UK Recognizes India’s Carbon Credit Trading Scheme Under CBAM
Source: The Hindu
GS III: Environment and Ecology, Effects of Globalization on the Indian Economy
Overview
- The UK has recognized India’s Carbon Credit Trading Scheme (CCTS) for carbon price relief under its CBAM, helping eligible Indian exporters avoid double carbon pricing.
- The CCTS aims to develop the Indian Carbon Market (ICM) through compliance and offset mechanisms, creating incentives for industries and other entities to reduce greenhouse gas emissions.
- Carbon border mechanisms are making the carbon intensity of production an increasingly important factor in international trade and export competitiveness.
- While the development can promote green industrialization, investment and export competitiveness, India must strengthen carbon accounting, MRV systems and domestic carbon market credibility to address compliance challenges and concerns over green protectionism.
Why in the News?
The United Kingdom has recognized India’s Carbon Credit Trading Scheme (CCTS) as a qualifying overseas carbon pricing mechanism for carbon price relief under the UK’s Carbon Border Adjustment Mechanism (CBAM).
News in Brief
- The UK has included India’s Carbon Credit Trading Scheme (CCTS) in its list of Qualifying Carbon Pricing Schemes (QCPS) for carbon price relief under the UK CBAM.
- The UK CBAM will come into effect from January 202 and aims to ensure that imported carbon-intensive goods face a carbon price comparable to that paid by domestic UK producers.
- The mechanism currently covers aluminium, cement, fertilizer, hydrogen, and iron and steel,
- Recognition of India’s CCTS can help prevent double carbon pricing, as eligible carbon prices paid in India may be considered while determining the UK CBAM liability.
India’s Carbon Credit Trading Scheme (CCTS)
- India’s Carbon Credit Trading Scheme (CCTS) is intended to develop the Indian Carbon Market (ICM) and create a market-based framework for reducing greenhouse gas emissions.
- Under the scheme, eligible entities can earn Carbon Credit Certificates (CCCs) for reducing their greenhouse gas emissions or improving their emission performance.
- These certificates can subsequently be traded within the prescribed carbon market framework.
Key Features
- The scheme is implemented within the institutional framework of the Ministry of Power and the Bureau of Energy Efficiency (BEE).
- It seeks to introduce a market-based approach for reducing greenhouse gas emissions.
- The CCTS broadly includes a compliance mechanism and an Offset Mechanism.
- Under the compliance mechanism, identified energy-intensive entities are assigned greenhouse gas emission intensity targets.
- Better performance in reducing emission intensity can make entities eligible for carbon credits under the prescribed framework.
- The offset mechanism enables non-obligated entities to voluntarily undertake projects that reduce, remove or avoid emissions.
- Such activities may include projects in areas such as energy, industry, agriculture, forestry, waste management and transport.
Legal Basis
- The development of India’s carbon market is linked to the Energy Conservation (Amendment) Act, 2022, which empowered the Central Government to establish a carbon credit trading framework.
- The Carbon Credit Trading Scheme was subsequently notified to establish the framework for the Indian Carbon Market (ICM).
Indian Carbon Market (ICM)
- The Indian Carbon Market is envisaged as a national market framework through which verified emission reductions can be translated into tradable carbon credits.
- The broader objective is to use market signals to encourage entities to reduce greenhouse gas emissions while supporting India’s climate commitments and industrial decarbonization.
- Institutional Framework
- National Steering Committee for Indian Carbon Market (NSC-ICM)- Provides overall oversight and guidance. It is co-chaired by the Secretaries of the Ministry of Power and MoEFCC.
- Bureau of Energy Efficiency (BEE)- Functions as the Administrator, responsible for implementing and developing procedures for the Indian Carbon Market.
- Grid Controller of India (Grid-India)- Functions as the Registry for issuing and maintaining records of carbon credit certificates.
Carbon Pricing
- It refers to assigning an economic cost to greenhouse gas emissions,
- This can take form of a carbon tax, emissions trading system or carbon credit mechanism.
What is a Carbon Border Adjustment Mechanism (CBAM)?
