Indian businesses should prepare for a national carbon market, as the recently passed Energy Conservation (Amendment) Bill, 2022, lays the foundation for this. The Bureau of Energy Efficiency (BEE) is developing a framework to roll out Perform Achieve and Trade (PAT) and Renewable Energy Certificates (REC) schemes into the market while creating avenues for voluntary participation. The BEE’s proposal states that “designated consumers” under PAT will transition from energy efficiency to emission-reduction targets from 2024. This will allow businesses to meet their mandated targets beyond energy efficiency and provide regulated entities with clear price signals to help them plan carbon-lowering investments and make better decisions.
A market can provide regulated entities with clear price signals to help them plan carbon-lowering investments and make better decisions. The BEE’s proposal to include additional sectors in a voluntary offset market could further reduce the overall cost of compliance by potentially including cost-effective reduction options. However, the EU’s carbon border adjustment mechanism (CBAM) will impose import duties on emission-intensive industries at the EU’s ETS carbon price, which could impact India’s iron and steel and aluminium industries, which accounted for 10.4% of exports in 2020.
Drawing on the experience of carbon trading systems around the world, here are four preparatory steps that Indian companies could take: measure emissions, assess reduction options, use an internal carbon price, and build capacity across departments. Businesses participating in a carbon market must implement process and technology interventions to meet compliance targets through internal reductions. They must also make decisions on carbon trading participation by buying or selling emission-reduction units outside the company to meet their targets or monetising internal reductions that exceed their targets.
As such decisions have operational and financial implications, carbon market participation will require the involvement of companies’ sustainability personnel and financial and operational departments. They must strive to reduce emissions through internal strategies across all relevant departments and use the data to formulate broader compliance strategies. To obtain optimal gains from a carbon market, businesses must develop good trading strategies. This would include making informed bids based on their internal marginal cost of abatement, expected reduction by the end of the compliance period, expectations on current and future market-price trends and other relevant factors.
Indian industry is estimated to account for about a quarter of India’s total annual greenhouse gas emissions (including fuel-use and process emissions). Therefore, Indian companies must prepare for the upcoming domestic carbon market to reduce their regulatory business risks in global markets, stay competitive in the years ahead, and play an important role in meeting India’s climate commitments.
