Introduction
In the realm of environmental finance, two primary concepts are under discussion: green credit programs (“GCP”) and carbon credits trading. Although these concepts share similar objectives, there are underlying distinctions between them.
The Ministry of Environment, Forest, and Climate Change introduced the Draft Green Credit Programme Implementation Rules, 2023 (referred to as “Draft Rules”) on June 26, 2023. This proposed program, aligned with the Government of India’s ‘LiFE – Lifestyle for Environment’ mission, which aims to combat climate change, enhance environmental efforts, and promote a healthy, sustainable lifestyle based on conservation and moderation values, as well as sustainable, eco-friendly development.
Furthermore, on June 28, 2023, the Ministry of Power, in consultation with the Bureau of Energy Efficiency exercised its authority granted under Section 14(w) of the Energy Conservation Act, 2001, to introduce the Carbon Credit Trading Scheme, 2023 (“CCTS”). The scheme aims to establish Indian carbon market framework with the primary objective of reducing greenhouse gas emissions by pricing emission reductions through the trading of carbon credit certificates. Further, on December 19, 2023, the Bureau of Energy Efficiency (“Bureau”) made amendments to CCTS and focused upon “offset mechanism” allowing the non-obligated entities to actively register and engage in carbon credit ecosystem by registering projects for accounting greenhouse gas emission reduction or removal, leading to issuance of carbon certificates.
The Bureau has also released a detailed compliance procedure which provides clarity with regard to the implementation of CCTS and also sets out specific greenhouse gas emission targets for obligated entities which are notified. (‘Obligated entities’ are those compelled by law to restrict their carbon footprint to a strategic level through their activities. Conversely, ‘non-obligated entities’ are not bound by such legal requirements.)
This initiative allows entities engaged in activities such as energy efficiency, renewable energy, etc. to issue carbon credits, which can then be purchased by carbon emitters. It further incentivizes curbing or offsetting carbon emissions for emission heavy industries. Through this pioneering effort, India aims to foster its first domestic carbon market, contributing to global climate action and transitioning towards low-carbon pathways.
In summary, while GCP offers green credits for eco-friendly projects, CCTS offer a means for companies to offset their carbon emissions and diminish their environmental impact. Both concepts are crucial for advancing sustainability and addressing climate change, albeit differing in focus, implementation, and outcomes.
Contrast: Green Credits and Carbon Credits
| S No | Particulars | Green Credits | Carbon Credits |
| 1. | Responsible Ministry | Ministry of Environment, Forest, and Climate Change | Ministry of Power |
| 2. | Scope | To establish a market mechanism enabling the participants to earn green credits which can be traded on a domestic market platform and to encourage industries/companies or other entities to undertake voluntary environmental measures to generate green credits. | To reduce greenhouse gas (GHG) emissions by setting emission intensity reduction targets for designated entities. |
| 3. | Coverage | GCP includes the following: i. Tree Plantation – promote activities to increase green system across the country; ii. Water Management – promote water conservation, water harvesting and efficient use and reuse of water; iii. Sustainable Agriculture – promote agricultural activities and land restoration to advance productivity and soil health; iv. Waste Management – promote sustainable collection, segregation and improved practices for waste management v. Air Pollution Reduction – promote measures for reducing air pollution; vi. Mangrove conservation and restoration – promote measures for conservation and restoration of mangroves; vii. Ecomark label development—encourage manufacturers to obtain ecomark label for their goods and services; viii. sustainable building and infrastructure—encourage construction of infrastructure with environment friendly technologies and materials. | Some key functions that may be carried out by the Bureau under CCTS includes the following: i. Identifying the sectors that will be included in the scheme. ii. Developing emission routes and targets for the sectors; and iii. Developing mechanism to ensure stabilizing the carbon price; iv. Issuing carbon credit certificates; v. Accrediting agencies as per the CCTS. |
