During his Independence Day speech Monday, Prime Minister Narendra Modi spoke about creating more green jobs, adding ‘Jai Vigyaan’ and ‘Jai Anusandhaan’ to ‘Jai Jawan, Jai Kisan’. A potential domestic carbon market and other measures covered by the Energy Conservation (Amendment) Bill, passed by Lok Sabha on 8 August, have also been presented by the government as helping India achieve its climate commitments. It is welcome and much needed. But, if the government is now fully embracing the use of market mechanisms for tackling climate change, then we need more discussion and debate about how this will work. In particular, who will benefit, and who will lose out.
Carbon markets have a long and controversial legacy in India and abroad. India hugely benefited financially from the Clean Development Mechanism (CDM) that allowed countries and their businesses to buy credits from projects that reduced GHG (greenhouse gas) emissions in India to ‘offset’ their own domestic emissions. More specifically, project developers and the industry of consultants that emerged around the CDM benefited. A lot of the projects certainly did good work, but some remain mired in controversy about corruption and environmental concerns. This ultimately led to the collapse of the CDM, with the value of the project credits having crashed, making it much cheaper for other countries and companies to buy these credits rather than actually invest in the green technologies we need.
Other countries have also established carbon markets linked to compulsory schemes that limit or put a cap on the emissions allowed by high-polluting entities such as factories and power plants. If these entities cannot make the emission cuts required to meet this cap, they can buy credit from those that emit less than their allowance. In some cases, offset project credits are allowed up to a certain limit. These domestic schemes are well-established in Europe, the US, China, and elsewhere.
India is relatively late in embracing a domestic carbon market, but this means we can learn and avoid some of the early mistakes of these schemes.
Setting caps in carbon markets
All the experts agree that carbon markets can be effective, particularly in allowing the private sector to use a market-based logic to invest in green technologies that will deliver emission cuts in the most cost-effective way. This is more efficient than the top-down approach of dictating where and how emissions should be reduced. However, experience with the CDM and other countries also shows that the design of the carbon market and the rules governing it are absolutely crucial.
So, what have we learnt about making a carbon market work effectively?
First, if we want to guarantee that it actually leads to the emission cuts we need, it should be connected to a hard cap, at least for the high-emission entities. A particular industrial sector or sub-sector needs to have an absolute limit to the GHG emissions it can produce as a whole. This will then trickle down to the emissions allowances for individual companies. And this cap needs to be known by the industry over the long term to give them the certainty and incentive to invest in green technologies.
Second, there need to be both incentives for high performance — coming from these companies selling excess allowances for a profit — and penalties for non-compliance. The penalty for exceeding a company’s allowance for emissions needs to be sufficiently prohibitive to ensure they prefer to make the necessary green investments.
Third, there needs to be protection from price rises and inflation for the poor and vulnerable in our society. Companies will always pass on any increase in their costs to their consumers. This is business logic that cannot be argued against. But there should be limits, and the type of windfall profits we have seen in the power sector in the West need to be avoided.
Depending on how the compulsory scheme is designed, it could lead to an increase in energy prices that trickles down into every industry and service. It is the government’s job to protect those that are already struggling to survive. The government should, at the earliest, come up with a clear set of rules to regulate the ‘carbon market’ since the Energy Conservation Bill delegates inordinate power to it.
Minister of Power Raj Kumar Singh, in his limited reply in the house, instead of clarifying the concerns raised by the honourable members, ended up praising the government for the growing installed renewable energy capacity of India, which, in itself, is incapable of making an appreciable impact. It would have been prudent had he stuck to the major objective of the Bill, which is efficient utilisation of energy. The government did not learn from the threat faced a few years back by the Indian companies possessing carbon credits, and thus, now has failed to take the same into account while drafting the Amendment Bill.
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Look towards the poor
Fourth, the domestic carbon market will also be a massive revenue generation scheme for the government. This money should be earmarked for cutting energy costs for poor households and helping them benefit from the new green economy. Installing rooftop solar energy, retrofitting homes with energy-efficient measures, and massive subsidies for electric vehicles could be a few initiatives. The diverting of revenue from the coal cess shows that the government cannot be trusted to make good on these promises.
The debate around establishing a domestic carbon market in India is yet to gain momentum. The new scheme has been developed by the government in closed-door consultations with industry experts. However, there is no rationale for the private sector to advocate for the four crucial principles described above. They have a business interest to argue for a scheme that gives them the flexibility to exceed emissions with no consequences and for any revenue generated to be used for business as usual activities.
In every other country, the creation of a domestic carbon market has been informed by constructive debates between industry and civil society. In India, civil society as a whole seems to be completely disengaged and uninterested. As a person who is passionate about climate and environmental issues, I received no prior communication from any NGO or civil society organisation to discuss the challenges of establishing a carbon market in India. There were no thought-provoking opinion articles on the subject in our media or online before the Bill was passed by the Lok Sabha. Therefore, I urgently call upon our world-class environmentalists to embrace market mechanisms and work together with politicians, bureaucrats, and industry experts to make sure this is a success for everyone and our planet.
Gaurav Gogoi @GauravGogoiAsm is Congress MP and deputy leader, Lok Sabha. Views are personal.
(Edited by Humra Laeeq)