Understanding Carbon Credits: The Basics and Beyond

A carbon credit refers to when there is effectively a permit to emit a pre-specified quantity of Carbon Dioxide (CO2) or other Greenhouse Gases (GHG) emissions. The concept of carbon credits has been introduced in pursuance of an international policy to control Greenhouse Gas (GHG) emissions in the environment. The term "carbon credit" refers to legally valid certificates that can be traded and can be granted the permit for emitting one ton of carbon dioxide or its equivalent.

Burning fossil fuels contributes significantly to industrial greenhouse gas emissions, particularly for the power, cement, steel, textile, and fertilizer sectors. Fossil fuels include coal, electricity produced from coal, natural gas, and oil. Carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), and others are the main greenhouse gases released by these industries. These gases all make the atmosphere more capable of trapping infrared energy, which has an impact on the climate. As the importance of reducing emissions became more widely recognized, the idea of carbon credits emerged.

Countries that have lowered their greenhouse gas emissions below their emission quota are given credits. At the current market price, carbon credits can be traded on the global market. It helps in forming a strategic mindset that can influence industrial and commercial houses towards low carbon emissions into the atmosphere and take advantage of carbon trading to sell their excess credits. Thus, the Greenhouse Gass (GHG) control mechanism gives birth to carbon trading that can successfully encourage carbon reduction schemes among different industries, and therefore, the concept of emitting carbon below the emission quota certainly helps many companies who are willing to sell excess carbon credits to commercial and individual customers. Industries can exchange, buy, or sell carbon credits in national and international markets at the prevailing market price.

Some of the major Carbon Credit traders in India

• Reliance Energy Ltd.
• Tata Motors Ltd.
• Tata Steels Ltd.
• Bajaj Fiserv Ltd.
• Tata Power Company Ltd.
• Grasim Industries Ltd.

Types of Carbon Market

By purchasing carbon credits, which are transparent, quantifiable, and results-based, businesses can support initiatives that keep the global climate goals within reach, such as restoring and protecting irrecoverable natural carbon sinks, like forests or marine ecosystems, and scaling up emerging carbon removal technology. There are two types of Carbon Market.

Voluntary Carbon Market

The voluntary carbon market enables private parties to buy and sell carbon credits representing the avoidance, reduction, or removal of GHGs from the atmosphere. Key market participants include project developers, who generate credits and issue them for sale; end purchasers — typically companies or other institutions seeking to offset their emissions; and various intermediaries such as brokers, traders, and retailers, which provide liquidity, distribution, and other services. Carbon markets are also supported and influenced by various standard-setting bodies and registries, which set minimum requirements for the creation and issuance of credits, as well as third parties who conduct related due diligence or auditing, either to support issuance or subsequent trading of credits.

Compliance Carbon Market

Compliance markets are made and regulated by mandatory international, national, or regional carbon management regimes. Most compliance markets today operate in accordance with the "cap-and-trade" principle, which is most common in the European Union (EU).

In accordance with the EU's emissions trading system (ETS), which went into effect in 2005, member nations set a cap or limit for emissions in a number of industries, including waste management, manufacturing, power, and oil. This cap is established in accordance with national climate goals and is gradually lowered to cut emissions.

Role of the Carbon Market

Carbon markets can play a crucial role in both complementing such efforts and accelerating the overall transition to a low-carbon economy. The role of the Carbon Market is -

• Enabling flexibility for when, where, and how emissions are reduced or removed can help lower the aggregate cost of reducing net emissions
• Driving capital toward existing and already scalable solutions, which may help to deliver near-term reductions or removals faster. By enabling carbon reduction and removal projects to access a wider pool of capital, carbon markets can facilitate more rapid deployment of proven solutions, which can drive down net emissions more quickly.
• Generating economic value for reducing or removing emissions can incentivize innovation with the potential to further accelerate decarbonization. By demonstrating the potential for future revenue, carbon markets can encourage investment to help speed up the development and deployment of new carbon reduction and removal technologies.
• Creating a range of potential environmental, social, and or economic co-benefits. Investing in projects via the purchase of carbon credits also provides opportunities for companies and investors to support other important objectives beyond carbon abatement, such as increased biodiversity, pollution reduction, job creation, community development, and enhanced resilience.

