This article is written by Abha Singhal and Arnav Srivastava, 2nd- Year B.A. LL.B. (Hons) Students, Rajiv Gandhi National University of Law, Punjab.
As the fight against climate change gains momentum, nations around the world are doing everything in their power to boost renewable energy production, establish domestic carbon markets, implement cutting-edge concepts like carbon trading, and mandate the use of non-fossil fuels to speed up the decarbonization process and advance sustainable development objectives.
Keeping in mind the much-needed development in the sphere of climate change and energy conservation, the Indian government, in December 2022, amended the Energy Conservation Act 2001 (Act) to improve energy efficiency and suggested a carbon credit trading system through which major energy consumers will be required to make sure that some of their energy needs are satisfied by renewable energy sources.
The Act was enacted with the legislative intent to regulate energy consumption and foster energy efficiency and energy conservation. The original intent was that industries consume less fossil-based energy while achieving greater efficiency. The Energy Conservation (Amendment) Act, 2022 (Amendment Act), essentially adds industrial facilities, buildings, vehicles, and vessels that have a significant volume of energy transmission or consumption. The amendment places a strong emphasis on promoting renewable energy while simultaneously capping industrial and agricultural carbon emissions and consumption.
The authors of this article have tried to thoroughly analyse the carbon credit trading scheme brought about by the recent amendment to the Act. Through this article, the authors will try to make the reader aware of the applicability of the said provisions and the scope of regulating the same.
CARBON CREDITS AND CARBON CREDIT TRADING
What is a carbon credit?
A carbon credit, or an offset, essentially, is a permit that showcases one credit equivalent to the removal of one ton of Carbon Dioxide from the atmosphere. It is a sanction that allows an individual, or a company to emit a certain level of greenhouse gases. These can be obtained through lowering emissions for a specific activity or by developing carbon sinks, like forestry. An organization that emits more carbon dioxide than what is allowed may purchase carbon credits. Businesses around the globe, effectively invest in initiatives that lower greenhouse gas emissions by buying carbon credits.
Carbon Credits in India
In the past, India has invested in the creation of carbon credits and their export to foreign businesses. 35.94 million carbon credits, or roughly 17% of all voluntary carbon market credits issued globally between 2010 and June 2022, were issued by India. By 2030, it is estimated to be $100 billion. India has a significant capacity for increasing the quality and quantity of carbon credits through efforts that have significant socio-economic shared benefits. Carbon markets are anticipated to restrict the growth of fossil fuel generation capacity while opening up new revenue opportunities for companies that produce, market, and consult carbon credits. The purpose of carbon credits is to promote economic growth while maintaining the nation’s carbon reduction goals in context.
CRITIQUE OF CARBON CREDIT TRADING UNDER THE AMENDMENT
Carbon Trading Under Perform Achieve Trade (Pat) Scheme
The Carbon Credit Trading brought about by this Amendment Act is not necessarily a novel concept introduced to conserve energy in India. Earlier, in 2012, the National Mission for Enhanced Energy Efficiency launched the Perform Achieve Trade (PAT) Scheme as a market-based compliance mechanism to speed up improvements in energy efficiency as well. Energy Saving Certificates (ESCerts) were introduced under the Act as a marketable asset created from the energy savings realized by notified enterprises under the PAT Scheme. Now the amendment has added carbon credit as well which would lead to the inclusion of the same activities under different heads. For instance, a power-producing company can obtain a renewable energy certificate if it generates renewable energy. It may also be lowering carbon emissions by creating renewable energy, making it eligible to get carbon credits. All energy-saving methods could also be considered carbon emission reduction strategies because they lower the amount of energy production required, which in turn lowers carbon emissions.
Other drawbacks of the Act
The definition and scope of carbon credit trading have not been defined anywhere under the Principal act or the amendment. Additionally, the amendment takes into account the representation of only five Indian states, which is mentioned under Section 4 (o) of the amendment act, for their views and opinions, and that would mean a majority of the Indian states are being left out of one of the most crucial processes which could hamper the implementation of this scheme.
Additionally, the amendment raises one crucial aspect of whether the Ministry of Power is competent enough to implement the carbon credit trading scheme in India. It is so because as per the Government of India (Allocation of Business) Rules, 1961, the Ministry of Power is in charge of general power sector policy, issues relating to energy policy and coordination, and power sector-specific energy conservation and energy efficiency. In India, the energy industry is the main source of greenhouse gas emissions. However, the scope of carbon credit trading may extend beyond the energy industry. Agriculture (14%) and industrial operations (8%), for example, contribute significantly to greenhouse gas emissions. The primary industry offering a net carbon sink, that is, one that absorbs greenhouse emissions, is the land use, land-use change, and forestry sector. Moreover, the said amendment does not specify the regulating body that will issue the trading certificates or will regulate the trading process altogether. For instance, electricity trading is regulated by the Central Electricity Regulatory Commission in India. Similarly, we need an independent body for carbon credit trading as well.
CARBON CREDIT AND ITS FAILURE IN AUSTRALIA
The concept of carbon credit trading is similar to the model of the cap-and-trade market, employed in countries like the UK and Australia. In this, the government allows a certain limit of emissions of these greenhouse gases on the purchase of a carbon credit. For instance, if a steel company exceeds the prescribed emissions limit, it either has to buy or use the reserved credits to fall under the emission cap. The value of these reserved credits declines over time and an entity can sell its excess credit to another entity. While on the surface level, the emission level might be under control, however, these credits may simply act as set-offs qualifying these corporations to claim they are eco-friendly without reducing overall emissions. For instance, there can be entities as well as individuals, that continue to emit greenhouse gases but those emissions are merely offset elsewhere. While this may lead to a net zero carbon footprint, however, it is tough to argue that a tree planting operation in another province or country has reduced the carbon produced by your vehicle.
Another issue with this scheme is that these carbon credits can be bought by companies for projects which would have happened anyway. For instance, a 2016 study for the European Commission into UN-sanctioned offset projects found that more than three-quarters of projects were unlikely to have resulted in additional emissions reductions, which meant that the majority of these projects would have proceeded anyways, without the offset of money. While entities involved in such activities of purchasing carbon credits without actual reduction make profit in their business, however, such activities severely hamper the integrity and credibility of the scheme, as it does not result in the value reduction of emission which was the primary aim of granting these carbon credits.
Based on the above study, Australian companies have also severely criticized the carbon credit model stating that certain landfill gas industries have received these carbon credits to eliminate methane, which they would have done anyways under the State Laws. Similarly, in Indian markets, these low-integrity carbon credits can be bought by other entities, including big fossil fuel companies, to equalize their emissions. Hence, these industries that were already a major contributor to greenhouse gases, may keep on polluting without emissions cut happening elsewhere in the economy. Therefore, there is an urgent need to change the way these credits are calculated and traded. The amendment is silent on how this issue would be dealt with, considering the diversity of Indian Markets in the Energy Sector.
CONCLUSION AND WAY FORWARD
To promote sustainable development and faster decarbonization, the government of India introduced the Amendment Act which brought Carbon Credit Trading into view intending to reduce Carbon Dioxide emissions in the country. While the majority of the members of parliament supported this act, due to a lack of clarity on many fronts such as the scope and definition of carbon credit trading, the question of whether it should come under the ambit of the Ministry of Power, lack of representation of states, and the lack of proper regulatory body have raised concern in the minds of many. The next step should be to bring about these much-needed changes and to train industry experts on the operational part to ensure the success of this initiative and to institutionalize it properly to cater to the needs of the Indian Ecosystem.