Everything you need to know about Carbon Credits

Carbon Footprint, Carbon Credits, Carbon Trading, and Carbon Tax, are words that are becoming very common in our day-to-day life. It is said that soon financial institutes will look for the carbon emission details of the business before approving any loans to them. It means in a nutshell, seeing the carbon market will be the deciding factor in the flow of the market.
Everyone is either on their way to reducing carbon emissions or drafting their roadmap for the same. Managing carbon footprint has become a major pillar of international efforts to reduce carbon emissions and manage these climatic changes. India, as a signatory to numerous international treaties, is also resolved to make significant contributions to sustainable development and battle climate change per the Paris Agreement.

According to a press release issued by the Ministry of Environment, Forest, and Climate Change on February 3, 2022,
1) India is determined to reach 500GW of non-fossil energy capacity by 2030.
2) Meet 50% of its energy requirements from renewable energy by 2030
3) reduce total projected carbon emissions by one billion tonnes by 2030
4) reduce the carbon intensity of the economy.

But, exactly, what is Carbon Credit? What role do Carbon Credits play in the domestic and global markets? Is there a well-established legal framework in India to govern carbon trading? What is the legal position of Carbon Credits? Today, we hope to shed some light on some of these looming questions.

What is the difference between carbon credit and carbon offset?

One Carbon Credit or Carbon Offset signifies one metric tonne of CO2 that has been removed or recycled from the atmosphere. While Carbon Credits generally reflect a decrease in greenhouse gas emissions, Carbon Offsets represent a reduction in greenhouse gas emissions through recycling, carbon sequestration (described below), and other comparable activities.

Every organization is allowed by the government to emit a specific amount of carbon dioxide or other greenhouse gases into the atmosphere. Carbon Credit Certificates are granted to organizations that achieve emission limitations lower than the authorized threshold. In contrast, organizations that produce more greenhouse gases than allowed must either purchase Carbon Credits from organizations that have been awarded Carbon Credit Certificates, therefore offsetting their excess emissions, or face penalties from the government.

What is a carbon credit certificate?

Carbon Credits Certificate is a document issued by the government or another authorized agency to an institution or organization that has either kept greenhouse gases out of the environment or has assisted in the removal of greenhouse gases from the atmosphere.

The credits specified in the Certificate represent the amount of carbon and other greenhouse gases removed/reduced and are calculated using advanced remote sensing data and other AI developed over time.

What is the cost of 1 carbon credit?

India assigns no specific price to a carbon credit and instead relies on external factors to establish the value of each carbon credit. According to the World Bank, carbon pricing value can be defined by external factors such as fuel cost, emission trading system, tax charge, excise duty, project quality, worldwide demand and supply of carbon, and so on.

To expand its carbon credit market, India recognized carbon as a commodity and began trading carbon credits on the Multi Commodities Exchange on January 4, 2008. Following that, the National Commodities and Derivative Exchange began trading carbon credit futures contracts. Yet, the volume of such trades is limited, and contract pricing is significantly impacted by fluctuating external factors.

It is just a matter of time and necessity that comprehensive norms and procedures to manage carbon credit prices be put in place.

What is Carbon Credit trading?

Energy is critical to human development. In order to save the globe from climatic collapse, it was critical to spread the destruction produced by rising carbon footprints and other greenhouse gas emissions throughout every area of the world. Carbon was recognized as a tradeable good in the United Nations Kyoto Protocol in 1997 and again in 2005 in order to create a sustainable environment. This was also underlined and emphasized in the 2015 Paris Climate Accord. These agreements allow a government to transfer and sell the excess capacity of Carbon Credits it has gathered to other countries/institutions/organizations that do not have enough Carbon Credits to satisfy their climate commitments. The Carbon Trade Certificate encourages companies and governments to invest in environmentally beneficial projects and activities.

To meet its promises, each country has set a self-imposed objective of obtaining Carbon Credits. Anything produced in excess of the statutory limit is permitted to be sold in international markets to governments and industries that demand additional Carbon Credits to emit greenhouse gases and meet climate goals. Carbon trading occurs via a decentralized market in which global private parties exchange Carbon Credit Certificates. When a Carbon Credit is acquired and a carbon offset is supplied, the Credit is “retired” and cannot be sold or used again.

From 2010 to 2022, India issued 35.94 million Carbon Credits and traded such Carbon Credits on worldwide global markets. To satisfy its COP-26 commitments, India now wants to focus oan developing a local market for trading Carbon Credits as well as preserving Carbon Credits to meet its Nationally Determined Contributions (NDCs, goals of India as commitment under the Paris Agreement).

What are Indian Carbon Credit Laws?

The law governing carbon credits in India (and around the world) is continually changing. To meet its COP-26 commitments, the (Indian) Energy Conservation Act, 2001 was revised by the Energy Conservation (Amendment) Act, 2022 (“Act”), which took effect on January 1, 2023. This Act empowers the Central Government’s Ministry of Electricity to develop and implement a carbon trading mechanism, as well as issue Carbon Credit Certificates.

Section 14AA of the Act empowers the Central Government to issue or authorize an agency to provide Carbon Credit Certificates to registered enterprises that comply with the Carbon Credit Trading Scheme. These Carbon Credit Certificates can then be sold to organizations that emit more carbon than is permitted; (ii) the Government of India for it to meet its commitments; and (iii) other nations that require assistance in meeting their commitments. Unfortunately, the Carbon Trading Scheme and the authority that will issue Carbon Trading Certificates are now unclear. Furthermore, many questions remain unanswered, such as how to put such a trading platform, how to regulate such a trading platform, and so on.

The Act is visionary and will be crucial in reaching India’s climatic goals and monetizing carbon credits. Unfortunately, it is still in its early stages and requires further development before it can be efficiently applied. A regularisation of the trading market, carbon credit pricing, and a carbon trading program that includes farmers are currently in the works, and addressing the issues it provides remains the Indian government’s important task.

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The entire article is the rework of an article written by Purvi Kapadia, Partner; and Vidhi Shah, Associate, Rajani Associates and published on Economic Times