Tough emission targets may raise carbon credit prices, impact net zero goal

India ignored the elephant in the room — iron and steel — when it announced new draft regulations last month for setting compulsory emission targets for greenhouse gases (GHGs) under the first phase of the compliance regime of the country’s Carbon Credit Trading Scheme (CCTS).

 

New Delhi put 282 units, falling under four sectors — aluminium, cement, chlor-alkali, and pulp and paper — on notice. The units belong to some of India’s leading conglomerates like Vedanta, Hindalco, Nalco, UltraTech, ACC, Ambuja, Dalmia, and JSW Cement. For now, it has left out five sectors, including steel and refineries, targets for which will be announced later this year.

 

“Steel represents about 12 per cent of India's GHG emissions, and it is imperative that we solve this. Otherwise, India’s vision of ‘net zero’ by 2070 is not going to be fulfilled,” said Harsh Choudhry, chief executive officer (CEO) and cofounder of Sentra World, a Bengaluru-based startup specialising in providing a carbon accounting platform for industrial manufacturing.

 

In the case of steel, India introduced a green steel programme last December, parallel to the CCTS compliance regime, under which the government will procure a certain percentage of low-carbon steel for projects, said Sumit Bhatia, vice-president at ARS Steels, a low-carbon steel producer. The green procurement should start next year, officials said. But steel producers, including Tata, Jindal, AMNS and SAIL, are yet to be served emission targets under CCTS. 

 

“The bigger question, which is actually a lot more complicated, is are these compliance targets aggressive enough,” said Vaibhav Chaturvedi, senior fellow, New Delhi-based Council on Energy, Environment and Water, a global think tank.

 

“At present, the numbers seem too conservative to deliver transformational outcomes,” said Vineet Mittal, chairman of Avaada Group, a Mumbai-headquartered green energy company. “Given the accelerating pace of global climate policy — especially with mechanisms like the European Carbon Border Adjustment Mechanism (CBAM), and the International Maritime Organisation’s (IMO’s) new GHG regulations — India must avoid a scenario where our industries face double carbon taxation, once domestically and once at international borders,” Mittal told Business Standard.

 

More stringent targets, combined with fair carbon pricing, are urgently needed to safeguard Indian industry’s competitiveness while still fulfilling our climate commitments, he added.

 

“CCTS is not designed to reduce emissions of India because we are still a country that has emissions intensity reduction as its goal, not emissions reduction,” said R R Rashmi, distinguished fellow of New Delhi-based think tank the Energy and Resources Institute (Teri).

 

At this stage of India’s development, targets for overall emissions reduction may lead to high carbon prices and hurt Indian industry’s competitiveness in global markets. But modest compliance targets are a disincentive to make Indian industry change the way it manufactures things, which allow emissions to grow.

 

Of greater concern is the duration of compliance targets under CCTS. The draft regulations impose modest GHG cuts of around 3.5-7 per cent by 2027 from 2023-24 levels across the four sectors. The next round of targets applies between FY28 and FY30.

 

Revising targets every three years does not lend confidence to the industry to pursue investments in expensive clean technology equipment, industry experts said.

 

“The current structure of CCTS doesn’t give longer-term certainty to investors,” said Chaturvedi, adding, “I mean, who will invest in a three-year target.’’

 

Other emission trading schemes (ETSes) like EU ETS have a 10-year duration. The Korean ETS announced a target of 2030 in January 2020. The European Union (EU) has announced 100 per cent auctioning of carbon credit, moving away from free allowances, by 2034, a decade in advance. “That is how it has to be,” Chaturvedi said.

 

Industrial investors looking at long gestation emission investments require a longer time horizon. A 10-year timeframe also synchronises with Nationally Determined Contributions (NDC), which are valid for five years but need to be submitted as many years in advance, meaning 2025 NDC must be achieved by 2035. The United Nations (UN) Paris Agreement was designed to give a 10-year horizon for investors and policymakers to achieve targets. 

 

Carbon price

 

A meek compliance regime may end up in a weak NDC, which embodies efforts by each country to reduce national emissions and adapt to the impacts of climate change. India should be concerned because most of the world’s polluted cities, led by Delhi, are in India.

 

“The climate situation is deeply unfair to India, which will suffer big temperature gains, making parts of it uninhabitable,” said Mathew Carr, a UK-based climate consultant.

 

There is always a tradeoff between climate and emissions, said Saurabh Diddi, director, Bureau of Energy Efficiency, which is administering CCTS. The compliance mechanism gives targets in terms of GHG emission intensity, say, how much CO2 is emitted for every tonne of steel production, he added.

 

Advanced western nations have put climate first, focusing on overall emissions reduction, but developing India may prioritise growth over climate. Carbon prices are an outcome of emission targets and the average cost of mitigation technology, Chaturvedi said.

 

The scales in the case of the EU and the UK have tilted towards emissions reduction at the cost of European companies shutting shop or migrating elsewhere. Carbon prices average 70-80 euros per tonne of CO2 emitted in the EU, and over 55 pounds in the UK.

 

To align with the Paris Agreement objective of limiting global warming to well below 2 degree centigrade, the High-Level Commission on Carbon Pricing and Competitiveness, a global carbon pricing coalition co-chaired by Mahindra group Chairman Anand Mahindra, recommended a carbon price of $50-$100 per tonne of CO2 by 2030. As of last year, less than 1 per cent of global GHG emissions were subject to a direct carbon price within this range. The International Monetary Fund (IMF) has proposed differentiated carbon price floors: $75 per tonne of CO2 for high-income countries, $50 for middle-income nations, and $25 for low-income ones, Carr said.

 

But Indian companies can ill-afford such lofty carbon pricing, Choudhry said. “You don’t want to achieve a higher carbon price for the sake of it, because there are implications for the economy,’’ he added.

 

Roughly, if you see worldwide, carbon is priced between $8 and $10 per tonne of CO2 emitted, Diddi said in a previous interview while declining to give a price for India. Industry officials said that Indian businesses can be comfortable with a $10 carbon price, much below IMF’s proposal. 

 

Target setting

 

The government plans to bring over 800 units under the compliance scheme, which together may contribute to around 25 per cent of India’s GHG emissions, Diddi said.

 

“This scheme will put forth a robust mechanism by incentivising industries to cut down emissions to the target levels, and offer a market to encash the credits issued for emission reductions achieved beyond the specified targets,” said Vinayak Walimbe, managing director of Customized Energy Solutions, an energy advisory.

 

There’s a penalty for non-compliance at twice the average carbon credit price. The baseline year for calculating the emissions data for the compliance regime would be FY24, and the compliance years would be from FY26 to FY27.

 

The targets were calculated on a scientific basis, Diddi said, “by taking whatever feasible technologies were there till 2030, and calculating the marginal abatement cost for 1 tonne of CO2, and investment required”.

 

The basis for adoption of these numbers is the lowest marginal abatement cost, so that India doesn’t burden industries with additional costs while pushing them towards emissions mitigation, Rashmi said.

 

Most of the emissions in cement and aluminium seem to be covered in the draft regulations, called Greenhouse Gases Emission Intensity (GEI) Target Rules, 2025, under the CCTS, 2023.

 

CCTS is an immediate response to EU’s carbon tax on Indian exports; it’s not an instrument for climate change, Rashmi said, adding, “The instrument for that kind of ‘net zero’ reduction is a long-term low carbon development strategy for India, which is not yet on the ground.”