Export of carbon credits can make India's emissions reduction more expensive

VCMs comprise trading in carbon credits by entities of their own volition to meet their internal emissions reduction targets.

The survey noted that there is uncertainty regarding accounting standards when credits are sold internationally and then redeemed by a foreign entity. It is not clear if such credits can simultaneously be claimed by the country where they were generated for their emission reduction target, it noted.

“If this is not, then with India’s ambitious NDC and net zero announcement, carbon credits sold to foreign entities will make India’s emissions reduction more expensive and difficult," the survey noted. NDC stands for nationally determined contributions, which are commitments made by countries to reduce their greenhouse gas emissions.

Avoiding double counting

Articles 6.2 and 6.4 of the Paris Agreement of 2015, which are yet to be implemented, lay out the guidelines for voluntary bilateral trade of carbon credits between countries. They propose adjustment of credits by the nation of origin to avoid double counting.

“The principles are clear, there cannot be double counting. Otherwise, it defeats the purpose," said Deepto Roy, partner at law firm Shardul Amarchand Mangaldas & Co.

What this means is that when an Indian entity sells carbon credits accrued by it to a foreign entity, the benefits of such credits will accrue to the ledger of the foreign country and not India. 

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So, even as the Indian government incentivizes investments in renewable energy and low-emission technologies through tax breaks and subsidies, the benefits of the carbon credits thus generated could accrue to other nations.

To be sure, the entity selling the credits will benefit from the fee it receives from the buyer.

Trading of credits in the international VCM by Indian entities is taking off, led by the export of international renewable energy certificates (I-REC). About 7.8 million I-RECs were issued in India in 2023 of which 4.5 million were redeemed, according to Evident I-REC registry data published by S&P Global in a recent report.

I-RECs are tradeable commodities that certify that the holder owns a unit of electricity generated from a renewable source. One I-REC is equivalent to one megawatt-hour (MWh) of renewable energy.

International buyers of I-RECs can redeem the instruments to add the carbon emissions mitigated while generating the clean energy into their emissions tally. 

Helping cut emissions

The Economic Survey noted that the effectiveness of the carbon market in helping cut emissions in India will depend only when regulated in the context of India’s pledge to become a net zero emitter of carbon by 2070.

While a compliance-based domestic carbon trading market is essential to ensure that the industry internalizes the emission costs into its production and investment decisions, the Economic Survey observed that India “may not subsidise the transition of other countries".

Roy said the reason we have carbon credits being traded overseas in the VCM today is because India doesn’t yet have a domestic compliance-based carbon market. Implementation of such a market, as outlined by the government's carbon credit trading scheme (CCTS), could help incentivize local trading of the credits.

Moreover, multinational companies buying these credits in the voluntary market may also explore redeeming them through their Indian subsidiaries rather than at their overseas headquarters, he said.

“If India creates a domestic compliance regime and starts discouraging the sale of credits in international voluntary carbon markets, these companies may conceivably redeem those credits in India to meet their internal company-wide targets while retaining the benefits of those credits in India," Roy said.