By Rita Roy Choudhury & Mukund Rajan

In the context of the Net Zero Carbon targets announced by countries (2070 for India) and corporates, carbon markets can be an important catalyst for the collective and individual action required to achieve the ambitious goals defined at the 26th Conference of Parties (COP26) to the United Nations Framework Convention on Climate Change in Glasgow last year. Further and discussions are expected at COP27 in Sharm-El-Sheikh in Egypt in November this year, around enabling market mechanisms under Article 6 of the Paris Climate Treaty, and financing for mitigation, adaptation, and resilience.

Private sector climate action can acquire momentum from robust market mechanisms that embrace scale, incentives, partnerships, and innovation. We believe a key role will be played by carbon markets in the drive for decarbonisation, incentivising emission reductions in the short-term and Net Zero transitions in the long-term. Already, according to the International Climate Action Partnership’s (ICAP) Status Report 2022 on Emissions Trading Worldwide, jurisdictions making up 55% of global GDP are using emissions trading, 17% of global greenhouse gas emissions are covered by an emission trading system (ETS), and eight countries, 19 provinces and states, one supranational (the EU), and six cities are implementing carbon markets.

Market mechanisms and the 4 Ds
India has had favourable experiences with market mechanisms. Over a decade earlier, the Clean Development Mechanism (CDM) under the Kyoto Protocol offered a primary carbon market for Indian participants, and later, the energy efficiency trading scheme Perform-Achieve-Trade and the Renewable Energy Certificate scheme have served as surrogate carbon markets. Lessons learnt from each of these can facilitate the creation of a robust national carbon market.

Key to the success of such a market mechanism will be four Ds—democratisation, decentralisation, demand generation, and data quality. While India is on the path to conceptualising a national carbon market, possibly in phases starting with a voluntary approach and moving to a compliance-based market, it would be important to integrate the four Ds in the framework.

Democratisation and decentralisation through the development of diverse mitigation outcomes that can be linked to a single carbon market can spur the deepening and widening of the carbon market in India. These can be catalysed through the widening of mitigation options, greater participation by MSMEs, and enhanced activity in geographically dispersed sectors, clusters, and regions.

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Mitigation outcomes should straddle opportunities across areas such as energy efficiency, renewable energy, wastewater treatment and reuse, modal shifts in transport, methane recovery and reuse, and afforestation and reforestation. The participation of MSMEs can be facilitated through a programmatic approach to aggregate and pool projects, creating economies of scale and facilitating better access to affordable finance and technologies. Greater inclusion and better regional distribution of mitigation action can be facilitated by locating projects in geographically dispersed sectors.

Accelerating demand through targeted communication and awareness campaigns for the adoption of climate-friendly and resource-efficient technologies, products, and appliances, and influencing consumer behaviour, will create shifts in purchasing choices of citizens as well as procurement decisions of corporate customers. This is amplified in the 10-year work programme adopted at COP26 to strengthen the implementation of Action for Climate Empowerment, which has the following elements: climate education and public awareness, training, public access to information, public participation, and international cooperation.

The fourth and most important D is data quality. Robust data inventorisation will aid effective reporting, monitoring, and verification of mitigation action. It will aid future policy direction through benchmarks on costs, benefits, and impacts of climate and sustainability-related action. China’s carbon market, as revealed by the ICAP report, in its recently completed first compliance cycle uncovered issues of data quality, including data fraud, leading the government to make improvement of data quality control the key task in its second compliance cycle.

A robust regulatory framework will need to underpin the 4Ds, to facilitate capacity building for market participants, government entities, and service providers such as verifiers and validators. From ensuring stability for participants and aligning the carbon market with the national Net Zero goal as the UK ETS provides, to encapsulating a just transition to Net Zero as the California ETS has done, India can learn lessons from other jurisdictions while it prepares to launch its national carbon market.

The way forward
Funds controlling more than $120 trillion have already signed up to the United Nations Principles for Responsible Investment, which emphasise environmental, social, and governance (ESG) requirements. ESG is becoming a major determinant of the flow of capital across markets, and for the channelling of climate finance. Leveraging this, discussions on carbon markets at COP27 must focus on greater transparency, efficiency, low transaction costs, broad coverage of sectors, greater regulatory certainty, and reward for innovation.

The establishment of a robust and efficiently functioning domestic market in India will be the precursor to participation in a more interconnected global market. This can spur new projects, while expanding the market for Indian carbon credits.

The authors are respectively, managing partner & chief executive, climate change & sustainability, and chairman, ECube Investment Advisors