India is a signatory to the Paris Agreement, 2015, and has committed to reducing its emissions intensity by 45% before 2030, using 2005 figures as a baseline. Emission intensity is the amount of greenhouse gas (GHG) emitted for every unit of gross domestic product.
In a bid to meet this target, the government has launched the Carbon Credit Trading Scheme, 2023 (CCTS) under the Energy Conservation Act, 2001. Carbon credit trading works on a cap-and-trade basis in which polluters pay for their greenhouse gas emissions exceeding a certain cap by purchasing carbon credits at a price determined on a trading platform. The CCTS is being implemented in phases and is expected to be fully operational by the financial year 2025-26.
Entities in energy-intensive industrial sectors (obligated entities) are required to trade under the CCTS, while other entities (non-obligated entities) are encouraged to do so under a voluntary trading mechanism (offset mechanism). According to the Detailed Procedure for Compliance Mechanism released under the CCTS in 2024, obligated entities must achieve the notified GHG emission intensity targets and monitor, report and verify their emissions annually. Accredited carbon verification agencies will review such returns.
Once the verification agencies and the authorities have duly verified the required submissions, the carbon credit certificates will be issued to obligated entities for them to trade. A single carbon credit represents the removal of one ton of carbon dioxide equivalent from the atmosphere. Carbon credit certificates will be traded on power exchanges registered with the Central Electricity Regulatory Commission for this purpose.
The CCTS can be seen as a positive step towards decarbonisation because it sets out a comprehensive framework for carbon credit trading, formulates clear calculations of emissions and establishes a transparent reporting and verification framework overseen by accredited verification agencies. To ensure conformity, the government has also released detailed accreditation procedures and eligibility standards for verification agencies. The CCTS provides an additional check that requires the obligated entity and the verification agency to explain any inconsistencies or misrepresentations, ensuring they comply with the prescribed standards. This defined and regulated framework will dissuade companies from resorting to greenwashing and build investor confidence in the Indian carbon market.
The multi-layered check and balance system offers assurance to private equity (PE) investors who are increasingly looking for environmental, social and governance (ESG)-conscious investments. Accordingly, the reports from verification agencies could become a requisite for due diligence by PE investors.
While the government has not yet released a detailed procedure for the offset mechanism, it has approved a list of sectors, including the energy, transport and agriculture industries. This will provide significant incentives to firms engaged in these sectors to take part in carbon credit trading. The government has also set in motion its plans to sell carbon credits earned by the Food Corporation of India (FCI).
The FCI has incorporated technology into its supply chain to reduce GHG emissions released during logistics and transport operations. This shows the government’s commitment to developing a functioning carbon trading market and serves as an example for non-obligated entities looking to take part in carbon credit trading.
The renewable energy and electric vehicle sectors have seen increasing PE participation in recent years. The sale of carbon credits may create additional revenue streams for them. However, it remains to be seen how the procedure for the offset mechanism will work in practice.
In addition, while the functioning of the carbon trading framework has been set out in theory, key metrics, such as sector-specific determinations of emission caps, pricing of carbon credits, possible auctioning of emission allowances and detailed procedures for the offset mechanism, are still awaited.
The CCTS is expected to boost investment in green technologies and sustainable agriculture, aligning with India’s need as a developing country to encourage voluntary decarbonisation. However, effective implementation will be the key to achieving net neutrality.
Vandana Pai is a partner and head of the investment funds practice and Heer Kamdar is an associate at Bharucha & Partners.