- A Carbon Border Adjustment Mechanism (CBAM) is a trade-related climate measure under which a country imposes a carbon-related charge on certain imported goods based on the emissions generated during their production,
- The idea is to ensure that imported products do not enjoy a cost advantage over domestic products simply because they were manufactured in countries where carbon emissions are subject to lower or no carbon pricing.
Objectives
- To prevent carbon leakage- Carbon-intensive industries may shift production to countries with weaker climate regulations to avoid higher carbon costs.
- This may reduce emissions in one country without reducing overall global emissions.
- To create a level playing field- Domestic industries facing carbon taxes or emission-related costs may become less competitive compared to imports.
- CBAM seeks to address this imbalance.
- To encourage cleaner production- Carbon-related trade measures can encourage producers and exporting countries to adopt cleaner technologies and reduce the emission intensity of their products.
However, such mechanisms also raise concerns among developing countries regarding trade protectionism, higher compliance costs and climate equity.
UK Carbon Border Adjustment Mechanism
- The UK CBAM is scheduled to come into force from 1 January 2027.
- It will cover carbon-intensive imports in sectors such as Aluminium, Cement, Fertilizer, Hydrogen, Iron and steel
- The mechanism aims to ensure that these imported products face a carbon cost broadly comparable to that faced by domestic producers in the UK.
International recognition of India’s evolving Carbon Market
- The UK’s recognition of India’s Carbon Credit Trading Scheme (CCTS) is significant for Indian exporters, especially those dealing in carbon-intensive products.
- Countries introducing carbon border mechanisms impose an additional cost based on the emissions associated with imported goods.
- In this context, recognizing India’s domestic carbon pricing mechanism can help ensure that eligible exporters are given credit for the carbon price already paid in India while determining their liability in the UK.
- This is important because it reduces the possibility of double carbon pricing.
- The move is particularly relevant for carbon-intensive sectors such as iron and steel, aluminium, cement, fertilizer and hydrogen, helping improve their competitiveness in the UK market.
- It also strengthens international confidence in India’s emerging carbon market and encourages industries to invest in cleaner technologies, energy efficiency and low-carbon production.
Opportunities for India
- Strengthening the Indian Carbon Market- International recognition can improve confidence in India’s carbon market framework and support its further development.
- Promoting Green Industrialization- The growing importance of carbon pricing can encourage industries to invest in renewable energy, energy efficiency, electrification, green hydrogen and other low-carbon technologies.
- Improving Export Competitiveness- A credible domestic carbon pricing framework can help Indian exporters adapt to emerging climate-related requirements in international markets.
- Attracting Green Investment- A well-functioning carbon market can create additional incentives for investments in projects and technologies that reduce greenhouse gas emissions.
- Supporting Climate Commitments- Market-based mechanisms such as carbon trading can complement government policies aimed at reducing the emission intensity of the Indian economy and supporting India’s broader climate goals.
Challenges and Concerns
- Accurate measurement of emissions- Calculating embedded carbon emissions across complex supply chains can be difficult.
- Higher compliance burden– Exporters may have to invest in carbon accounting, reporting and verification systems.
- Diverse international standards- Differences in carbon pricing mechanisms and emission calculation methods can create regulatory uncertainty.
- Risk of green protectionism- Developing countries are concerned that carbon border measures could become a new form of trade barrier.
- Need for credible carbon markets– India’s carbon market will require transparent monitoring, reporting and verification systems to gain wider international acceptance.
Way Forward and Conclusion
The UK’s recognition of India’s CCTS marks an important step in linking carbon markets, climate action and international trade.
Going forward, strengthening India’s carbon market and promoting low-carbon production will be crucial for manufacturing export competitiveness while supporting the country’s climate goals.
UPSC Prelims and Mains Practice Question
With reference to India’s Carbon Credit Trading Scheme (CCTS), consider the following statements:
- It seeks to facilitate the reduction, removal or avoidance of greenhouse gas emissions through the trading of carbon credit certificates.
- It forms part of the framework for developing the Indian Carbon Market.
- The UK has recognized India’s CCTS for carbon price relief under its Carbon Border Adjustment Mechanism.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (d)
Mains Practice Question
Q. Carbon border adjustment mechanisms are increasingly linking international trade with climate policy. Discuss (250 words)
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