Vishleshan for Regulatory Exams, 29th September 2025: The Carbon Rupee: Powering India’s Green Future

Staying updated on economic and regulatory issues is non-negotiable for exams like RBI, SEBI, or NABARD. Every topic matters. Every update can turn into a question. In today’s Vishleshan, we focus on ”The Carbon Rupee: A New Market to Fund India’s Green Ambition” This issue is timely. Its relevance is growing. And its impact is deeply linked with policy and regulation. Understanding it now will not just help in exams but also sharpen your perspective.

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The Carbon Rupee: A New Market to Fund India’s Green Ambition

Context: India is creating a new currency for climate action: the carbon credit. This article delves into the launch of the domestic carbon market, designed to fund the nation’s multi-billion-dollar green transition by making polluters pay.

Source: Business Standard

The article reports on India’s accelerated timeline to launch two critical carbon market mechanisms: the domestic Carbon Credit Trading Scheme (CCTS) by the end of October, and an international trading system under Article 6 of the Paris Agreement by January. This move aims to counterbalance India’s image as a fast-growing emitter by creating a framework to fund its ambitious climate goals, estimated to require $467 billion by 2030 for key sectors.

The CCTS will initially target several high-emitting sectors in a phased manner (first phase covering 282 units in aluminium, cement, chlor-alkali and pulp & paper; second phase covering steel, refineries, petrochemicals and textiles), with emissions targets announced through FY2027 and fresh targets to be set for FY28–30.

The government is notifying emission targets for high-emission industries in phases and setting up a new regulatory body, the National Designated Authority (NDA), to oversee both domestic and international carbon trading, including a new bilateral agreement with Japan (India’s first bilateral JCM with any country). However, challenges remain in creating an efficient market, setting the right price for carbon, and defining the role of financial players.

The World of Carbon Markets: Key Concepts

To understand India’s new scheme, it’s essential to grasp the fundamental concepts that underpin carbon trading globally.

What is a Carbon Credit?

A carbon credit is a tradable permit or certificate that represents the right to emit one tonne of carbon dioxide (CO₂) or its equivalent in other greenhouse gases (CO₂e).

• Origin: The concept originated from the Kyoto Protocol (1997), an international treaty that committed industrialised nations to limit and reduce their greenhouse gas (GHG) emissions. It created a market-based mechanism to help countries meet these targets cost-effectively. It continues under the Paris Agreement as a tool to mobilise finance and incentivise emissions reductions.
• The Core Idea: Think of it like a “permission slip” to pollute. A company or country that reduces its emissions below a set target earns credits. It can then sell these surplus credits to another entity that has exceeded its emission limit.

The Concept of Carbon Pricing:

Carbon pricing is an economic tool used to make polluters pay for their emissions. It shifts the burden of the damage caused by GHG emissions back to those responsible for them. The goal is to create a financial incentive for industries and individuals to reduce their carbon footprint. The two main forms are:

• Carbon Tax: A straightforward tax levied on the carbon content of fuels.
• Emissions Trading System (ETS) or Carbon Market: A market-based approach where a cap is set on total emissions, and entities can trade emission allowances (carbon credits) to comply. This is the model India is adopting.

What is a Carbon Market?

A carbon market is a trading system where carbon credits are bought and sold. It turns emission reductions into a tradable commodity.

How it Works:

• Cap: A government or regulatory body sets a limit or “cap” on the total amount of greenhouse gases that can be emitted by a specific group of polluters (e.g., factories, power plants).

• Allowances: The total cap is divided into allowances (carbon credits), which are then allocated or sold to the individual polluters.

• Trade: Companies that can reduce their emissions at a lower cost can sell their extra allowances to companies for whom reducing emissions is more expensive. This is the “trade” part of “cap-and-trade.”

Types of Carbon Markets:

• Compliance Markets: These are created as a result of a government’s regulatory policy (like the EU-ETS or India’s upcoming CCTS). Participation is mandatory for the entities covered by the regulation.

• Voluntary Markets: In these markets, individuals, companies, or organisations buy carbon credits to voluntarily offset their emissions for reasons like corporate social responsibility (CSR), branding, or environmental consciousness.

Impact of Carbon Trading:

• On Countries: It provides a flexible and cost-effective way to meet national climate targets (Nationally Determined Contributions or NDCs). It can also drive innovation in green technologies and attract green investment.
• On the World: It helps in achieving global climate goals by putting a price on carbon. However, its effectiveness depends on the integrity of the credits and the stringency of the emission caps. Poorly designed markets can lead to “greenwashing,” where credits don’t represent real emission reductions.

Article 6 of the Paris Agreement:

Article 6 is a crucial part of the Paris Agreement (2015) that provides a framework for countries to cooperate voluntarily to achieve their climate targets. It allows countries to transfer carbon credits earned from the reduction of GHG emissions to help one or more countries meet their climate targets.

• Article 6.2: Governs bilateral or plurilateral agreements where countries can trade emission reduction credits directly with each other. The India-Japan deal mentioned in the article is an example of this.
• Article 6.4: Establishes a centralised UN-supervised global carbon market, open to both public and private sector participation. This is a successor to the Kyoto Protocol’s Clean Development Mechanism (CDM).

Operationalising Article 6 was a major COP agenda item; recent COP work has produced guidelines that make international trading under the Paris framework more practicable and credible. The Article-6 machinery helps countries like India attract technology/finance via bilateral JCMs or the UN mechanism.

What is additionality?