| 4. | Functioning | The programme shall function in two phases: Initial Phase – Water Management and Afforestation. Subsequent Phase – Sustainable agriculture, waste management, air pollution reduction, mangrove conservation and restoration, eco mark label development, and sustainable building and infrastructure. Green credit has the potential to streamline the industrial framework and mitigate carbon emissions by directing capital shifts from industries with high pollution and energy consumption towards eco-friendly sectors. | A Carbon Credits Certificate is a document authorized by the government or another accredited agency, awarded to institutions or organizations that have either prevented greenhouse gases from entering the atmosphere or aided in their removal. The credits detailed in the certificate signify the amount of carbon and other greenhouse gases removed or reduced. These credits are typically given to companies which are carbon efficient or are offsetting their carbon emissions by doing activities good for reducing carbon footprint. |
| 5. | Registration | A person keen to earn green credits shall register electronically with the Administrator for any activity undertaken for grant of green credit and a certificate will be issued for such green credits. The Indian Council of Forestry Research and Education and an autonomous body as declared by the then Ministry of Environment and Forests, Government of India has been designated as the ‘Administrator’. The Administrator or a separate designate agency is mandated to establish and maintain Green Credit Registry – an electronic database containing data relating to the registration and issuance of green credit. | The Grid Controller of India Limited has been appointed as the registry for the Indian carbon market and shall be responsible for obtaining registration of obligated and non-obligated entities and shall also be responsible for maintaining secure databases, recording transactions, share transaction records with power exchange which is an electronic trading platform as defined under sub-clause (as) of clause (1) of Regulation 2 of the Central Electricity Regulatory Commission (Power Market) Regulations, 2021 and Bureau, assists in IT infrastructure development, and acts as a meta-registry for India. |
| 6. | Credits | Green Credits in respect of any activity undertaken is to be calculated basis the resource requirement, parity of scale, scope, size and other relevant parameters. | Carbon credit quantities are determined using sophisticated remote sensing data and other AI technologies refined over time using the formula: Number of certificates = (Notified GHG emission – Achieved GHG emission) × Production. |
| 7. | Key Roles / Terms | i. Administrator: developing guidelines and methodologies for activities relating to GCP ii. Steering Committee: responsible for the monitoring of the implementation of the GCP iii. Technical Committee: assist the Administrator in implementation of the GCP | i. Bureau of Energy Efficiency: It acts as the administrator of the Indian carbon market, it identifies emission reduction sectors, sets targets, issues carbon credits certificate, develops market stability mechanisms, accredits verification agencies, maintains databases, and undertakes various capacity-building activities. ii. Technical Committees: These committees shall be constituted by the Bureau and chaired by experts with focus on different areas as maybe specified by the Bureau. It provides recommendations to the Bureau and perform functions assigned to them. iii. Accredited Carbon Verification Agencies: Accredited by the Bureau with Central Government approval, these agencies verify carbon emissions based on recommendations of the National Steering Committee which will be constituted by the Central Government for governance of the Indian carbon market and direct oversight of its functioning. iv. Ministry of Power on recommendation of Bureau will determine the sectors and obligated entities to be covered under compliance mechanism. The Bureau will also recommend the emission reduction targets which will be approved by the Ministry of Power and notified by the Ministry of Environment, Forest and Climate Change under the Environment Protection Act, 1986. Obligated entities shall achieve these recommended emission intensity targets. Those entities which will surpass these targets will be issued carbon credit certificates and those who meet shortfall will be required to buy the carbon credit certificates from Indian Carbon Market. |
| 8. | Trading Platform | Trading Platform shall perform functions in relation to green credit trading as per guidelines to be issued by the Administrator. | Central Electricity Regulatory Commission (“CERC”) shall act as a regulator by regulating trading activities, ensures the interests of buyers and sellers, regulates the frequency of trading, and provides oversight to prevent fraud or mistrust within the Indian carbon market. |
Analysis
The world is moving towards net zero emission, our Prime Minister has, in fact, committed to making India a net zero emissions nation by 2070 in the 26th session of the Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC) held in Glasgow, United Kingdom in November, 2021. Nations worldwide are adopting net zero emissions plans, which will result in a robust carbon credit economy in the future.
