The Indian Carbon Market: Evolution and Expectations

About the Report

The passing of an amendment to the Energy Conservation Act of 2001 lays down the basis for
establishing a carbon market in India. Since then, the government has accelerated its efforts to set up
a voluntary as well as compliance mechanism for carbon credit trading. This paper provides a glimpse
of the expected architecture for the upcoming Indian Carbon Market ICM . It briefly explores the
existing market-based approaches in India including the Perform Achieve and Trade and Renewable
Energy Credits and how the government is planning to integrate them with the ICM.

The crux of the paper lies in decoding the phased transition of the existing marked-based
mechanisms into a new framework. Being developed by the Bureau of Energy Efficiency BEE ,
Ministry of Power, along with the Ministry of Environment, Forest and Climate Change – ICM seeks to
establish a compliance as well as an offset market that is in line with global standards. It explains how
the new ICM framework will coexist with the voluntary carbon market and the Article 6 framework of
the Paris Agreement, and provide additional avenues for entities interested in carbon offsetting.

The paper draws from primary and secondary sources to curate a comprehensive view of the
expectations from the Indian Carbon Market. It draws heavily from conversations with participants of
the stakeholder consultations conducted by BEE while formalising the framework. The author
engaged with multiple stakeholders in the carbon market, including those who are working closely
with the Bureau of Energy Efficiency to solidify the contours of the upcoming policy. It must however
be noted that policy is still under construction and might evolve based on newer consultations and
discussions.

About Neufin
Neufin is building a technology platform for businesses to simplify access to green financing. Our
mission is to become the platform that powers the world's transition to zero emissions. We aim to
address the $10 trillion/year gap in climate finance globally through innovative delivery of financial
products across key stressed geographies - India, South East Asia SEA , Middle East & Africa MEA .
Neufin has extensive experience working on the voluntary carbon market. Our products range across
the carbon value chain - simplifying the carbon offset generation process, proving market access for
sale of offsets, pricing strategies, market intelligence as well as legal-commercial advisory. We help
businesses retain the maximum value for their carbon assets.

About the Author

Arshiya heads Research and Communications at Neufin. Her interest lies in exploring the relationship
between climate action and policy developments. Her role focuses on dissecting the evolving
regulatory and policy regime at the intersection of climate and finance.
For any queries and comments, you can reach out to her at [email protected].
The Indian Carbon Market: Evolution and Expectations

Contents
Contents......................................................................................................................................................... 1
Background........................................................................................................................................................3
1. The Emergence of Carbon Markets in India........................................................................................... 4
1.1. What are carbon markets?............................................................................................................... 4
1.1.1. Compliance Carbon Markets................................................................................................... 4
1.1.2. Voluntary Carbon Markets....................................................................................................... 5
1.2. Emergence of Carbon Markets........................................................................................................5
1.2.1. Clean Development Mechanism and the Indian Experience................................................ 6
2. Existing Ecosystem in India...................................................................................................................... 7
2.1. Perform Achieve and Trade PAT Scheme.................................................................................... 7
2.2. Renewable Energy Certificates REC ............................................................................................ 8
3. What does the Indian Carbon Market intend to accomplish?...............................................................8
4. Operationalisation of the Indian Carbon Market.................................................................................... 9
4.1. Target Setting....................................................................................................................................9
4.2. Elements of the Indian Carbon Market........................................................................................... 9
4.2.1. Perform Achieve and Trade Scheme Energy Saving Compliance Mechanism).................9
4.2.2. Emissions Trading Scheme Compliance Mechanism)........................................................ 10
4.2.3. Carbon Offset Scheme Project-based Mechanism)...........................................................10
4.3. Uniform Metrics for Trading........................................................................................................... 10
4.4. Phased Implementation...................................................................................................................11
4.4.1. Phase I 2023 2025 – Transitioning of the PAT scheme.................................................... 12
4.4.2. Phase II 2026 onwards) – A comprehensive Carbon Credit Trading Scheme................. 12
4.5. How will the conversion work?...................................................................................................... 13
4.6. Sectoral Scope................................................................................................................................ 14
4.7. How is ICM different from the international carbon market under Article 6 of the Paris
Agreement?................................................................................................................................................. 14
5. Administrative Framework......................................................................................................................15
6. Demand Generation................................................................................................................................ 16
7. Recommendations...................................................................................................................................17
7.1. Addressing the complexities in the conversion of ESCerts and RECs to Carbon Credits....... 17
7.2. Creating transparent systems........................................................................................................18
7.3. Getting the taxonomy right............................................................................................................ 18
7.4. Establishing Designated Customer DC specific conversion factors....................................... 18
8. Conclusion................................................................................................................................................18

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The Indian Carbon Market: Evolution and Expectations

Background
India is actively engaged in climate action to achieve the global climate goals outlined in its Nationally
Determined Contributions NDCs), as a signatory of the Paris Agreement. Following the Conference of
Parties COP 26 in Glasgow, India submitted its updated NDCs with revised goals that promised a
reduction in GHG Emissions Intensity of GDP by 45% by 2030, and increasing the share of non-fossil
fuel-based electric power installed capacity to 50% by 20301. Further, India aims to achieve around
40% of its cumulative electric power installed capacity from non-fossil fuel-based sources by 2030
and create an additional carbon sink through forest and tree cover.

To support the achievement of these enhanced NDC targets, the government has initiated the
development of a domestic carbon market through which it aims to mobilise new mitigation
opportunities by creating demand for emission credits from private and public entities. A
well-functioning carbon market can incentivise the adoption of low-cost options, attract technology
and finance to sustainable projects, and facilitate the transition to a low-carbon economy and also
cushion the impact of the Carbon Border Adjustment Mechanism CBAM on the industry.

