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Analysis: Can a National Carbon Market Help Regulate Emissions in India?

Analysis: Can a National Carbon Market Help Regulate Emissions in India?

Image: Matthias Heyde/Unsplash

  • Does India have the capacity to regulate emissions well enough to build an efficient carbon market? Its track record suggests otherwise.
  • One report wrote “several iterations of dilution and delay, and a continuing attempt to push the deadline further back” on the implementation of green norms for thermal power plants.
  • Another report on emissions regulation in India also pointed to multiple failures at states’ pollution control boards – from vacancies to lack of representation of stakeholders.
  • The Wire Science interviewed three experts on these findings and their implications for India’s plans to allow carbon-trading.

Bengaluru: India is on track to establish a nationwide carbon market. In August, Lok Sabha passed a Bill to amend the Energy Conservation Act 2001 to provide a legal basis for the market. Essentially, the government will set quotas for allowable emissions and allow companies that successfully reduce their emissions to below the threshold to sell the balance as ‘carbon credits’ to others who haven’t done so. This system will apply to companies that operate in the energy sector, like coal power plants and in industries like iron, steel and cement.

Earlier this year, the Bureau of Energy Efficiency, an agency under the Union power ministry, prepared a draft blueprint of the proposed carbon market. The aim is “to reduce emissions and to pursue a low carbon path more vigorously … providing an opportunity to re-imagine and refresh the development paradigm,” the draft read. It also states that a key aim of carbon markets is “to support achievement of the Indian Nationally Determined Contribution (NDC) under the Paris Agreement.”

So a question arises: does India have the capacity to regulate emissions well enough to build an efficient carbon market? Its track record suggests otherwise.

Of the implementation of environmental norms for thermal power plants, a September 2022 report by Prayas Energy Group wrote “several iterations of dilution and delay, and a continuing attempt to push the deadline further back.” The report raised questions about India “ever having a tighter emission control regime”, and also offered caution for ideas like ‘carbon trading’.

While market mechanisms may seem attractive and self-regulating, “it requires careful market design, credit allocation, and market oversight if it is to function effectively,” the authors wrote.

Another report on emissions regulation in India, published this month by the Centre for Policy Research, also pointed to multiple failures at states’ pollution control boards – from vacancies (as high as 84% in Jharkhand) to lack of representation from civil society stakeholders and academia.

The Wire Science spoke to Maria Chirayil and Ashok Sreenivas, co-authors of the Prayas report, to understand the manner in which emissions are currently regulated (or not) in India and the implications for the carbon market.

The questions are in bold.

From the Prayas report, it seems like the biggest hurdle to emissions regulation in India are the agencies failing to enforce them – not other factors like the cost of installation of pollution control equipment.

Factors such as cost of installation of pollution control equipment and supply chain challenges do play a significant part in compliance to the emission norms. Rather than calling it the “biggest” hurdle, the role of agencies in emissions regulation and adherence is often an overlooked contributor to the current state of affairs.

Starting at the design stage, there was limited transparency and coordination in the definition and notification of the norms between the power and environment ministries. There was also delay from generating companies in initiating implementation, and insufficient direction and monitoring from the regulatory commissions.

This is further elaborated in section 3 of the report.

[Interviewer’s note: This section details patterns of delayed action from key institutions like the Central Electricity Authority (CEA) and pollution control boards (PCBs). It also highlights the environment ministry’s meek acceptance of industry demands to dilute norms and its willingness to postpone deadlines, and the fact that emissions data is not available in public.]

Are emissions regulations in India well-drafted? That is, is only enforcement an issue or is there room to improve laws and regulations too, because the report mentioned a “regulatory ambiguity”?

Adherence to emissions regulations requires action from both environmental and electricity regulators. The regulatory ambiguity discussed in the report particularly refers to electricity sector regulations and actions by electricity regulatory commissions. Clarity and timely direction from these agencies toward implementation and implication of adherence to the norms could have helped in addressing some of the challenges with regard to emission norm adherence today.

Currently, India has a ‘perform, achieve, trade’ (PAT) scheme that aims to build energy efficiency in some sectors. Has it worked? Are there any lessons we can learn from PAT to build the carbon market?

The PAT scheme has resulted in some efficiency improvements across various sectors. However, there could perhaps have been even greater improvements if the PAT targets and monitoring mechanisms were more efficient. One challenge with PAT was the market was oversupplied with energy saving certificates. The carbon market design needs to ensure that there is a good balance between supply and demand for carbon certificates.

Also read: When Carbon Credits Drive People From Their Homes


The Wire Science also spoke to Vaibhav Chaturvedi, an economist at the Council on Energy, Environment and Water, to understand if – given the subpar implementation of emission regulations in the country – we can build a carbon market that can reduce emissions. Chaturvedi works on low-carbon pathways.

At present, we can all agree India has a long way to go in effectively regulating industrial emissions. The regulatory capacity of institutions like the CEA and PCBs is highly under-exercised. There are issues like vacancies, multiple rounds of dilutions and postponement of deadlines and lax implementation of environmental norms overall. In this scenario, is it possible to build an effective carbon market?

Carbon markets are a long term plan and we shouldn’t be viewing them through our current regulatory structures and challenges. They are part of an institutional architecture and are here to stay. Like the Bureau of Energy Efficiency’s ‘Standards and Labeling‘ programme, which has been in existence since 2009.

An example is the five-star rating for air conditioners which you can expect to be in the market till 2050 also. These interventions are operational changes that have occurred. In contrast, consider capital subsidies for rooftop solar where the objective is to incentivise first users and then when it expands and capital costs come down, the subsidy will be taken off.

The decarbonisation debate requires deep structural changes because it’s a fundamental shift in the way we operate both production and consumption today. And in any process of setting up a new thing, we always learn by doing. Carbon markets can work. In the US, acid rain was effectively stopped with an emissions trading scheme. The question is ‘which policy and regulatory ecosystem is it located in?’

And you are right. Our regulatory space needs to be strengthened. The monitoring, reporting and verification framework is very very important. There is no running away from the fact that we need a strong regulatory framework. But we will not be starting from scratch because we have a PAT scheme to build on and learn from.

We would also need to customise to suit our economy like ensuring micro, small and medium enterprises are not hit and prices are not so high that vulnerable sections of the population are affected.

Would you categorise India’s proposed carbon market scheme as a stick approach or one with more carrots?

I’d say it’s a combination of ‘command and control’ and incentives. That’s why it’s powerful. The command and control aspect is… instead of asking one company like Tata Steel, for example, to reduce its emissions, saying that five sectors together – petro chemicals, steel, cement, automobile and power sector – should reduce emissions by a certain amount.

The incentive is the choice about how to undertake the emission cuts. Whichever company finds it cheaper to mitigate will mitigate in larger scales, and those for which it is not, they will abate less and trade more. So as a regulator, I don’t have to bother about individual companies but only track country-wide power and industrial emission reductions and how they fare year-to-year, is there a declining trend, etc.

Each sector has its own technology-related opportunities and costs so which sector goes first in bringing down emissions will depend on their decisions based on their own market. So let the sectors and individual companies decide based on their own internal calculations.

Rishika Pardikar is a freelance journalist in Bengaluru.

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