However, CCTS encounters various obstacles, such as the coordination of multiple stakeholders, including regulatory bodies, which inherently complicates its structure and raises concerns about bureaucratic delays. This uncertainty could diminish the effectiveness of the scheme, highlighting the importance of implementing streamlined processes and clear guidelines. Furthermore, a free trade market for carbon credits may be established, however CERC may not be the most ideal regulator to regulate such market and regulators similar to SEBI and RBI may need to be setup in order to step in and control the trades in an effective manner. CERC may alternatively undertake a study of global standards around regulating carbon trading platforms and avail inter-regulatory support as and when required.
Additionally, CCTS may disproportionately benefit larger entities over smaller ones, as financially robust entities can more easily acquire carbon credit certificates compared to their counterparts. Addressing this issue requires measures to ensure fair participation and benefits across all sectors with strict sectoral caps on heavy emitter entities.
Further, another concern lies in keeping an eye on carbon credits and exercising supervision. A governing body may find it challenging to keep an eye on carbon credit projects because they are widely dispersed and frequently located in remote areas, and the third-party verification agencies might also raise trust issues.
On the other hand, the GCP serves as guidelines rather than mandatory practices for companies. Despite not being obligatory, many companies, particularly those capable of attaining their objectives easily, are inclined to participate. They do so to accrue credits for their environmental commitments, which they can then sell for additional revenue. This dynamic could potentially benefit smaller companies unable to presently invest in clean solutions such as green fuels, emission control technologies, waste management systems, and the like. These smaller entities could purchase surplus credits to fulfill their objectives, thereby stimulating demand for green credits in the market. Moreover, earning green credits has the potential to enhance the reputation of businesses and instill confidence in investors, facilitating access to funding for further implementation of clean solutions.
The primary concern regarding green credits is that they cannot be bought or sold as a commodity in the market, indicating that the restriction aims to prevent the speculative or commercial use of green credits. However, analyzing green credits can prove to be beneficial from the lens of ‘Green Mergers and Acquisitions’, wherein, companies begin to acquire green technology from eco-friendly companies to increase efficiency and reduce pollution level which would instill positive corporate value, healthier environment and obtaining of green credits.
Moreover, if these ‘green credits’ becomes tradeable, they can play a crucial role in the Company’s ordinary course of business acting as ‘reward points. For instance, if a Company has a 10 green credits, each credit of INR 100 each thereby, a total of 1000 credit points has been earned by the Company. If a Company is to pay penalty of INR 10,000 for non-compliances, then these 1000 credit can be used and then only INR 9000 shall be paid by the Company in a similar manner how e-wallets work. Lenient provisions for penalties can be given to Companies with high green credit score.
Environmental markets promise to provide financial as well as environmental returns thus providing a roadmap towards sustainable development. However, knowledge asymmetries and mismatched expectations of stakeholders causing tailbacks in implementation leading to fruitless outcomes.
Further, the payments, or green credits fails to specify the objective of tree planting activities and hence, the outcome for which credits are issued cannot be measured. Similarly, large-scale tree planting cannot guarantee the desired outcomes. To exhibit such outcomes, robust monitoring and appraising mechanisms with defined outcomes are required.
By exploring issues surrounding outcome-based models, ecosystem preservation, geographic sensitivity, tree densities, and socio-economic factors, this analysis seeks to foster a more robust and inclusive framework. Its objective is to propel the envisioned green credit initiative toward becoming a comprehensive and effective instrument for preserving the environment and fostering sustainable development in India.
Conclusion
To streamline oversight and ensure effectiveness, impact tokens along with blockchain technology offer promising avenues for channeling investments towards achieving the sustainable development goals by tackling the fundamental industry challenges. Additionally, integrating artificial intelligence tools to enhance data management and transparency can further bolster the effectiveness of this approach.
It is also proposed that a single regulatory body be established to oversee both green credits and carbon credits. This regulatory body would fall under the purview of the Ministry of Environment, Forest, and Climate Change. By integrating the governance of both types of credits under one umbrella, a harmonious approach can be achieved, facilitating easier monitoring and enhancing overall effectiveness. This unified regulatory structure would promote synergy between green and carbon credit initiatives, leading to more cohesive and impactful environmental policies.
Author – Anish Jaipuriar (Partner)
Co-Authors – Kritika Shrivastava and Divyam Sharma