Carbon markets can play a crucial role in driving emission reductions, offering cost-effective solutions
and potentially save India from incurring a loss of $35 trillion due to unmitigated climate change over
the next 50 years2. India is well-positioned to capitalise on the advantages offered by the emerging
economic space of carbon credit generation and trading. This is evident from India's current standing
as one of the leading producers and exporters of carbon credits, with approximately 17% 35.94
million) of all voluntary carbon market credits issued worldwide emerging from the country3. The
global carbon credit market experienced significant growth at 164% in 2021 alone. Furthermore, it is
anticipated that the global market value of carbon credits emerging from voluntary carbon markets
will reach $100 billion by the end of 20304.

Acknowledging this untapped potential, the Bureau of Energy Efficiency, an agency under the
Ministry of Power, has been developing a framework for an Indian Carbon Market ICM in the form of
the Carbon Credit Trading Scheme CCTS . Although certain specifics around the framework are still
awaited, what is known is that the ICM is being built with a forward-thinking approach that would
permit its integration with the international carbon market under Article 6 of the Paris Agreement.

Section 1 of this paper discusses the concept of carbon markets, their different types, and the
evolution of carbon markets in India. In Section 2 we explore the various market-based mechanisms
akin to a carbon market that already exist. In Section 3 we examine the need for a new ICM a
framework. Section 4 takes a deeper dive into the developments in the Indian Carbon Market and the
upcoming Carbon Credit Trading Scheme. In section 5 we proceed to discuss the proposed
governance framework for the scheme and finally make recommendations based on the gaps
identified in the proposed framework.

1
Press Information Bureau. August, 2022 . Cabinet approves India’s updated NDC to be communicated to the UNFCCC.
https://pib.gov.in/PressReleaseIframePage.aspx?PRID 1847812
2
Deloitte. August, 2021 . India’s Turning Point: How Climate Action can drive our economic future:
https://www2.deloitte.com/in/en/pages/about-deloitte/articles/turning-point.html
3
Confederation of Indian Industry. February, 2023 . Indian Carbon Credit Market ciiblog.in/indian-carbon-credit-market/
4
Confederation of Indian Industry. February, 2023 . Indian Carbon Credit Market ciiblog.in/indian-carbon-credit-market/

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The Indian Carbon Market: Evolution and Expectations

1. The Emergence of Carbon Markets in India

1.1. What are carbon markets?

Carbon markets are designed to effectively decrease greenhouse gas emissions by facilitating the
exchange of emission units, known as carbon credits. A carbon credit is a tradeable permit that allows
a polluting company to emit one tonne of CO2 and can sold or purchased depending on the volume of
CO2 the company emits. A carbon credit may be created by the government or awarded when the
equivalent of one tonne of carbon dioxide CO2e) is removed from the atmosphere and stored in the
land or is prevented from being released into the atmosphere. By assigning a value to carbon
emissions, carbon market mechanisms promote awareness of the environmental and social costs
associated with carbon pollution. This, in turn, encourages investors and consumers to make choices
that align with lower-carbon alternatives. Carbon markets can be categorised into two primary types:
cap-and-trade and voluntary markets. Cap-and-trade markets, also known as compliance markets
are regulated by the regional governments and set mandatory limits, or caps, on greenhouse gas
emissions, whereby organisations surpassing these limits have the option to purchase surplus
allowances to offset their excess emissions or pay fines. On the other hand, voluntary markets
facilitate the trading of carbon credits outside the scope of regulatory frameworks.

1.1.1. Compliance Carbon Markets

Figure 1: How compliance carbon markets function

In specific jurisdictions such as the European Union, Korea, China, and California, environmental
cap-and-trade regulations mandate that companies offset their carbon footprint. Cap-and-trade
systems provide a market-driven approach to reducing emissions, fostering technological
advancements and promoting economic growth. The "cap" represents the maximum limit on the
volume of carbon emissions that a company is legally allowed to generate. As the cap is progressively
lowered in subsequent years, overall pollution levels decrease. Electric utilities, refineries, and large
factories that surpass a predetermined threshold of carbon tons per year are obligated to possess
allowances (permits to emit one metric ton of carbon) or offsets (carbon credits) equivalent to their
annual emissions. These entities participate in a compliance market, where the trading of these
carbon credits takes place.

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The Indian Carbon Market: Evolution and Expectations

1.1.2. Voluntary Carbon Markets

Figure 2: How voluntary carbon markets function

The voluntary carbon marketplace encompasses all transactions involving carbon offsets that are not
mandated by a regulatory body. This includes offsets purchased for the purpose of resale or
retirement, in order to achieve carbon neutrality or other environmental objectives. The voluntary
market primarily relies on companies and individuals willingly and voluntarily assuming the
responsibility of offsetting their own emissions, as well as entities that procure offsets prior to the
imposition of regulatory emission reduction mandates. The driving force behind these buyers stems
from corporate social responsibility, ethical considerations, the aspiration to enhance their reputation,
and similar motivations. Furthermore, pre-compliance buyers may seek to acquire credits at a lower
price prior to the implementation of new regulatory requirements. Although voluntary carbon markets
may be comparatively smaller in scale than compliance markets, they exhibit greater flexibility and
innovation in terms of financing mechanisms, monitoring practices, and methodologies.

