THE INDIAN

CARBON
MARKET
Pathway Towards an Effective
Mechanism

1
Research direction: Sunita Narain and Nivit Kumar Yadav

Writers: Parth Kumar and Manas Agrawal

Editor: Rituparna Sengupta

Cover and design: Ajit Bajaj

Graphics: Vineet Tripathi

Production: Rakesh Shrivastava and Gundhar Das

The Centre for Science and Environment is grateful to the Swedish International
Development Cooperation Agency (Sida) for their institutional support.

We are also grateful to these experts for their valuable inputs:

Zhibin Chen, Senior Carbon Market Expert, International Carbon Action Partnership
Dr. Sebastian Osorio, Senior Scientist, PIK - Potsdam Institute for Climate Impact Research
Darius Sultani, Doctoral Researcher, PIK - Potsdam Institute for Climate Impact Research

© 2024 Centre for Science and Environment

Maps used in this document are not to scale.

Citation: Parth Kumar and Manas Agrawal 2024. The Indian Carbon Market: Pathway towards
an effective mechanism, Centre for Science and Environment, New Delhi

Published by
Centre for Science and Environment
41, Tughlakabad Institutional Area
New Delhi 110 062
Phones: 91-11-40616000
Fax: 91-11-29955879
E-mail: [email protected]
Website: www.cseindia.org
 THE INDIAN
CARBON
MARKET
Pathway Towards an Effective
Mechanism
 CONTENTS

Objective of the research 7

CHAPTER 1: AN INTRODUCTION TO CARBON MARKETS 9

1.1 Market mechanisms for emission reduction:
A background 10
1.2 What are carbon markets? 11
1.3 Why do we need carbon markets? 12
1.4 Types of carbon markets: compliance
and voluntary 12
1.5 How do compliance markets function
through emission trading systems? 14

Carbon Markets Glossary 19

CHAPTER 2: CASE STUDIES OF MAJOR

CARBON MARKETS 20
2.1 Case study 1: European Union ETS (EU-ETS) 23
2.2 Case study 2: Korea ETS 38
2.3 Case study 3: China ETS 47
2.4 Case study 4: Surat Emission Trading System 57
2.5 Overall summary 65

4
CHAPTER 3: LEARNINGS FROM THE PAT SCHEME 67
3.1 The PAT scheme: An introduction 68
3.2 Steel sector: Analysis of CO2 emission reductions 72
3.3 Cement sector: Analysis of CO2
emission reductions 73
3.4 Power sector: Analysis of CO2 emission
reductions 74

CHAPTER 4: OVERVIEW, CHALLENGES AND

RECOMMENDATIONS 79
4.1 Overview 80
4.2 Necessary design elements for an
ideal carbon market 88
4.3 Challenges and recommendations 89

REFERENCES 101

5
OBJECTIVE OF THE
RESEARCH

7
 OBJECTIVE OF THE RESEARCH

India has pledged to meet its Nationally Determined Contribution (NDC)

targets by 2030. Additionally, it aims to attain net-zero emissions by 2070,
following the guidelines set forth by the United Nations Framework Convention
on Climate Change (UNFCCC). In order to achieve these goals, India is actively
exploring decarbonization strategies and employing emission reduction tools
and mechanisms for greenhouse gas (GHG) emitting sectors in the country.
Carbon markets represent one such tool or mechanism implemented globally, as
well as at national and sub-national levels by numerous countries. India, too, is
in the process of developing and launching its own national compliance-based
carbon market. This report aims to collate a clear set of learnings from the past
and ongoing compliance-based emission trading schemes worldwide, including
those operating in India. The aim is to facilitate the effective operationalization of
carbon markets in India and ensure they continue to serve their intended purpose
of reducing emissions. The major questions that this report attempts to answer
are:

- What are the market-based mechanisms for emission reduction, how have
they evolved, and what factors have led to the emergence of compliance-
based carbon markets and their various types?

- What can be learnt from existing international and Indian emission trading
systems for the upcoming Indian carbon markets?

- What lessons from the Perform, Achieve, and Trade (PAT) scheme should
be carefully taken into account when designing the forthcoming carbon
markets in India and its transition from the PAT scheme?

- What are the possible risks associated with the market? What can be the
possible challenges for the upcoming Indian carbon market and what are
the suitable and necessary measures to make it effective?

8
AN INTRODUCTION TO
CARBON MARKETS
1
Carbon markets are market-based mechanisms to reduce carbon
emissions. If run effectively, they can become key players in meeting
GHG reduction targets globally.

