The Ministry of Power (“MoP”), on March 27, 2023, released the draft Carbon Credit Trading Scheme (“Draft Scheme”) for stakeholders’ comments. The Draft Scheme is in pursuance of powers conferred upon the MoP under the Energy Conservation Act, 2001, as amended by Energy Conservation (Amendment) Act, 2022. Section 14(w) and Section 14AA empowers the central government to specify the carbon trading scheme in consultation with Bureau of Energy Efficiency (“BEE”).

The Draft Scheme focuses on creation of governance mechanism and specifies the constitution and role of various entities, aiming at decarbonization of the Indian economy by pricing the greenhouse gas emissions through trading of carbon credit certificates (“CCC”). The key aspects of the Draft Scheme are as follows:

Key Definitions: Following key definitions have been proposed under the Draft Scheme:

1. Accredited Carbon Verifier has been defined as an agency accredited by BEE to validate or verify the activities under the Draft Scheme.
2. CCC or Carbon Credit Certificate has been defined as certificate issued by the central government which represents reduction or removal of one ton of carbon dioxide equivalent.
3. Indian Carbon Market (“ICM”) has been defined as national framework with objective to decarbonize the Indian economy by pricing the greenhouse gas emission through trading of CCC.
4. Compliance mechanism has been defined as a mechanism for compliance with prescribed greenhouse gases norms by the entities who are registered under the Draft Scheme.
5. Voluntary mechanism has been defined as a mechanism for registration of projects by non-obligated entities for obtaining CCC.
6. Obligated entities have been defined as registered entities who are identified under the Draft Scheme and are required to comply with the prescribed emission norms.
7. Non-obligated entities have been defined as registered entities who are not are not mandatorily required to comply but may voluntarily register their projects voluntarily or purchase CCC.
8. Registered entity is defined as entity, including designated consumers, registered for and under the Draft Scheme.
9. Validation is defined as a process of evaluation under the voluntary mechanism by an accredited carbon verifier.
10. Verification is defined as a process of evaluation under voluntary and compliance mechanism for issuance of CCC.

The administrative framework envisaged under the Draft Scheme for implementation of ICM has been set out in brief below.

Administrative Framework:

Indian Carbon Market Governing Board (“ICMGB”) has been created for overseeing the regulatory and administrative functions of ICM. It is jointly headed by the Secretary, Ministry of Environment, Forest, and Climate Change (“MoEFCC”) and Secretary, MoP. Director General of BEE is designated as ex-officio member secretary. Additionally, following authorities shall also be a part of ICMGB:

1. Joint-secretary or above from Ministry of Finance, Niti Ayog, MoP, MoEFCC, Ministry of New and Renewable Energy, Ministry of Steel, Ministry of Coal, Ministry of Petroleum and Natural Gas, each;
2. Chairperson of Central Electricity Authority;
3. CMD of Grid Controller of India Limited; and
4. Any other member nominated by ICMGB.

The functions of ICMGB are:

1. Recommend procedures for institutionalization of ICM for the approval of central government; 
2. Recommend to the central government the rules and regulations for the functions of ICM;
3. Approve projects and recommend methodologies to be used under voluntary mechanism;
4. Recommend the central government for issuance of CCC and guidelines regarding sale of such certificates outside India;
5. Recommend to the central government or its designated agency for issuance of CCC;
6. Approve the process or conditions for crediting period/renewal/retirement of CCC;
7. Oversight of administrative and regulatory functions, and constitution of any committee or working group of ICM; and
8. Any other function as assigned by central government.

