In July 2024, the Indian government adopted detailed regulations for the planned compliance carbon market under the Carbon Credit Trading Scheme (CCTS). These new regulations set out the key design elements of the compliance mechanism under the CCTS, marking a significant advancement in India's emerging carbon pricing framework. The Bureau of Energy Efficiency (BEE) published a draft version of the regulations in November 2023 and refined them through an extensive stakeholder consultation process.
Regulatory and institutional framework of the CCTS
The amended Energy Conservation Act, 2022 empowers the Indian government to establish a domestic carbon market and to authorize designated agencies to issue carbon credit certificates (CCCs). Each CCC will represent one tonne of CO2 equivalent (tCO2e) reduction or removal from the atmosphere.
The Ministry of Power (MoP) will oversee the regulatory framework of the CCTS, with the BEE acting as the designated administrator.
Key elements of the compliance mechanism
The planned compliance mechanism under the CCTS will take the form of an intensity-based ‘baseline-and-credit’ scheme, with mandatory GHG emissions intensity targets (defined as tonnes of CO2 equivalent per unit of output) set for obligated entities in each year.
The new compliance mechanism will gradually integrate the sectors currently covered by the existing Perform, Achieve and Trade (PAT) scheme – a mandatory energy efficiency scheme covering more than 1,000 entities from 13 energy-intensive sectors.
Scope and coverage
Initially, the compliance mechanism will cover entities from nine industrial sectors already regulated under the PAT scheme: aluminium, chloralkali processes, cement, fertiliser, iron and steel, pulp and paper, petrochemicals, petroleum refining, and textiles. The government plans to expand the scope at a later stage, notably to coal-fired power generation.
The CCTS will initially cover carbon dioxide (CO2) and perfluorocarbons (PFCs), with provisions to expand to other greenhouse gases in the future. The scheme will cover both direct (scope 1) and indirect (scope 2) emissions.
The BEE plans to develop a sectoral GHG emissions intensity trajectory for each covered sector up to 2030. This trajectory will be based on India’s Nationally Determined Contribution (NDC) commitments, available technology, and expected abatement costs in the respective sector.
Compliance and trading
The government will notify obligated entities with a mandatory emissions intensity target (baseline), defined as tons of CO2 equivalent per unit of output, for each year of the specified compliance period. Entities that overachieve their GHG emissions intensity target will be eligible for the issuance of CCCs, and entities that fall short of their target will be required to purchase and surrender an equivalent number of certificates to compensate for the shortfall. At the end of the compliance year, entities can bank any surplus certificates for future use or trade them with other participants.
The BEE will issue the CCCs, which will be traded through the country's power exchanges. Obligated entities will be required to register on a national registry, while non-obligated entities may do so if they wish to participate in trading. The scheme will not initially allow over-the-counter (OTC) trading.
Link to the voluntary offset mechanism and timeline
The compliance mechanism will be complemented by a voluntary domestic offset mechanism that will allow non-obligated entities to register eligible projects for GHG emissions reduction, removal, or avoidance against the baseline for the issuance of CCCs. This component of the CCTS aims to incentivise emission reductions in sectors outside of the compliance market and to increase market liquidity.
The BEE expects to release detailed regulations for the voluntary offset mechanism by the end of 2024, with CCC trading of voluntary offsets beginning in 2025. India aims to have the compliance carbon market fully operational by 2026, signalling its commitment to addressing climate change through market-based solutions.