1.2. Emergence of Carbon Markets

The concept of national and global carbon markets gained significant traction with the
implementation of the Kyoto Protocol in 2005 and the subsequent launch of the European Union
Emissions Trading System EU ETS , which marked the first large-scale regional greenhouse gas
GHG emissions trading scheme. Initially, carbon markets were predominantly adopted by developed
countries; however, they did foster an understanding of the potential of such markets in financing
climate initiatives. Presently, the World Bank's latest State and Trends of Carbon Pricing report
reveals the existence of 32 operational Emissions Trading Systems ETSs) worldwide, with global
carbon pricing revenue reaching US$ 95 billion in 20225. These figures indicate a growing opportunity
that India should also harness to support its climate objectives. By directly financing climate initiatives
and exploring potential international collaborations and funding avenues under Article 6 of the Paris
Agreement, India can leverage the expanding scope of carbon markets.

Although India does not currently possess an explicit carbon market, it does employ instruments that
closely resemble carbon market mechanisms. The Perform, Achieve, and Trade PAT program and
5
World Bank. May, 2023 . State and Trends of Carbon Pricing 2023.
https://openknowledge.worldbank.org/entities/publication/58f2a409 9bb7 4ee6 899d-be47835c838f

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The Indian Carbon Market: Evolution and Expectations

Renewable Energy Certificates REC are two prominent market-based approaches in India aimed at
regulating energy consumption and transitioning towards cleaner energy sources. These initiatives
are facilitated by the Ministry of Power MoP . Furthermore, India has extensive experience
participating in the United Nations backed international carbon trading platform, known as the Clean
Development Mechanism CDM , which has been implemented by the Ministry of Environment, Forest
and Climate Change MoEFCC . Moving forward, India will leverage its existing expertise and
experiences to develop its domestic carbon market.

1.2.1. Clean Development Mechanism and the Indian Experience

India's experience with the rollout of the Clean Development Mechanism CDM has been substantial,
positioning the country as a major participant in this global carbon market instrument established by
the Kyoto Protocol. The CDM was specifically designed to facilitate developing nations in accessing
financial resources, technology transfers, and capacity building for their sustainable development
endeavours. Simultaneously, it provided developed countries, primarily the European Union, and to a
limited extent Japan and Korea, with a cost-effective means of meeting their emission reduction
obligations. This was achieved through investments in mitigation actions in developing countries or
the purchase of carbon credits known as Certified Emission Reductions CERs) from CDM projects.

India, under the stewardship of the National CDM Authority NCDMA operating within the Ministry of
Environment, Forest and Climate Change MoEFCC , emerged as a prominent participant in the CDM
framework. The country accounted for the second-largest number of CERs generated, reflecting its
significant contributions to the initiative. Out of the total 7,847 projects registered by the CDM
Executive Board, India alone accounted for 1,686 projects, representing approximately 12.6% 255
million) of the total CERs issued. Indian CERs were predominantly generated from a diverse range of
projects in sectors such as renewable energy, energy efficiency, industrial gases, fuel switching,
municipal solid waste, and forestry. Notably, around 85 90% of these projects were developed by the
private sector, highlighting the active involvement of non-governmental entities. The CDM played a
crucial role in facilitating the early deployment of large-scale renewable energy technologies in India,
including solar, wind, small hydro, and biomass projects.

The government has made concerted efforts to streamline the CDM process, establish dedicated
institutions, and provide the necessary infrastructure to support the implementation of CDM projects.
Despite its achievements, the CDM encountered challenges in India, including complexities in project
registration and validation processes, delays in decision-making, and limited awareness among
potential project developers. Factors such as declining demand for CERs and the evolution of new
mechanisms under the Paris Agreement have also impacted the CDM market in recent years.
However, the knowledge and expertise gained from participating in the CDM can serve as a valuable
foundation for India's future endeavours in developing its domestic carbon market and engaging in
international collaborations to combat climate change.

2. Existing Ecosystem in India

While India does not have an explicit carbon market, it has instruments that closely resemble carbon
markets in the form of Perform Achieve and Trade PAT and Renewable Energy Certificates REC .
These are market-based approaches to regulate energy consumption and prompt the transition to
cleaner energy.

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The Indian Carbon Market: Evolution and Expectations

2.1. Perform Achieve and Trade PAT Scheme

The Perform, Achieve, and Trade PAT scheme is an energy conservation initiative focused on
reducing energy intensity6 in energy-intensive industries through the accelerated adoption of
energy-efficient and low-carbon technologies. The scheme operates by setting mandatory energy
intensity targets for selected designated consumers (DCs)7 based on their relative performance
within their respective sectors. DCs may include entities that exceed a specified threshold of energy
consumption including iron and steel plants, shopping malls, metros, banks, hotels among several
others.

Under PAT, designated consumers are given specific energy consumption targets, referred to as
Specific Energy Consumption SEC , which is measured in toe/t (tonne of oil equivalent per tonne of
product). These targets are adjusted to account for various factors such as product mix, capacity
utilisation, changes in fuel quality, and import/export of power. The designated consumers are
required to achieve these targets within a three-year cycle.

To incentivise energy conservation, the scheme incorporates a mechanism where DCs can earn
Energy Saving Certificates ESCerts) for surpassing their energy intensity targets that are awarded
based on verified energy savings quantified by an accredited energy auditor AEA . For every unit of
energy saved vis-à-vis the target, the DC receives ESCerts equivalent to 1 tonne of oil equivalent
(toe) of energy savings which can then be traded on a dedicated. On the other hand, if a DC's energy
consumption exceeds the target, they are obligated to purchase ESCerts from the market to cover
the shortfall.