ICM Administrator- BEE has been designated as ICM Administrator and in this role, will perform the following functions:

1. Develop standards, processes, and methodologies for registering projects under voluntary mechanism;
2. Issue CCC as recommended by ICMGB and develop mechanism for market stability of carbon credits;
3. Develop targets and trajectories for obligated entities under compliance mechanism;
4. Recommend the fee towards implementation of carbon credit trading scheme for the approval of ICMGB and collect fee from registered entities;
5. Develop procedures for accredited carbon verifiers and accredit the agencies in accordance with such procedures;
6. Constitute technical committees for the purposes of the carbon credit trading scheme;
7. Develop the process/conditions for crediting period/renewal/retirement of CCC;
8. Undertake capacity building activities for the stakeholders;
9. Develop and maintain security protocols as approved by ICMGB and IT infrastructure including knowledge platform required for ICM;
10. Develop data submission formats and forms for effective functioning of ICM;
11. Coordinate with any committee or working group formulated by ICMGB in connection with ICM; and
12. Any other functions assigned by ICMGB or central government.

Grid Controller of India Limited is designated as ICM registry and in this role, will perform, the following functions:

1. Comply with the directions issued by the ICMGB or the Central Energy Regulatory Commission (“CERC”);
2. Register the obligated and non-obligated entities;
3. Maintain record of all transactions and share the same with BEE and power exchange(s), and
4. Assist in development of information technology platform for maintaining database of CCCs;
5. Function as meta-registry for India;
6. Establish links with other national/international registries as approved by ICMGB;
7. Maintain secure database as approved by ICMGB; and
8. Any other function assigned by ICMGB or BEE.

CERC is designated as the regulator of trading of CCC and in this role, will perform functions such as regulation of frequency of CCC trading and matters relating to trading of CCCs, provide market oversights, ensure prevention of fraud, safeguard interest of sellers and buyers.

The Draft Scheme empowers BEE to constitute one or more technical committees as required under compliance or voluntary mechanism. Each such technical committee is required to be chaired by a member who has requisite knowledge in the relevant area and sectors. The technical committee shall perform functions for the purposes of carbon credit trading scheme as specified by BEE and shall make its recommendations to BEE.

Mechanism: The Draft Scheme envisages two-fold mechanism for its implementation, i.e., voluntary and compliance mechanisms. The compliance mechanism is applicable to obligated entities and the voluntary mechanism is applicable to non-obligated entities under the Draft Scheme.

1. Compliance mechanism: Under this mechanism, the obligated entities are required to reduce the emissions intensity of greenhouse gases in terms of tonnes of carbon dioxide emitted per tonne of production.
2. Voluntary mechanism: Under this mechanism, the non-obligated entities can register their projects for issuance of CCC.

Accreditation of Accredited Carbon Verifiers: Accredited Carbon Verifiers are those bodies accredited by BEE to validate or verify activities in respect of the carbon credit trading scheme as published by BEE from time to time. The eligibility criteria for accreditation of agencies to function as accredited carbon verifiers will be specified by BEE with approval of ICMGB.

Detailed Procedures: The procedure for operationalization of ICM and various mechanisms will be developed by ICMGB and the other relevant authorities under the Draft Scheme. These procedures shall contain the following:

1. Criteria for issuance of CCC to those obligated entities who reduce their greenhouse gas emissions below the prescribed greenhouse gas emission norms;
2. Validity, floor and forbearance price of CCCs;
3. Requirement, format, and timeline for submissions;
4. Monitoring, reporting and verification mechanism; and
5. Other related and incidental matters, regarding compliance mechanism.

Functions of power exchange: The power exchanges as identified under CERC (Power Market) Regulations, 2021 shall seek approval of CERC for trading of CCCs and shall perform functions regarding trading of CCCs.

Author`s view:

The Draft Scheme and the framework created thereunder has the potential to support India’s commitment to its obligations under the Paris Agreement and will be an effective pathway towards emission reduction. In due course, the ICM can be significant in connecting the domestic carbon market with global carbon trading mechanism.

Please find a copy of the Energy Conservation Act, 2021, here and a copy of the Draft Scheme, here.

This update has been contributed by Rachika Agrawal Sahay (Partner) and Mrinal Mishra (Associate).

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