Carbon Accountability: Assessing the feasibility of credit trading in India

By Professor Siddartha Ramakanth Keshavadasu, Centre for Energy Studies, Administrative Staff College of India

The Government of India notified the National Designated Authority for the Implementation of the Paris Ag­reement (NDAIAPA) on May 30, 2022, vide gazette order. The national designated authority  is responsible for taking de­cisions regarding the eligibility of projects that can participate in the international carbon market under Article 6 of the Paris pact. This comes as Article 6, whi­ch fo­cuses on carbon trading throu­gh bilateral/cooperative approaches and international market mechanisms, nears com­p­le­tion. The country has ta­ken steps mandated by the host par­ty/co­untry to fulfil its obligations under the NDAIAPA.

In the same year, the government passed an amendment to the Energy Conser­va­tion Act, 2001, which lays the foundation for the Indian carbon market. The am­endment gives the government the au­thority to develop a carbon credit trading scheme. Although neither the pri­ncipal act nor the amendment act provides a specific definition for carbon cre­dit, it generally refers to a tradeable permit that lets the holder emit a certain quantity of carbon dioxide or other gr­eenhouse gases. Carbon credit certifica­tes may be issued by the government or any authorised agency to registered en­tities that take part in the carbon credit trading scheme. The amendment de­fi­nes a “registered entity” as any entity, including designated consumers, registered under the Carbon Credit Trading Scheme. The objective of the scheme is to reduce greenhouse gas emissions and, thereby, address climate change. The amendment act allows anyone oth­er than the designated consumer to pur­ch­ase a carbon credit certificate. It is important to note that the scheme has not yet been notified by the central government. Additionally, this scheme is not the first trading scheme under the Energy Conservation Act.

Think tanks such as the Council on En­ergy, Environment and Water (CEEW) have commissioned studies on the Indian carbon market. CEEW published “Understanding Carbon Markets: Pros­pe­cts” for India and Stakeholder Pers­pec­tives, which talks about two key typologies of carbon markets – project-ba­sed/offset and the emission trading sc­heme. It outlines the key features that determine their environmental integrity and functional boundaries.

Against this backdrop, this article pri­ma­rily focuses on the much-discussed Carbon Border Adjustment Mechanism (CBAM). The European Union (EU) is one of the organisations that have consistently been at the forefront of global efforts to tackle climate change. Given India’s growing role in the global arena, especially its influence on geopolitics, it is crucial to evaluate and discuss the relevance of the proposed Carbon Credit Trading System by the Indian government for the domestic market.

The CBAM is a policy tool that tackles the issue of carbon leakage and ensures a level playing field for businesses that operate within the EU. The fundamental concept is to ensure that imports into the EU are subject to the same carbon pricing mechanism as domestic production. This approach aims to prevent companies from relocating to countries with weaker environmental regulations. This would help incentivise businesses to reduce their carbon emissions, thereby promoting global action against climate change.

However, there are valid criticisms re­garding the CBAM. One concern is that it could be seen as a form of protectionism and potentially violate rules set by the World Trade Organization (WTO). More­over, the mechanism could have a disproportionate impact on developing countries that may not have the resour­ces to implement their own carbon pricing mechanisms and create administrative issues for businesses that export to the EU.

Meanwhile, supporters argue that the CBAM would promote an equal playing field in terms of carbon emissions be­cau­se imports into the EU would be subject to the same carbon pricing mechanisms as domestic production. It would also help to avoid the problem of “carbon leakage”, wherein companies move production to countries with weaker environmental regulations. Ad­di­tionally, it would enable other countries to implement their own carbon pricing mechanisms and help drive glo­bal action against climate chan­ge. How­ever, there are concerns regarding the potential violation of WTO rules which could lead to legal challenges and trade dis­putes. Some examples of the argu­me­nts in favour of and against the CBAM are as follows…

Arguments for the CBAM

Carbon leakage

One of the main supporting arguments for the CBAM is that it can help prevent “carbon leakage”, where companies mo­ve production to countries with weaker environmental regulations. For example, if the EU were to implement a carb­on pricing mechanism, companies may choose to relocate to countries outside the EU that do not have such regulations. By implementing the CBAM, the EU could ensure that imports from these countries are subject to the same carbon pricing mechanism as domestic production, thus avoiding the problem of carbon leakage.