Additionality means a project’s emissions reductions would not have occurred in a business-as-usual scenario without the revenue from credits. If credits are issued for non-additional actions, buyers are not actually reducing global emissions — they are just paying for claims. This is a critical integrity criterion and has been a major weakness in past crediting systems

India’s Carbon Credit Trading Scheme (CCTS)

The CCTS was created by the Energy Conservation (Amendment) Act, 2022, replacing/expanding the earlier PAT (Perform, Achieve and Trade) scheme which focused on energy efficiency and issued ESCerts. CCTS shifts the emphasis to GHG emission intensity and issues Carbon Credit Certificates (CCC) where 1 CCC = 1 tonne CO₂e reduced. The move is part of India’s updated NDC commitments and the push to build an Indian Carbon Market (ICM).

• Origin: The CCTS was officially notified in 2023 under the Energy Conservation (Amendment) Act, 2022. It is designed to create India’s first national Indian Carbon Market (ICM).
• Comparison with PAT Scheme: CCTS replaces the older Perform, Achieve, and Trade (PAT) scheme. The key difference is the focus:
  • PAT Scheme: Focused on energy efficiency. It incentivised industries to reduce their energy consumption per unit of production and issued Energy Saving Certificates (ESCerts).
  • CCTS: Shifts the focus directly to GHG emission intensity. It targets the reduction of emissions (measured in tonnes of CO₂ equivalent) and issues Carbon Credit Certificates (CCCs). This is a more direct and comprehensive approach to decarbonisation.

How CCTS Works:

1. Coverage: The scheme covers India’s most energy-intensive and high-emission sectors.
2. Targets: The government sets mandatory emission reduction targets for specific industrial units within these sectors.
3. Verification: A new body, the National Designated Authority (NDA), headed by the Environment Secretary, will oversee the process. Companies will submit their emission data, which will be verified by accredited agencies.
4. Credit Issuance: Companies that overachieve their targets (emit less than their allowance) will be issued Carbon Credit Certificates.
5. Trading: Companies that underachieve (emit more than their allowance) must buy these certificates from the market to meet their compliance obligations.
6. Penalty: Failure to comply will result in a penalty, which the article states could be equivalent to twice the value of the credits.
7. Registry: The Grid Controller of India will operate a registry to track the issuance, holding, transfer, and retirement of credits.

Progress So Far:

As the article highlights, the implementation is moving at a fast pace:

• Phase 1 Notified: Covers 282 units in the aluminium, cement, chlor-alkali, and pulp & paper sectors.
• Phase 2 by October: Will cover 253 steel plants, 21 refineries, 11 petchem units, and 173 textile units.
• NDA Established: The 21-member regulatory body was created in August. It is chaired by the environment secretary. The NDA will approve international Article-6 projects and oversee CCTS implementation.
• Verifier Appointment: The Bureau of Energy Efficiency (BEE) is in the process of appointing verifiers by December.

Decoding the Article: An Analysis

The article stresses that India is launching both a domestic compliance market (CCTS) and an international trading mechanism (Article 6) simultaneously.

• Why the urgency? To counter the negative perception of being the “world’s fastest-growing major emitter” and to secure the technology and finance needed for its ambitious climate targets. The figure of $467 billion needed by 2030 for just four sectors underscores the massive financial challenge.

Key Players and Processes:

• The NDA is the Lynchpin: This newly formed 21-member board is central to the entire framework. It will not only manage the domestic CCTS but also be the single-window authority for approving international projects under Article 6, like the Indo-Japan Joint Crediting Mechanism (JCM).
• Timeline is Aggressive: The process is moving quickly, from notifying targets and appointing verifiers in 2025 to issuing the first credits by late 2026. This reflects a strong political will.

The Unresolved Challenges:

Despite the rapid progress, the article points out several critical unanswered questions, which are the main challenges for the market’s success:

• Creating Scarcity and Price Stability: As analyst Subham Shrivastava notes, the success of the market depends on setting “tight enough” emission targets to create real demand for credits. If targets are too lenient, there will be an oversupply of credits, and their price will collapse, defeating the purpose.
• Price Discovery Mechanism: A major uncertainty is how the price of carbon credits will be determined. The article asks crucial questions: Will there be a floor price? How will a market stabilisation fund work to prevent volatility?
• Role of Financial Players: The decision to currently exclude traders and financial intermediaries is a significant one. As CEEW’s Vaibhav Chaturvedi points out, financial players are crucial for creating liquidity and depth in a market. Their absence could hamper the market’s efficiency.

The International Dimension: The Indo-Japan JCM

• A Bilateral Breakthrough: The agreement with Japan under Article 6.2 is India’s first and is progressing fast. This is vital for developers like Sanket Mantri of Bhumi, whose project of destroying harmful refrigerant gases is of great interest to developed nations.
• The Process: The article details the multi-step process for such projects: submitting plans to the NDA, getting them evaluated, developing detailed project designs, and finally getting credits allocated, which can then be used by both governments to meet their NDCs.
• Credit Sharing and Sales: A key detail is that the credits generated will be shared between Japan and India. Indian developers also get the right to sell their share of credits to domestic private players like Tata or Reliance once before they are retired.

India’s Market in Global Context

The article provides a useful price comparison:

• EU ETS: Over $70/tonne (the world’s most mature and expensive market).
• China’s ETS: ~$10/tonne.
• India’s CCTS (Projected): ~$15/tonne.

This suggests India is aiming for a price point that is more ambitious than China’s but still far below the EU’s, reflecting its status as a developing economy balancing growth with climate action.

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