In the initial phase, 306 Designated Consumers (DCs) who exceeded their targets were granted a
total of 3.82 million ESCerts. Conversely, 110 DCs who fell short of their targets were required to
procure approximately 1.42 million ESCerts. These transactions took place through a double-sided
uniform price auction, where the market price experienced substantial volatility, varying between 200
INR and 1200 INR per ESCert throughout the trading period. During this time, there was no floor price
set for the certificates8. However, when trading resumed in 2023, a floor price of 1820 INR per ESCert
was set.

2.2. Renewable Energy Certificates REC

The Renewable Energy Certificate REC mechanism was developed to support the implementation of
Renewable Energy Purchase Obligations RPOs) imposed on obligated entities, such as electricity
distribution companies DISCOMs) and large captive generation plants that use fossil fuels. RPOs
mandated the obligated entities to meet certain renewable energy targets, which varied from state to
state based on the renewable energy potential in each state. In case the obligated entities failed to
meet their RPO targets, they had the option to fulfil their obligations by purchasing RECs from
renewable energy generators located in any state. The main objective was to promote the
widespread adoption of renewable energy in an efficient manner. REC mechanism provided an
additional financing avenue to attract investments in renewable energy projects.

6
Energy intensity is the amount of energy used to produce a given output or activity. Using less energy to produce a product or
provide a service result with reduced energy intensity.
7
Designated Consumers means the Consumers using or engaged in any of the following processes i.e. Arc Furnace, Induction
Furnace, Iron & Steel, Aluminium, Textile, Paper & Pulp, Chlor-Alkali, Petro-Chemical, Cement, Pharmaceuticals IT/ITES, Airports,
Malls, Hotels, Banking, Railways/Metros or as may be specified by the Commission from time to time and connected at a supply
voltage of 11 kV & above
8
Sarangi, G. and Hesary, F. August, 2020 . Unleashing market-based approaches to drive energy efficiency interventions in
India: an analysis of the PAT scheme. ADBI Working Paper, Asian Development Bank Institute ADBI , Tokyo.

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The Indian Carbon Market: Evolution and Expectations

However, the REC market faced the challenge of oversupply – financially distressed DISCOMs, despite
being obligated, did not purchase an adequate number of RECs and perceived the acquisition as an
additional cost without receiving any direct benefits. Other issues with the REC scheme included low
levels of purchase obligations, which required frequent adjustments due to the declining costs of
renewable energy generation. Non-compliance did not invite major penalties, the amount and
enforcement were insufficient to drive compliance. The scheme also faced limitations in terms of the
availability of traders and financiers to facilitate a smooth market operation and provide liquidity. Due
to poor falling trading volume, the ceiling price for RECs has been subject to multiple revisions. The
floor price for solar RECs went from as high as 12,000 INR/MWh in 2012 to 100 INR/MWh in 20209.

3. What does the Indian Carbon Market intend to

accomplish?
A well-designed and competitive carbon market mechanism has the potential to efficiently reduce
GHG emissions at the least cost, benefiting regulated entities, and sectors, and promoting the
adoption of clean technologies. So far, India's existing market mechanisms have not fully realised their
potential, hindering support for the decarbonisation of the country's energy sector and industries. To
address this, the Carbon Credit Trading Scheme CCTS proposes the integration of the PAT and REC
markets into a single carbon market mechanism.

One of the challenges faced by India's market mechanisms is that their measurement units, such as
tonnes of oil equivalent or MWh, do not align with a carbon dioxide equivalent CO2e). This limitation
hampers their growth potential and their effectiveness as price discovery mechanisms for carbon. It
also fragments the domestic energy market and restricts cross-linkages. An additional challenge,
faced specifically by the REC market, is that low targets and weak enforcement have led to an
oversupply of certificates.

A unified domestic carbon market mechanism can help overcome these challenges. This mechanism
would incorporate the existing PAT and REC frameworks, with certificates expressed in CO2e.
Establishing a single market at the national level would reduce transaction costs, improve liquidity,
foster a common understanding, streamline accounting and verification procedures, and facilitate
targeted capacity development. Mandated participants would have set targets aligned with existing
and emerging policy objectives, contributing to India's NDCs.

The power sector, in particular, faced weak enforceability on distribution companies DISCOMs),
which were financially strained and had limited incentives to minimise costs. To address this, ICM
intends to bring power generators under the umbrella of regulated entities with assigned CO2e
intensity targets.
Lastly, at a macroeconomic level, there is a growing international demand to quantify the carbon
intensity of traded products. An example of this is the Carbon Border Adjustment Mechanism CBAM
being introduced by the European Union. CBAM imposes an additional tariff on products with high
emission intensity imported into the EU, which is likely to affect $8 billion worth of Indian exports,
particularly the steel and aluminium sector. Such a carbon tax underscores the need to consider the
carbon intensity of industrial products and their potential impact on India's exports. A carbon market

9
Sawhney, A. 2022 . Renewable energy certificates trading in India: A decade in review. ADBI Working Paper, No. 1313, Asian
Development Bank Institute ADBI , Tokyo.

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The Indian Carbon Market: Evolution and Expectations

mechanism could serve as a starting point for this accounting process and support Indian industries
in transitioning to lower carbon technologies.

4. Operationalisation of the Indian Carbon Market

4.1. Target Setting

ICM will be different from most compliance carbon markets across the world wherein entities will be
given an intensity cap, or a relative emissions reduction target (often called a “rate-based”,
“output-based” or “intensity-based” target), instead of an absolute emission reduction target. Under
the framework, targets will be expressed in relative form, such as the emissions reductions per unit of
output (e.g. tCO2-eq/MWh). With an intensity-based target, absolute emissions may rise.
Intensity-based targets are selected where there is greater uncertainty about future levels of output
and demand growth, which is the case in developing economies. They can allow installations to adjust
more flexibly to changes in economic conditions. Intensity-based targets are therefore a means of
applying an environmental constraint to economic activity in a flexible manner.

