A case for joining the global carbon coalition

Why in news?

India has stayed out of the Open Coalition on Compliance Carbon Markets (OCCCM) even as its carbon market goes live.

UPSC Relevance – Prelims: Carbon Credit Trading Scheme, carbon credits, OCCCM, CBAM, Article 6 of Paris Agreement

Mains: GS3 – Conservation, environmental pollution and degradation  

What is a Carbon Market?

A carbon market is a system where the right to emit greenhouse gases (GHGs) is bought and sold. It puts a price on carbon so that polluting has a cost and cutting emissions has a reward.

• Carbon credit: A tradable certificate. One credit usually equals one tonne of carbon dioxide equivalent (tCO2e) reduced, avoided or removed.
• Basic logic: A firm that cuts emissions cheaply can sell its surplus credits. A firm for whom cutting is costly can buy them. Total reduction is achieved at the lowest overall cost.
• Example: If Cement Plant A beats its target by 1,000 tonnes, it earns 1,000 credits. Plant B, which missed its target, buys these credits instead of paying a penalty.
• Carbon pricing tools: There are two main ways to price carbon – a carbon tax (price is fixed, quantity of reduction is uncertain) and emissions trading (quantity is fixed, price is set by the market).

Types of carbon markets

Global context

• Kyoto Protocol (1997): Created the Clean Development Mechanism (CDM). India was among the largest hosts of CDM projects, but credit prices crashed after 2012.
• Paris Agreement, Article 6: Article 6.2 allows countries to trade emission reductions bilaterally (ITMOs). Article 6.4 sets up a UN-supervised crediting mechanism, the successor to CDM. Rules were finalised at COP29, Baku (2024).
• Spread of carbon pricing: Over 50 countries now have some carbon pricing measure. The EU, China, UK, South Korea and others run full emissions trading systems.

India’s Carbon Market – Carbon Credit Trading Scheme (CCTS)

Challenges in Operationalising India’s Carbon Market

• Intensity targets, not a cap: Since targets are per unit of output, total emissions can keep rising with production. Credibility with foreign partners may suffer.
• Weak price signal: If targets are lenient, too many credits will be issued and prices will fall. The PAT scheme saw ESCert prices drop sharply because of surplus supply.
• MRV capacity: Monitoring, Reporting and Verification needs plant-level data, trained verifiers and audits. India has a shortage of accredited carbon verification agencies.
• Narrow coverage: Only a few industrial sectors are covered. Power, the largest emitter, and transport are outside the compliance market for now.
• Low liquidity: A small number of buyers and sellers means thin trading and volatile prices. Rules on banking credits, price floors and ceilings are still evolving.
• Overlap of schemes: PAT, Renewable Energy Certificates, Green Credit Programme and CCTS run side by side. This creates confusion and risk of double counting.
• Burden on MSMEs: Smaller firms lack money and technical staff for reporting and clean technology upgrades.
• Integrity of offsets: Voluntary market scandals (overstated forest credits) show the risk of low-quality credits. Strong methodologies are needed.
• Article 6 and double counting: If India sells credits abroad, those reductions cannot also count towards its own NDC. Clear rules on ‘corresponding adjustment’ are needed.
• No international linkage: CCTS is isolated. Its credits are not yet recognised by other systems or by the EU’s CBAM.

Open Coalition on Compliance Carbon Markets (OCCCM)

• Launch: May 2026, in Florence, by the European Union, China and Brazil.
• Members: Germany and New Zealand joined first; Canada, France, Norway, Singapore, Türkiye and the UK followed. India is not a member.
• Aim: To align how the world’s compliance carbon markets communicate with each other. It is a platform for exchange on carbon pricing, MRV systems, carbon accounting and use of high-integrity offsets.
• Nature: It does not impose mitigation targets or binding decisions on members.

Why Should India Join OCCCM?

• Shape the rules: Standards on MRV, accounting and offsets will be set by members. Joining lets India push for rules suited to developing economies, rather than accept them later as an outsider.
• CBAM preparedness: Common accounting methods can help get CCTS prices recognised abroad and lower the CBAM burden on Indian exporters.
• Future linkage and revenue: Linking CCTS with other systems could let Indian firms sell credits to countries with tighter targets.
• Learning and capacity: Access to the experience of the EU ETS and China’s ETS on price stability, registry design and verification.
• Low risk: Membership carries no binding targets. Brazil and China are founding members, so Global South concerns already have a voice.
• Fiscal gains: Carbon pricing can raise revenue at a time when climate impacts like heatwaves and floods strain budgets.

Way Forward

• Join OCCCM early, with a clear position that no common price or binding target will be accepted.
• Move gradually from intensity targets to absolute caps in mature sectors like cement and aluminium.
• Build a strong MRV system – digital reporting, accredited verifiers, public disclosure of data.
• Add price stability tools (floor price, market stability reserve) to avoid the PAT experience.
• Merge or align PAT, REC and Green Credit Programme with CCTS to avoid double counting.
• Bring the power sector in a phased manner and support MSMEs with finance and technical help.
• Negotiate CBAM recognition of CCTS prices with the EU, including in the India-EU FTA talks.

Practice MCQ

Q1. Consider the following statements regarding India’s Carbon Credit Trading Scheme (CCTS):

1. It has been notified under the Environment (Protection) Act, 1986.

2. The Bureau of Energy Efficiency acts as the administrator of the scheme.

3. Obligated entities under the compliance mechanism are given absolute caps on their total emissions.

How many of the statements given above are correct?

(a) Only one        (b) Only two        (c) All three        (d) None

Answer: (a). Statement 1 is incorrect: CCTS is notified under the Energy Conservation Act, 2001. Statement 3 is incorrect: India uses emission intensity targets, not absolute caps.

Q2. Consider the following statements:

Statement-I: An Indian steel exporter that pays a carbon price in India may be able to reduce its liability under the EU’s Carbon Border Adjustment Mechanism (CBAM).

Statement-II: CBAM allows a deduction for the effective carbon price already paid in the country of production.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct but Statement-II does not explain Statement-I

(c) Statement-I is correct but Statement-II is incorrect

(d) Statement-I is incorrect but Statement-II is correct

Answer: (a). CBAM permits deduction of a carbon price effectively paid in the exporting country. This is why a credible domestic carbon market like CCTS matters for Indian exporters.

Mains Practice Question

“India’s carbon market has moved from paper to practice, but a working trading platform is not the same as a working carbon market.” Discuss the challenges in the full functioning of the Carbon Credit Trading Scheme and suggest strategies to realise the full potential of India’s carbon market. (15 marks, 250 words)

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