Establishing a carbon market

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In her Budget speech, the Finance Minister signalled that polluting industries, such as iron, steel, and aluminium, will have to conform to emission targets. “A road map for moving the ‘hard to abate’ industries from energy efficiency targets to emission targets will be formulated. Appropriate regulations for transition of these industries from the current ‘Perform, Achieve, and Trade’ (PAT) mode to the ‘Indian Carbon Market’ mode will be put in place,” she said.

PAT versus emissions trading

The Bureau of Energy Efficiency defines PAT as a “regulatory instrument to reduce specific energy consumption in energy-intensive industries, with an associated market based-mechanism to enhance the cost effectiveness through certification of excess energy saving which can be traded.” PAT is about meeting energy efficiency standards, which means for producing a certain output, there is an attempt to use no more than a prescribed amount of energy. So, a firm that produces more steel than another can use more fuel, but can still be more energy efficient. There is no restriction on the absolute energy used. Meeting these standards generates credits or certificates for successful firms, which they can trade.

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In contrast, emissions trading, often known as cap and trade, is a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Polluters are given emission caps. This is not based on relative standards such as energy-efficiency requirements, but on absolute standards, which are emission ceilings.

The Finance Minister’s announcement underlines the fact that even from the perspective of a developing country such as India, climate change is not about equity concerns alone, but also about searching for viable options to move away from excessive dependence on fossil fuel.

In the last 15 years, India has been trying to decarbonise various sectors to meet its multiple development prerogatives, including poverty alleviation and providing its population access to affordable and reliable energy. India joined the Clean Development Mechanism, one of the Kyoto Protocol’s ‘flexibility mechanisms’ allowing industrialised countries to undertake climate mitigation projects in developing countries through which they could earn certified emission reduction units which could be traded and used by them to meet their emission reduction targets. By 2011, India became the largest supplier of Certified Emission Reduction Units in the world after China. In pursuance of its National Mission for Enhanced Energy Efficiency (one of the eight missions comprising the National Action Plan on Climate Change), India launched PAT in 2012.

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India needs iron and steel for industrialisation, especially given the massive housing demand in urban centres with a rising population. Emissions from iron and steel production are big contributors to climate change. In the context of a Net Zero Emissions scenario by 2050, the International Energy Agency (IEA) says in a policy brief that the signs of the announced iron and steel projects meeting net zero emissions is very low.

Carbon market mode

In the international legal system, substantive obligations on climate change mitigation can be described as due diligence obligations or obligations of conduct. This means that states are obligated to exercise their best possible efforts to mitigate climate change. An example of a due diligence obligation is the nationally determined contributions (NDCs), at the heart of the Paris Agreement 2015.

It is legitimate that India re-arranges or improves upon its existing PAT scheme or devises its version of carbon market mode within the boundaries of its NDCs. India’s NDC consists of eight targets, two of which relate to the energy sector. The first is to reduce emissions intensity of its GDP by 45% below the 2005 levels by 2030. The second is to achieve about 50% cumulative electric power installed capacity from non-fossil fuel-based energy sources by 2030, subject to international finance and technology transfer.

Since India does not have binding greenhouse gases reduction targets compared to a baseline year in pursuance of its NDCs, it is likely that it will have its own version of the carbon market, different from the European Union Emissions Trading System (ETS). India has not taken a formal stand on ETS and has refused mandatory emission cuts. At this stage, ETS will be in conflict with India’s development priorities.

The 2021 draft blueprint presented by the Bureau of Energy Efficiency envisages two mechanisms: in the first phase, a voluntary market supported by a domestic project-based offset scheme (carbon offset mechanism); and in the second, a compliance market with mandatory participation for regulated entities (carbon credits trading mechanism). As per the IEA policy brief, “it will include updating emissions measurement methodologies to support the launch of a domestic carbon credits trading scheme from 2026, which will include the iron and steel sector, alongside other industry sectors such as petrochemicals, chemicals, and aluminium”.

India’s search for an appropriate policy tool towards establishing a carbon market of its choice shows that climate change debates cannot be built around equity alone; they also need to be located in the broader context of socioeconomic priorities.

Anwar Sadat teaches International Environmental Law at the Indian Society of International Law, New Delhi. Email: sadatshazia@gmail.com