4.2. Elements of the Indian Carbon Market

The Indian Carbon Market will establish frameworks for three elements that will come together to
form an emissions trading system.

4.2.1. Perform Achieve and Trade Scheme Energy Saving Compliance

Mechanism)

● While the existing PAT scheme will remain in place, its functionality will extend to ICM. Once
implemented, PAT cycles will be one-year long instead of being three years long.
● The government will continue to set energy consumption targets for the Designated Consumers
or DCs – which will now also be a part of Obligated Entities under ICM.
● The DCs or Obligated Entities that over-achieve their target will be issued ESCerts. Those who
fail to achieve their targets will be required to purchase ESCerts. The trading shall be done
between obligated entities within the PAT cycle.
● In order to help clear the unsold inventory of ECSerts, overachieving DCs will be allowed to
convert their ESCerts into Carbon Credits. These credits can be sold to other DCs and obligated
entities under the compliance market, or to other voluntary buyers who do not have obligations
under any framework.
● It must be noted that as per the recent amendments to the Energy Conservation Act, 2001,
ESCerts can be purchased by any person.
The process of conversion and the interlinkage of PAT with the carbon market has been
discussed in greater detail in the subsequent sections.

4.2.2. Emissions Trading Scheme Compliance Mechanism)

● The government allocates emission allowances (represented by carbon credits) to obligated

entities. For now, the list of Obligated Entities is limited to those under PAT’s sectoral scope.
● At the end of the compliance period, these entities can trade carbon credits based on their
requirements
● Entities that failed to meet their emission intensity targets will have to purchase credits
● Entities that succeeded in meeting their emission intensity targets can sell their credits.

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The Indian Carbon Market: Evolution and Expectations

4.2.3. Carbon Offset Scheme Project-based Mechanism)

● Entities that are not obligated to participate in the market will be allowed to generate and trade
credits under the offset mechanism. Obligated entities may choose to participate in this market if
they wish to do so – however, it will not account towards their compliance targets.
● Project proponents can register their carbon offset projects.
● The government is developing the required framework to enable the functioning of this market.
This includes establishing relevant registration, monitoring, issuance and trading infrastructure
that is in line with the global voluntary carbon market.
● The government will provide a basis to convert unsold RECs and CDM credits into carbon credits,
that can then be purchased by any voluntary buyer.
● Entities may choose to purchase offset carbon credits to meet their own climate commitments
and stakeholder accountability.

The details of this conversion of RECs and CDM credits have been discussed in greater detail in the
subsequent sections.

4.3. Uniform Metrics for Trading

ICM will adopt a standardised and consistent metric, known as Carbon Credit Certificates CCC , as
its fundamental trading unit, with 1 tonne of CO2 equivalent (tCO2e) representing the basis for
measurement. The goal is to quantify and express all types of carbon emissions in a unified unit of
carbon dioxide emissions, namely tCO2e, which will be certified as Carbon Credit Certificates CCCs).
However, given the existence of different mechanisms within the ICM, including mandatory and
voluntary (offset schemes), the CCCs will be appropriately labelled based on their respective
generation methods.

Figure 3: Credits generated under ICM based; Source: BEE stakeholder consultation, 2022

4.4. Phased Implementation

The Indian Carbon Market will branch into two mechanisms – a compliance market and a
non-compliance market. Sectors that currently fall under the ambit of the PAT scheme will be subject

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The Indian Carbon Market: Evolution and Expectations

to a compliance-led carbon credit trading system, whereas other non-obligated sectors will be
allowed to participate in the market under a project-based offset system.

According to recent developments, the mechanisms will be rolled out in a phased manner:

Figure 4: Phase-wise implementation of ICM; Source: BEE stakeholder consultation, 2022

4.4.1. Phase I 2023 2025 – Transitioning of the PAT scheme

Building upon the compliance mechanism: The focus of phase one is to integrate the existing PAT
and REC mechanisms into a carbon market mechanism. At present, one PAT cycle is three years long
– under ICM, each PAT cycle will be one year long. In Phase I, the current obligated entities under the
PAT scheme will continue to operate within the existing energy efficiency compliance framework.
These entities will be required to fulfil their energy targets by obtaining ESCerts. Similarly, obligated
entities under the Renewable Purchase Obligation RPO will need to meet their obligations through
Renewable Energy Certificates RECs).

However, the surplus ESCerts and RECs generated during this phase will be eligible for conversion
into carbon credit certificates. These converted certificates can be purchased by non-obligated
entities for voluntary purposes, thereby facilitating the trading of excess or unsold certificates
through the offset scheme. The eligibility criteria, additionality requirements, and conversion factors
for transforming ESCerts and RECs into equivalent carbon credit certificates are still under
development.

Building an offset mechanism: Simultaneously, the establishment of an offset scheme operating on a

project-based framework, targeting non-obligated sectors will commence. The registration process

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The Indian Carbon Market: Evolution and Expectations

for these projects will adhere to meticulous methodologies to demonstrate their additional value and
their capacity to reduce, avoid, or remove emissions. Within the domestic offset scheme, a governing
structure will be responsible for developing and approving methodologies to estimate carbon
emissions reductions and removals derived from offset projects. This structure will also establish the
necessary validation, registration, verification, and issuance processes. The criteria for determining
the additionality of offset projects will be contextual, taking into account technological
advancements, financial requirements, and national priorities, while also aligning with international
standards outlined in Article 6 of the Paris Agreement. Project proponents, however, will retain the
ability to choose where they want to register the projects – the offset market under ICM, the
international voluntary carbon market, or the UN-guided voluntary market being established under
the provisions of Article 6.4 of the Paris Agreement.

