Ensuring carbon-market’s success | The Financial Express
Written by ABC Audio ALL RIGHTS RESERVED on August 25, 2022
By Ashwini Hingne and Shubhangi Gupta
The Lok Sabha recently passed a Bill to set up a nationwide carbon trading market. Carbon trading is an important way to reduce the cost of cutting emissions. It creates a price for carbon that provides an incentive to invest in cleaner technologies. But the rules of the carbon market have to be designed in a way that it works efficiently, produces genuine environmental benefits, and safeguards the interests of vulnerable industries and consumers.
We conducted a carbon market simulation with 20 of India’s leading companies that set strong emission reduction targets and engaged in three rounds of voluntary carbon trading over the course of a year. This simulation revealed six key factors that will be critical.
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Common carbon currency: India already has two energy trading mechanisms—Perform Achieve Trade (PAT) for energy efficiency and Renewable Energy Certificates (REC) for renewable energy.
The new national carbon market should link with these existing market-based mechanisms and create one common carbon currency. Fragmented markets for clean energy, energy efficiency, and other ways of reducing emissions will only increase the transaction costs of carbon trading. Linking these markets will give companies more flexibility to meet their emission reduction targets by using the most efficient measures at their disposal. A common carbon currency will also improve the liquidity of the market making it more dynamic and responsive to demand and supply.
Diversity of sectors: The cost of reducing carbon varies significantly across sectors. To tap into low-cost emission reduction opportunities in India, the new carbon market should cover a wide set of sectors and not just the most energy-intensive sectors where emission reduction may be difficult and expensive. The carbon market should also be extended to include MSMEs, which have ample scope to adopt clean technologies but little finance to do so. For instance, under the UK’s Climate Change Agreements Scheme, the regulator inks umbrella emissions reduction deals with sectoral industry associations that then meet the target collectively.
Monitoring, reporting and verification (MRV) system: Robust MRV is important to ensure genuine emission cuts and avoid double counting. Emissions accounting practices are not consistent across companies. There are no standardised emissions factors or mandates on accounting and reporting procedures. To ensure the credibility and comparability of all participants’ data, and coherence with other markets, the carbon market must have standardised accounting and reporting guidelines with recommended emission factors and verification requirements. Transaction costs must be kept at a minimum by relying on traceable and easily monitored activity data.
Policies for innovation and competitiveness: A carbon market that incentivises deep decarbonisation beyond the low-hanging fruit will require complementary policies that spur innovation in new green technologies, support the building of the infrastructure needed to enhance uptake, and provide the financial support to make them viable. For example, the EU’s Energy Trading System allocates a share of auction proceeds to support innovation and the uptake of new clean technologies. It will also be important to identify vulnerable sectors and stakeholders, offer rebates and incentives to keep the cost of reduction affordable, and redistribute proceeds to ensure a just and equitable transition and avoid political pushback. For example, California’s cap-and-trade system uses its auction proceeds to electrify bus lines, extend train lines, provide purchase rebates for EVs, and provide exemptions or rebates to small businesses and low-income disadvantaged communities.
Long-term price signal: Creating stable and long-term demand in the carbon market is important to maintain a sustained price signal to spur investment. For this, it is important to communicate not only short-term entity-level sector-aligned targets but also a long-term emissions reduction target for the carbon market, along with policy measures such as penalties, incentives, and naming and shaming to drive compliance.
Stakeholder capacity building: In our simulation, companies with prior experience in GHG estimation and management made more effective trading decisions, but others were also able to build their capacity and improve their outcomes as they participated in more rounds of mock trading. Communicating the policy clearly and effectively, developing the market in consultation with all relevant stakeholders, and addressing sector-specific challenges is key for industry buy-in.
India has announced ambitious climate goals across sectors, including renewable energy, green hydrogen and electric vehicles, amongst others. A carbon market can be an effective economic policy in India’s toolkit to support the uptake of these new energy sources and technologies. The success of the market however will depend on robust design and thoughtful complementary policies.
Ashwini Hingne and Shubhangi Gupta, Researchers, World Resources Institute
With Varun Agarwal, researcher, World Resources Institute India
