Model Answer

Introduction

The Carbon Credit Trading Scheme (CCTS), set to launch in mid-2026, marks a transformative shift in India’s climate policy framework. By facilitating the trading of greenhouse gas emissions credits, India aims to bolster its efforts towards achieving net-zero emissions by 2070 while promoting sustainable industrial growth.

Potential Advantages of CCTS

1. Industrial Competitiveness: The CCTS incentivizes industries to adopt cleaner technologies, ultimately reducing operational costs and enhancing competitiveness in global markets. For instance, companies investing in low-carbon processes can gain a competitive edge, particularly in sectors like steel and cement.
2. Compliance with Global Standards: With the EU’s implementation of the Carbon Border Adjustment Mechanism (CBAM), Indian exporters will face higher tariffs unless they control emissions. A robust CCTS prepares industries for these regulations, reducing potential financial losses.
3. Climate Diplomacy: An effective carbon market enhances India’s credibility in global climate negotiations, attracting climate finance. This aligns with India’s commitments under its Nationally Determined Contributions (NDCs).
4. Revenue Generation: The CCTS creates new revenue streams for both industries and the government. Companies can sell surplus carbon credits, promoting circular revenue generation, while the government can auction credits to fund green infrastructure.
5. Encouragement of Renewable Energy: By making carbon-intensive energy sources less financially viable, the CCTS encourages a shift towards renewables, supporting India’s goal of achieving 500 GW of non-fossil fuel capacity by 2030.

Challenges in Implementation

Despite its potential, the CCTS faces significant challenges:

1. Weak Emission Reduction Targets: The current focus on emissions intensity rather than absolute reductions may lead to an excess supply of credits, dampening market prices.
2. Inadequate Compliance Mechanisms: High non-compliance rates due to weak penalties undermine the scheme’s credibility.
3. Limited Sectoral Coverage: Key polluting sectors, such as thermal power and agriculture, are currently excluded, limiting the scheme’s impact.
4. Measurement and Verification Issues: The lack of reliable systems for measuring and verifying emissions raises concerns about the integrity of carbon credits.
5. Lack of Secondary Market: The absence of a structured market for trading carbon credits hampers price discovery and overall market activity.

Measures to Enhance Effectiveness

To address these challenges, several measures can be adopted:

1. Strengthening Emission Targets: Setting ambitious and realistic emission reduction targets is essential to ensure a robust carbon market.
2. Expanding Sectoral Coverage: Gradually including more sectors, especially major emitters, will maximize the market’s depth.
3. Integrating with Renewable Energy Markets: Creating a unified trading platform for carbon credits and renewable energy certificates can enhance market efficiency.
4. Enhancing Monitoring Framework: Implementing robust monitoring and verification systems is crucial for maintaining investor confidence.
5. Promoting Private Sector Participation: Offering tax incentives and support for clean technology investments will encourage private sector involvement.

Conclusion

India’s Carbon Credit Trading Scheme holds immense potential for driving emissions reductions and fostering sustainable industrial growth. To realize this potential, it is crucial to address the existing challenges through a well-structured approach that strengthens regulatory mechanisms and expands market participation. A successful CCTS can position India as a leader in climate action while contributing to sustainable economic development.