Level playing field

Another argument is that the CBAM can help create a level playing field for businesses. If some companies are subject to carbon pricing mechanisms and others are not, it would be unfair. By impleme­nting the CBAM, the EU can ensure that all companies are subject to the same rules.

Global action against climate change

Supporters of the CBAM also argue that it can play a vital role in driving global action against climate change. By enabl­ing other countries to implement their own carbon pricing mechanisms, the CBAM can help spur international cooperation on this issue.

Arguments against the CBAM

Violating WTO rules

One of the main arguments against the CBAM is that it could violate regulations set by the WTO. For example, the CBAM could be seen as a form of protectionism, which is generally prohibited under the WTO rules. If other countries were to challenge the CBAM in a WTO dispute, it could lead to a prolonged and costly legal battle for the EU.

Disproportionate impact on developing countries

The CBAM could have a disproportionate impact on developing countries. If the developing countries are unable to im­p­lement their own carbon pricing mechanisms, they could be subject to higher tariffs under the CBAM. This could create a trade barrier and hinder economic development in these countries.

Complex administrative burdens

Finally, there are concerns that the CBAM could be extremely complex and difficult to administer. It would require accurate reporting and measurements of carbon emissions of imported goods, which could be challenging. Additiona­lly, the CBAM could create a significant administrative burden for businesses that export to the EU, which could be particularly difficult for small- and medium-size enterprises.

Nevertheless, the CBAM is an important proposal that warrants thorough consideration. We need to find ways to ad­d­ress the pressing issue of climate ch­an­ge, and the CBAM could be a way to do so. Of course, we need to ensure that it is implemented in a way that is fair and equitable for all and that it does not create unintended consequences or negative impacts. And, with the right appr­o­ach, the CBAM could prove to be an eff­ective policy tool for addressing the problem of climate change.

The way forward

As to whether the CBAM can be effectively implemented, that remains to be seen. It will certainly be a complex undertaking, and there will be many challenges to overcome. However, I’m optimistic that with the right approach and sufficient resources, it can be achieved.

India is not part of the EU, and therefore, not directly affected by the proposed CBAM. However, it is a major exporter of goods to the region, and the CBAM could have significant implications for these businesses.

If India were to implement a similar policy, it should carefully consider the potential impacts on both domestic businesses and those that export to other countries. Some ways that India could implement a CBAM-like policy include

  • Implementing a carbon pricing me­cha­nism: India could implement its own domestic carbon pricing me­chanism, similar to the one proposed by the EU. This would help to incentivise businesses to reduce carbon emissions while also ensuring a level playing field for domestic businesses subject to the same regulations as those that export to the EU.
  • Developing a CBAM: India could consider implementing a CBAM, similar to the one proposed by the EU. This would involve imposing a carbon tax on imports based on the carbon emissions associated with the production of imported goods. The revenue generated from this programme could be used to support domestic efforts to reduce carbon emissions.

If the country were to implement a CBAM-like policy, it would need to consider ways to address the concerns raised by critics of the EU’s proposed CBAM. For example, India could consider exempting developing countries from this policy or providing financial assistance to help these countries implement their own carbon pricing mechanisms.

Overall, any policy aimed at reducing ca­r­bon emissions and addressing climate change must be carefully desig­n­ed and implemented to avoid uninten­ded consequences or negative impacts on businesses or the economy. More­ov­er, engaging in international dialogue and cooperation is crucial to ensure that policies are harmonised and global action against climate ch­an­ge is achieved.