Carbon regime is yet to kick in, but the voluntary market is buzzing already
Summary
- Even as India works on regulations for formal carbon credit trading market, voluntary trading has taken off led by international renewable energy certificates.
- Sellers include most independent power producers generating clean energy while buyers are MNCs, including Big 4 consultants and IT majors.
MUMBAI , NEW DELHI : Mumbai/New Delhi: The market for voluntary carbon trading is picking up in India, even before the planned rollout of an official mechanism to speed up the decarbonization journey. However, an abundance of carbon certificates due to the flurry of renewable energy projects has dampened their prices, experts said.
At the heart of this market are international renewable energy certificates (I-REC) accrued by the country’s fast-growing clean energy sector. Around two dozen renewable energy producers sell these certificates, while buyers include multinational corporations including Big 4 consultants and large technology companies, industry participants said.
“When I look at the domestic carbon credit market today it is mostly companies buying I-RECs. This is because everyone first wants to meet their energy transition targets and curb their scope-2 emissions," said Siddhanth Jayaram, co-founder at Climes, a firm that helps companies track and cut their emissions.
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Scope-2 emissions are the indirect greenhouse gas emissions of a company caused by the production of electricity that it consumes. Scope-1 emissions are the direct emissions caused during business operations.
One I-REC is equivalent to one megawatt-hour (MWh) of renewable energy. Buyers can redeem these certificates to add the carbon emissions mitigated by this clean energy into their emissions tally to meet their net-zero targets.
Issuances growth flat
About 7.8 million I-RECs were issued in India in 2023, according to Evident I-REC registry data published by S&P Global in a recent report. Year-on-year growth in issuances was flat in 2023, after a 119% growth in 2022.
Along with I-RECs, virtual power purchase agreements (VPPA) and carbon avoidance credits have also taken off, Jayaram said. VPPAs are contracts wherein the power producer supplies an agreed upon quantity of renewable energy to the grid and the buyer receives green credits for it. Carbon avoidance credits are certificates awarded for choosing business practices that reduce carbon emissions that would have otherwise occurred.
"Trading of I-RECs is largely done in the voluntary market. In the last three-four years, we have seen a massive demand for these certificates owing to the Scope-1 and 2 requirements," said Aditya Malpani, senior director for open access and regional business head - west at Ampin Energy Transition, a renewable energy company.
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India has emerged as one of the leading sellers of I-RECs thanks to rising renewable energy generation in the country. However, only 4.5 million of the I-RECs issued in India in 2023 were redeemed, resulting in an issuance to redemption ratio of 2.4 to 1, as per Evident data. Prices of India hydropower I-RECs subsequently dipped 7.9% month on month to around 70 cents ( ₹58, approx.) at the end of January, as per S&P Global Commodity Insights.
“Currently, the market size is small and only about 50 lakh certificates are traded in a year which accounts for about 400-500 MW of renewable power. These are largely in the short-term market. With long term I-RECs gaining momentum, we anticipate the market size of I-RECs to grow to 3-5 GW in the coming years," Malpani of Ampin Energy said.
Other forms of carbon offsets
Carbon offsets other than I-RECs are yet to take off in India, though there are some green shoots. Climes is planning agroforestry projects in 2,000 acres of degraded land in Andhra Pradesh, Telangana and Maharashtra to earn carbon credits. The company will supply local farmers with saplings and facilitate irrigation. Farmers will keep proceeds from the produce and get a share of the earnings from the sale of carbon credits generated from the project, Climes’ co-founder Jayaram said.
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The company expects to generate 500,000-600,000 credits from such projects over the next 3-4 years, he said. One credit is equivalent to one million tonne of carbon captured. These credits can then be sold for an over-the-counter price of $10-20 per credit ( ₹835-1,670), he said. The company expects to generate 10-12 million carbon credits from these projects over the coming two decades.
Regulation
India still does not have a compliance-based carbon credit regime where polluting industries are required to meet emission reduction targets. India's Perform, Achieve and Trade (PAT) scheme sets energy consumption reduction targets for certain energy-intensive industries compared to a baseline year. Excess energy savings beyond the targets yield Energy Savings Certificates (ESCerts), which can then be traded with companies missing their targets.
The government introduced the Carbon Credit Trading Scheme (CCTS) last year which will succeed PAT and set carbon emission reduction targets instead of lower energy consumption targets.
Presently, all transactions, including those of I-RECS, are in the voluntary carbon trading market.
“The voluntary carbon trading market has seen a sharp growth with a lot of foreign players looking to purchase high-integrity carbon offsets to meet their sustainability targets," said Deepto Roy, partner at law firm Shardul Amarchand Mangaldas & Co.
“Once regulations for domestic carbon credit trading are finalized, this market will become even bigger, more lucrative and competitive," Roy said.
