Carbon credit market: Why power ministry is best suited to run this project

Rather unusually in the central government, there has been public differences between the environment ministry and the power ministry on who should regulate the carbon credit mechanism. Last week, in Parliament, several MPs raised the issue, some obviously at the behest of one or the other ministry. 

It is a market with potentially extraordinary regulatory powers which can straddle several sectors. A Bureau of Energy Efficiency report (under the power ministry) notes of the $100 billion turnover for such a market globally by 2030, India will account for at least a quarter. 

An Invest India report (government agency to promote investment in India)  notes “the global markets for carbon credits increased by almost 164 per cent” in FY22. 

How is carbon traded? One carbon credit stands for 1 tonne of carbon dioxide removed from the environment. So, a carbon credit is created when an individual or a company invests in certain green projects such as renewable energy generation or forestry projects. They can sell those to companies that are investing in projects that have an adverse environmental footprint. The buying of the credit, raises the costs for the latter, in effect subsiding the former. 

There is a history to why the power ministry under minister R K Singh, has decided why it wishes to get the rights under the Energy Conservation (Amendment) Bill, 2022 for regulating this business. For several years the ministry has assumed the pole position for developing markets for energy-related goods. The carbon credit market is supposed to be an extension of the same and hence the perceived synergy. Already in August this year, months before the bill became a law this December, Singh announced he will not allow the export of carbon credits from India, assuming that the market will be under his ministry’s domain. 

It is also true that the environment ministry has been sitting on the proposal to make the market operational for a long time. While it had held consultations with the stakeholders, the market mechanism was taking time to come up. 

Energy market battle: 

There was a court battle for several years between Singh’s ministry and the finance ministry on who will control the spot and futures market for energy. The court agreed that spot prices are the domain of the power ministry, while futures trading shall be regulated by the finance ministry. 

Under the Securities Contract (Regulation) Act, of 1956, all trading in the futures price of a commodity is supposed to be under financial regulator, Sebi’s watch. The definition of futures market means trading in underlying contracts which promise to sell or buy the goods in futures. But in the case of electricity, the electricity regulator, Central Electricity Regulatory Commission has argued that since all the products for the electricity markets it has approved result in delivery of the commodity after eleven days, the trades qualify as a spot market. Only if it permits a non-deliverable market, does Sebi need to walk in. 

In the power exchanges now, there are effectively three types of products, the Real Time, Day Ahead and Term Market. The first, Real Time market, as its name implies, offers matching electricity produced and sold throughout the day. They are designed as half-hourly markets throughout the day where auctions are held at intervals of 15 minutes each and then a period to make the delivery. It is a popular product globally. 

The next is the Day Ahead market, where the demand and supply is matched for delivery with a 24-hour lag. The Term Market allows participants to trade electricity contracts for up to 11 days ahead. There are also the Renewable Energy certificates but those are not contested territory. 

It is the Term Market, which is at the centre of the argument. While Sebi is convinced that irrespective of delivery, the term market is a futures product. CERC is equally convinced that it is not. It has noted that since there is a delivery of the electricity in eleven days, it qualifies as a spot market. Only if the trade was squared off in rupees would it qualify as a futures trade and be open for Sebi to decide upon. 

But a 2016 notification issued by the department of economic affairs in the finance ministry has complicated matters. It lists the goods which qualify for “forwards” market. The definition makes no distinction between deliverable and non-deliverable market. Electricity figures in the list. So according to the notification, it is the market regulator Sebi, which will not only run the show but shall also decide if a trade in a particular commodity qualifies as a futures one. 

At its heart the problem is simple. Does CERC have the right to decide penalties for a default in a trading environment like the Term Market? Because for any contract just beyond 11 days, the market will come under the Sebi. "Two markets for the same commodity cannot be run by two regulatory agencies,” Sebi has raised in its contention with the government. 

Having settled the dispute, the power ministry feels it is in the best position to decide what types of products should be introduced in the carbon credit market. 

A BEE report notes, it is firm in the financial services sector who are the largest users of carbon credits (in 2019) accounting for a quarter of all credits retired in the year. This was followed by chemicals and petrochemicals (including oil and gas) at 20 per cent. All other sectors account for less than 10 per cent of carbon credit retirements. Given these ramifications, it is best that the power to run the carbon market vests with the power ministry.