.

The first transition phase (2023-25) will focus on the fungibility of ESCerts and RECs into offsets and will be available to be bought from non-obliged entities. Entities with surplus ESCerts and RECs can choose to convert them into C-CCC.

Based on fuel mix and principles of additionality and conservativeness, an entity-specific conversion factor will be calculated for the conversion of surplus ESCerts into offsets.

In the first phase, the PAT scheme will be in force, and along with the development of the offset market, the Monitoring, Reporting and Verification (MRV) guidelines, setup of registry, and a comprehensive governance structure for both offset and compliance market will be developed in consultation with the relevant stakeholders.

In the second phase (2026 onwards), it is proposed that a fully functional national ETS will be launched with sectors and entities that are already part of the PAT scheme.

The obligated entities will be given a GHG emission intensity target (tCO2e/t product) and will be allocated M-CCC accordingly. Based on their performance on emission intensity, the entities will choose to abate or trade emissions.