Building a robust framework through a consultative process: Concurrently, the government is in the
process of formulating the Monitoring, Reporting, and Verification MRV guidelines for both the
compliance and offset markets. Furthermore, infrastructure development essential for the smooth
operation of the carbon market, such as the establishment of a registry and trading platform, will be
actively pursued during Phase I. A comprehensive governance structure will also be devised, outlining
the roles and responsibilities of all parties involved in the implementation of the Indian carbon market.
To ensure the effectiveness and efficiency of the carbon market, relevant authorities will carry out
capacity-building programs, aimed at enhancing their knowledge and expertise in the field. This will
involve upskilling and re-skilling initiatives to equip them with the necessary competencies.

A robust stakeholder consultation process will be undertaken in Phase I, seeking valuable insights and
suggestions to ensure the success and widespread acceptance of the Indian carbon market. This
phase will lay the foundation for the comprehensive development of the carbon market in India.

4.4.2. Phase II 2026 onwards) – A comprehensive Carbon Credit Trading Scheme

During Phase II, ICM will see a significant shift from the current energy efficiency compliance market
to a carbon compliance market. Obligated entities will receive GHG intensity reduction targets in this
phase. Under the compliance market in Phase II, obligated entities will be required to fulfil their
obligations by engaging in the trading of carbon credit certificates specifically designed for
compliance purposes, known as mandatory carbon credit certificates M CCC . The obligated entities
will consist of the same entities as in the current PAT scheme, and there is also the possibility of
including new sectors within the compliance market.

Within Phase II, obligated entities will have the responsibility to monitor, report, and verify their GHG
emissions and performance to demonstrate compliance under the Carbon Credit Trading Scheme.
The targets for reducing emission intensity will align with India's Nationally Determined Contributions
NDC trajectory. The obligated entities will be mandated to enhance their GHG emissions per unit of
output or an equivalent measure of emission intensity. Entities that emit less than the target emission
per unit of output will receive credits, while those exceeding the target will need to offset their
emissions by purchasing credits from other obligated entities. Target emission levels will be specific
to each sector or entity and may undergo revisions to ensure alignment with national GHG reduction
targets. The proposed carbon credit trading scheme will transform the current three-year cycle of the
PAT scheme into an annual compliance cycle.

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The Indian Carbon Market: Evolution and Expectations

Furthermore, the Renewable Purchase Obligation RPO obligation for obligated entities will continue
to be fulfilled through Renewable Energy Certificates RECs). Phase II proposes the inclusion of both
energy and process emissions within the scope of GHG emissions from obligated entities.

The successful outcome of Phase II will result in the complete transition of the current energy
efficiency compliance market operating under the PAT scheme into a carbon emissions compliance
market, known as the Carbon Credit Trading Mechanism within the Indian Carbon Market.
Additionally, the Integrated Carbon Market ICM will facilitate the following activities:

● Option for transitioning projects registered and carbon credits issued under other international
voluntary mechanisms/markets into the ICM.
● Establish connections with emerging international mechanisms under Article 6.2 and Article
6.4 of the Paris Agreement.
● Develop comprehensive GHG reporting guidelines for both obligated and non-obligated
sectors and entities.

4.5. How will the conversion work?

Under the Indian Carbon Market ICM , the surplus certificates from the existing PAT and REC
mechanisms will undergo conversion to CCCs providing advantages to current participants.
Depending on the quantity of available PAT and REC certificates, the implementation of eligibility
criteria for the conversion and registration of unused certificates within the ICM may be considered.
Unused or unissued Certified Emission Reductions CERs) generated by Indian entities through the
CDM and not transferred to international carbon markets under Article 6, may also be selectively
employed for compliance within the ICM framework.

To address the variability in carbon intensity among designated consumers (DCs) caused by factors
such as fuel type, fuel mix, and other considerations, it is imperative to develop specific conversion
factors tailored to each DC. A thorough examination of the designated consumers under the PAT
scheme reveals significant differences in emission intensity even within the same sectors.
Consequently, the utilisation of DC-specific emission factors for conversion is essential. BEE will
provide general formulas for conversion that would then allow the fungibility of ESCerts and RECs
with C CCCs.

4.6. Sectoral Scope

As per the initial scope of ICM, certain sectors will be obligated to participate in the market, whereas
others will have the opportunity to participate voluntarily. Entities obligated to improve their energy
efficiency as per the PAT Scheme will be classified as “obligated entities” Figure 5 and will be
obligated to reduce GHG intensity. ICM also provisions for entities from non-obligated sectors to
participate in the offset market and trade O CCCs to meet their carbon neutrality goals. Entities from
these sectors will have the opportunity to participate in the carbon market through designated project
proponents. These proponents can register their projects under the scheme after meeting the
eligibility criteria established by the Bureau of Energy Efficiency, subject to approval by a relevant
authority.

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The Indian Carbon Market: Evolution and Expectations

Figure 5: List of obligated-entity sectors under ICM; Source: BEE Stakeholder consultation, 2022

To demonstrate emission reduction and additionality for generating carbon credits, project
proponents may be asked to utilise existing methodologies from structures such as the CDM, Gold
Standard, Verra, and other voluntary carbon markets. Furthermore, there is a proposal to develop new
methodologies that will facilitate the inclusion of innovative project ideas capable of achieving
significant reductions, avoidance, or removal of greenhouse gas emissions.