Overview of the Carbon Credit Trading Scheme, 2023

The "draft Green Credit Programme Implementation Rules, 2023" were introduced by the Ministry of Environment, Forests, and Climate Change on June 26, and two days later, on June 28, the Ministry of Power announced the Carbon Credit Trading Scheme, 2023. The scheme's implementation highlights the urgency of addressing climate change and the critical role that market-based mechanisms play in achieving emission reduction targets.

To address the issue of greenhouse gas (GHG) emissions and mitigate climate change in the nation, the Bureau of Energy Efficiency (BEE), an organization established by the Ministry of Power to raise awareness of and disseminate information on energy efficiency and conservation as well as help develop strategies and policies towards that end, has launched the Carbon Credit Trading Scheme.

Each ton of carbon dioxide equivalent (CO2) that is reduced or avoided is given a value known as a carbon credit by the Carbon Credit Trading Scheme. The framework of the nation's carbon market would allow for the sale, purchase, and trading of these credits.

Energy Conservation Bill 2001

The Energy Conservation Bill is an amendment to the law originally passed in 2001. Through the amendment’s addition of new clauses, parliament authorized the establishment of a domestic carbon credit trading scheme. The bill’s provisions will permit the generation of carbon credits by public and private sector entities in India with the aim of reducing emissions.

Latest Regulation on Carbon Credit Trading Scheme, 2023

India’s Carbon Credit Trading Scheme, 2023 (CCTS 2023) was notified by the Government of India on 28 June 2023 under the Energy Conservation Act, 2001, to develop the country’s first-ever domestic carbon market. The notification underlines the necessary framework and the roles of diverse stakeholders for the development and functioning of the Indian Carbon Market (ICM). The market will be driven by setting Greenhouse Gas (GHG) emission intensity reduction targets in line with India’s Nationally Determined Contributions (NDC) for selected entities to be obligated under CCTS 2023.

Below mentioned are the key stakeholders under ICM –

• The Bureau of Energy Efficiency (BEE) will be the administrator for the ICM and will be responsible for the development of the GHG emissions trajectory and the targets for the entities to be obligated under the notification.
• The Grid Controller of India Limited will be the designated agency for the maintenance of the ICM Registry and will register the obligated entities and maintain the record of the transactions among the obligated entities, among other functions.
• The trading of carbon credit certificates will be governed by the Central Electricity Regulatory Commission (CERC). They will safeguard the interests of the buyers and the sellers, decide on the frequency of trading, and take action to prevent fraud or mistrust. The CERC will register the power exchanges to trade the carbon credit certificates and decide on and notify the rules of trading periodically.

Regulatory Developments

• The Energy Conservation Amendment Bill 2022 - aims to offer India a legal framework for carbon trading.
• PIB Press Release on Proposed Amendments

• Private sector participation in climate action will be facilitated by additional incentives in the form of carbon credits against the adoption of clean technologies.
• Propose expansion of scope to larger residential buildings

• The Bureau of Energy Efficiency (BEE) has also released a blueprint for the national carbon market in India

Indian Carbon Market (ICM)

The government intends to create the Indian Carbon Market (ICM), where a national framework will be established with the goal of decarbonizing the Indian economy by putting a price on the emissions of greenhouse gases (GHGs) through the trading of Carbon credit certificates.

The Carbon Credit Trading Scheme is being made with the aim of the Ministry of Environment, Forest & Climate Change in accordance with the Bureau of Energy Efficiency, Ministry of Power. Since India already has a market mechanism based on energy savings, the new Carbon Credit Trading Scheme will strengthen efforts to transition to a more sustainable form of energy by expanding the focus to include all potential energy sectors in India.

For these sectors, benchmarks and targets for GHG emissions intensity will be developed, and they will be consistent with India's emissions trajectory under the terms of the Paris Agreement. Based on how these sectoral trajectories are performing, the trading of carbon credits will happen. Additionally, it is expected that a voluntary mechanism will be developed concurrently to encourage GHG reduction from non-obligated sectors.