4.7. How is ICM different from the international carbon market under Article
6 of the Paris Agreement?

It's important to note that the carbon credits supplied under ICM, as policy mandates, may not always
meet the "additionality" requirement under Article 6.4 carbon market mechanisms of the Paris
Agreement. Credits for international trading under Article 6.4 would need to exceed domestically
mandated targets and be issued by the Supervisory Body SB of the Carbon Market Authority CMA
or generated through bilateral or plurilateral commercial agreements subject to international review.
Domestic monitoring, reporting, and verification MRV and issuance processes cannot substitute
these international processes.

As per the Paris Agreement guidelines, India will periodically update its NDCs, leading to more
ambitious climate targets and increased emission reduction requirements. Thus, market measures are
crucial for gradually decarbonising the economy and fostering the active participation of the private
sector across various sectors.

However, it is worth noticing that in February 2023, the Ministry of Environment, Forest and Climate
Change notified a list of sectors to be considered for the trading of carbon credits under bilateral/
cooperative approaches under the Article 6.2 mechanism. Although speculative, it may thus be

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The Indian Carbon Market: Evolution and Expectations

triangulated that this set of notified sectors will be encouraged to generate and trade offset credits
O CCCs), which can later be traded under the provisions of Article 6.2 of the Paris Agreement.

Figure 6: List of priority sectors for the trading of carbon credits under the Paris Agreement; Source: PIB, 2023

5. Administrative Framework
Governing Board
According to the draft architecture released by BEE on March 27, 2023, the Indian Carbon Market
Governing Board ICMGB will oversee ICM and will consist of members from relevant central
ministries and agencies. The ICMGB will include representatives from the Ministry of Environment,
Forest and Climate Change, Ministry of Power, Ministry of Finance, NITI Aayog, Ministry of New and
Renewable Energy, Ministry of Steel, Ministry of Coal, Ministry of Petroleum and Natural Gas, Central
Electricity Authority, Grid Controller of India, and Bureau of Energy Efficiency. The responsibilities of
the ICMGB encompass recommending procedures, rules, and methodologies for the functioning of
the ICM, including its voluntary mechanism. It will also propose guidelines for the sale of CCCs
outside India, approve projects and recommend the issuance of CCCs, and oversee administrative
and regulatory functions. Furthermore, the ICMGB may establish committees or working groups and
undertake other tasks assigned by the Central Government.

Administrator
The Bureau of Energy Efficiency will serve as the administrator for the ICM and function as the
secretariat for the ICMGB. Its tasks include developing standards and processes for project
registration under the voluntary mechanism, issuing CCCs, and establishing mechanisms to ensure
market stability. The Bureau will also recommend charges for ICMGB approval, devise procedures for
crediting periods, renewals, and retirements of CCCs, conduct capacity-building activities, manage
the IT infrastructure, and coordinate committees and working groups.

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The Indian Carbon Market: Evolution and Expectations

Registry
The Grid Controller of India will act as the registry for the ICM, responsible for registering obligated
and non-obligated entities, maintaining transaction records, and sharing them with the ICM
administrator and Power Exchanges. The registry will also assist in developing the IT platform to
maintain the database of CCCs, establish connections with other registries, and perform other
functions delegated by the ICMGB or the administrator.

Verifier
The scheme introduces the concept of an "Accredited Carbon Verifier," which refers to an agency
authorised by the Bureau of Energy Efficiency BEE to conduct validation and verification activities
pertaining to the Carbon Credit Trading Scheme CCTS .

Regulator
The Central Electricity Regulatory Commission CERC will regulate the trading activities within the
ICM. Its role includes overseeing the trading of CCCs, safeguarding the interests of buyers and
sellers, regulating trading frequency, providing market oversight, and taking corrective actions to
prevent fraud or mistrust. The Commission will also approve the participation of power exchanges in
ICM trading, and these power exchanges must seek approval for their bylaws and rules from the
Commission. The power exchanges will carry out functions related to CCC trading in accordance with
the Commission's regulations.

Technical Committee
The Bureau is responsible for establishing technical committees for different sectors and areas as
required by either the compliance or voluntary mechanism of the Carbon Credit Trading Program.
Each committee will be chaired by a knowledgeable member in the respective field and include other
necessary members. The Bureau will also specify the procedures and eligibility criteria for accrediting
agencies to serve as accredited carbon verifiers. It will develop methodologies and detailed
procedures for project registration and CCC issuance in different sectors with the support of these
technical committees, and submit them to the ICMGB.

6. Demand Generation
To attract investments, the carbon credits traded through the ICM Indian Carbon Market) must have
a strong demand-supply ecosystem. Active participation and avoidance of oversupply leading to
unused credits are crucial for the effectiveness of carbon credits. Demand for carbon credits can
come from regulated entities as well as entities voluntarily pledging to offset their emissions. Several
ideas have been floated around to ensure demand generation for O CCCs, including:
● Encouraging PSUs Public Sector Undertakings) to purchase credits exclusively from the ICM to
fulfil their carbon neutrality targets.
● Issuing a policy or guidance document mandating corporates to purchase offset credits and
carbon credit certificates units to meet their carbon neutrality goals.
● Leveraging SEBI's mandate for the top 1000 companies in India to report their ESG indicators to
infuse demand for CCCs.
● Encouraging procurement from carbon-neutral companies as part of Sustainable Public
Procurement SPP , offering preferential benefits to such organizations, products, and services.
● Allowing carbon offset projects registered under voluntary schemes, including CDM Clean
Development Mechanism), to register under the ICM and sell credits to Indian entities.

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The Indian Carbon Market: Evolution and Expectations

● Exploring carbon-neutral certification for products and services as part of the Eco-mark scheme
to create demand for carbon-neutral offerings.
● Ensuring the quality and environmental integrity of carbon credits to attract demand from
non-obligated entities by implementing a robust Measurement, Reporting, and Verification MRV
mechanism in India's carbon market.

Though concrete communication on these suggestions is pending, what is clear is that the
government intends to draw in finance for climate mitigation action through the upcoming carbon
market. As discussed above, the oversupply of RECs and ESCerts on power exchanges, coupled with
inadequate adherence to purchase obligations by heavy emitters under the Perform-Achieve-Trade
PAT mechanism, has resulted in their diminished value. In the absence of measures to stabilise
certificate prices, investors have incurred losses in the past. To address this issue, a proposed
stabilization fund aims to rectify the situation by enhancing exchange liquidity and instilling
confidence in traders.

India intends to establish a stabilisation fund as part of its efforts to maintain prices of the carbon
credits in the planned carbon market above a certain threshold. This measure aims to ensure the
market remains attractive to investors and effectively reduces emissions, according to two
government sources. The fund would be utilised by the market regulator to purchase carbon credits in
the event of excessively low prices. The establishment of consistent investor interest in credits, along
with a price floor, becomes crucial as significant market declines could potentially discourage
industries from actively reducing their carbon dioxide emissions.

7. Recommendations
Based on in-depth discussions with various stakeholders, as well as Neufin’s internal analysis, we give
four recommendations that could help resolve complexities that exist in the proposed framework.

7.1. Addressing the complexities in the conversion of ESCerts and RECs to

Carbon Credits
In the past, market-based mechanisms such as the PAT Scheme and RECs have been riddled with a
problem of poor compliance due to a lack of penalties and an oversupply of instruments in the market.
A shortage of demand and excess supply indicated distrust around the potential of ESCerts and RECs
among stakeholders. The ICM intends to begin its journey by converting instruments that lack
credibility, which creates three points of contention:
● Conversion of already existing instruments means that the new carbon credits do not denote
any additional emission reduction.
● An unstandardised conversion methodology, though important, creates room for confusion.
● This may potentially backfire and the demand generations for converted credits, particularly in
the voluntary market, becomes a challenging task. It is therefore recommended that a simpler
design be chosen to help entities monetise the unsold ESCerts and RECs.
The government must consider finding other ways to clear the inventory of unsold ESCerts and RECs
without coalescing the existing PAT and REC frameworks with ICM.

7.2. Creating transparent systems

India can benefit by learning from other countries in their experiences of implementing an ETS.
Although contexts differ drastically, Korea and the EU provide rich examples of the dos and don’ts

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The Indian Carbon Market: Evolution and Expectations

that India may refer to while building its framework and developing implementation strategies. One
such example is the liquidity crisis caused due to information asymmetry between the industry and
the Korean government. Since the companies were unsure about how the ETS policy will evolve
year-on-year, they refrained from trading despite holding surplus allowances, which led to a poor
supply of allowances in the market. India can prevent landing itself in such a situation by following a
consultative process where the government keeps the industry informed of its plans and keeps
feedback loops open, allowing corrective systems to evolve.

7.3. Getting the taxonomy right

The currently suggested framework introduces several new terminologies such as O CCC, M CCC,
and C CCC. Using a taxonomy distinct from the more conventional terminology being employed in the
voluntary and international carbon markets may create confusion among stakeholders – the learning
and adjustment curve for these actors may be steep. The system should either be aligned with the
more widely acknowledged systems or a special taxonomy should be developed to permit fungibility
of the various carbon credits emerging out of ICM with other instruments such as Allowances in
EU ETS and Certified Emission Reductions CER in the CDM market.

7.4. Establishing Designated Customer DC specific conversion factors

Under PAT, different DCs may utilise various types of fuels, have different fuel mixes, or operate under
distinct operational conditions which can significantly influence the volume of CO2 emitted.
Therefore, it becomes crucial to develop conversion factors that can appropriately quantify and
account for these variations in carbon intensity. ICM must establish DC-specific conversion factors to
ensure that the carbon credits issued and traded accurately reflect the actual emission reductions
achieved by each DC.

8. Conclusion
The Indian Carbon Market ICM has the potential to effectively reduce carbon emissions and address
climate change through the trading of Carbon Credit Certificates CCCs). But while the intent behind
introducing a more integrated carbon market in India is laudable, the systems need to be tailored in a
manner that limits the administrative burden on obligated and non-obligated entities. If the
government intends to allow the convergence of the ICM with the carbon market under Article 6 of
the Paris Agreement as well as the international voluntary carbon market, it must foster a framework
that permits fungibility and easy participation. Carbon markets hold immense potential in aiding India
in its green transition – hence there is a need to enable the flow of foreign investment into the country
by permitting international trading rather than limiting ICM to domestic finance.
Coordination among various stakeholders, including obligated and non-obligated entities, technical
committees, and power exchanges, will be crucial for the effective functioning of the ICM. Ensuring
market stability, preventing fraud or mistrust, and continuously aligning the emission intensity targets
with national goals are ongoing challenges that need to be addressed.
Overall, with proper implementation, stakeholder coordination, and addressing the identified
challenges, the Indian Carbon Market has the potential to be an effective mechanism for reducing
carbon emissions and contributing to global climate change mitigation efforts.

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