Therefore, in order to operationalize the scheme, the ICM will specify the necessary validation, registration, verification, and issuance processes, as well as methods for the estimation of carbon emissions reductions and removals from various registered projects. Guidelines for the emissions scheme's Monitoring, Reporting, and Verification (MRV) will also be developed after consultation. The establishment of an extensive institutional and governance structure with clear roles for each party involved in the implementation of ICM is planned. All entities will have their capacities built up in order to gain new skills in the area.

Certificate for Carbon Credit Trading Scheme

Carbon credit certificates are earned by entities covered under the law by reducing emissions.

Steps to Obtain a Carbon Credit Trading Certificate are:

• Plan your project - You must plan to determine how your project will affect the climate. Then, compare it to the criteria established by the organization that certifies carbon credits.
• Approval of Project - Your project is now prepared for the certification organization's initial review after all estimates and evaluations. If everything goes according to your plans, you'll get the go-ahead.
• Validation from the third party - A third party will conduct an impartial evaluation of your project. To confirm that your project complies with their certification standards, this may involve a site visit.
• Final Review and Approval - Your project will be prepared for certification and will be given certified carbon credits following a successful validation. Following that, you can either use these credits to offset your own emissions or sell them via a carbon registry.
• Monitoring of Project - It doesn't stop there once your carbon credits have been certified. The monitoring strategy you created during project planning must be put into action. As a result, you must provide the organization that certifies carbon credits with monitoring project reports. To ensure that the credits you sell actually reduce or eliminate emissions, this is essential.

Challenges in Carbon Credit Trading

Both buyers and sellers of carbon credits may encounter some difficulties when participating in carbon markets. Carbon credits can be difficult, expensive, and risky for buyers to obtain and manage. They could run into problems like fluctuating prices, unclear regulations, problems with quality control, double dipping, or greenwashing, as discussed below:

Double-counting of GHG emission reductions

This happens when the same emission reduction is cited by multiple parties or by means of multiple systems. This could compromise carbon markets' credibility and environmental integrity.

Regulatory Uncertainty

Shifting regulations and policies in different countries impact the market, creating uncertainty for investors and businesses.

Green-washing

This is the practice of fabricating or misrepresenting an environmental commitment without actually reducing emissions or altering business practices by using carbon credits or offsets. Public trust may be damaged as a result, and resources may be diverted from more efficient climate action.

Climate projects' authenticity and high standards

Determining the degree of additionality, measurability, verifiability, permanence, and the prevention of emissions shifting presents a challenge in ensuring the credibility and authenticity of climate projects.

Price Volatility

Carbon credit prices can be volatile, making it difficult for businesses to plan long-term sustainability initiatives.

Benefits of the Carbon Credit Trading Scheme

Thus, India, being a developing nation, can benefit from carbon credit and its trading in the following ways:

Profitability

Firstly, money from carbon credits generated through carbon trading can profitably be used to create renewable energy projects.

Energy Saving

Secondly, energy-saving initiatives can also be taken by proper usage of carbon credits.

Employment Generation

Thirdly, the advantages of carbon credits can also be seen in terms of generating employment for the people by setting up industries that will engage in the manufacturing of renewable energy products.

Carbon Credit vs. Carbon Offsets

Carbon Credit

Carbon credit is a transferable financial instrument that can be purchased or sold by businesses and is recognized as representing a reduction in emissions by governments (or independent certification bodies).

Tradeable 'permits' to emit Carbon Dioxide

Governments & regulatory bodies create them to limit emissions by an industry or sector (mandatory cap-and-trade)

Companies can sell "unused credits" to other companies if their emissions are below their allotted level.

Carbon Credit creates a financial incentive for companies to reduce their emissions.

Carbon Offsets

A carbon offset is a reduction or removal of emissions of carbon dioxide (CO) or other greenhouse gases (GHG) to compensate for emissions made elsewhere.

These projects reduce or remove GHG from the atmosphere

These projects include planting trees, investing in renewable energy, improving energy efficiency, etc.

Carbon offsets are more readily available and are voluntary in nature.

When you buy a carbon offset, you're basically paying someone else to reduce emissions.

How can Corpbiz assist you?

Corpbiz is the platform that measures, tracks, assists in reducing, offsets, reports, and certifies so you can purchase carbon credits or participate in trading schemes without relying on an external source. We'll demonstrate how simple it is to organize your reduction strategy, use our simulator to set lower targets each year, and support projects that will offset the remaining emissions.