There are two primary types of carbon markets: compliance markets

that are regulated by governments, and voluntary markets, where
entities can offset their emissions by buying credits from carbon
offset projects.

India is developing its own carbon market to meet its Nationally

Determined Contributions, aiming for a 45% reduction in emission
intensity of GDP by 2030. The Indian market will cover multiple
sectors and emissions under a national regulatory framework.

9
 AN INTRODUCTION TO CARBON MARKETS

1.1 Market mechanisms for emission reduction: A

background
The idea of using market mechanisms for environmental policy came up in the
late 1960s and 1970s as a part of ‘Project 88’ in the United States of America.
Project 88 was an effort by a group of US economists and policy makers to find
innovative solutions to major environmental and natural resource problems. A
similar idea was proposed in Europe in the 1980s. However, the potential role of
market mechanisms in environmental policy was not really addressed in the 1992
United Nations Framework Convention on Climate Change. Finally, in 1995, the
United States of America launched the first major market-based emission trading
system. However, this system was only for air pollutants such as SO2 and NOx.1

Market mechanisms for greenhouse gas (GHG) emissions were first introduced
at the Kyoto Protocol in 1997. One of the central features of the Kyoto Protocol
was its requirement for countries to reduce their GHG emissions to set levels,
which added economic value to emission reduction. To help countries meet their
emission targets under the Kyoto Protocol and encourage developing countries
and the private sector to contribute to emission reduction efforts, the protocol
introduced three market-based mechanisms—International Emission Trading
(IET), Clean Development Mechanism (CDM) and Joint Implementation (JI).2

In the framework of International Emission Trading (IET), nations bound by the

Kyoto Protocol can exchange emission units with other participating countries
to address deficits in meeting their respective targets. This further led to the
establishment of the European Union Emissions Trading Scheme in 2005 and
many other such trading schemes/markets in different regions. The linking of
these markets at the global level is expected to happen at some point.

The Clean Development Mechanism (CDM) allowed for a developed nation to

undertake a GHG reduction (or emission removal) project in a developing country
through which they could earn certified emission reductions (CERs) which could
be traded and used by developed countries to meet their emission reduction targets
under the protocol. Developing countries could be recipients of capital investment
and clean technology under this mechanism. Under Joint Implementation (JI),
developed countries with emission reduction commitment under the protocol, can
set up clean energy projects in other developed countries with commitments and
could use the earned emission reduction units (ERUs) to meet their targets under
the protocol.3

10
Figure 1: Evolution of the market mechanisms

Source: CSE, 2023

Article 6 of the Paris Agreement, ratified by 195 nations in 2015, established both
market-based mechanisms (outlined in Sections 6.2 and 6.4) and non-market
approaches (specified in Section 6.8) for reducing emissions. Under Clause 6.2
of the Agreement, parties or nations have the option to voluntarily participate
in cooperative initiatives, such as emission trading. These initiatives involve
the utilization of internationally transferred mitigation outcomes (also known
as emission reduction units) to help fulfil the targets established within their
Nationally Determined Contributions. Article 6.4 of the Agreement replaces
the CDM and institutes a global market for trading emissions. This market
operates under the oversight and direction of the Conference of the Parties
and is available for voluntary use by parties or countries. It mentions that this
market shall be supervised by a body designated by the Conference of Parties.
Article 6.8 acknowledges non-market approaches available to parties to assist the
implementation of their NDCs through mitigation, adaptation, finance, technology
transfer, and capacity building, without involving emissions trading.4

1.2 What are carbon markets?

Article 17 of the Kyoto Protocol introduced GHG emission reduction targets for
developed countries and market mechanisms to help these countries meet their
respective targets. This led to the formation of a new commodity in the form of
emission reductions or removals along with a corresponding market. Since carbon
dioxide is the principal greenhouse gas, emission reduction units and their trading
markets are simply referred to as carbon credits and carbon markets.5

11
 AN INTRODUCTION TO CARBON MARKETS

1.3 Why do we need carbon markets?

The world needs to reduce its GHG emissions in order to adhere to the Paris
Agreement’s goal of limiting global warming to 1.5°C. While there are various direct
pathways for avoiding and reducing emissions from different emission sources,
the challenges and enabling conditions vary within and across different sectors
and regions. A market-based tool like a carbon market is seen and advocated as
a bridge for abating emissions during the time it may take to develop technology,
infrastructure and an enabling environment to achieve the required reduction.6
Here are some anticipated advantages within an ideal framework of carbon
markets:
• Enabling achievement of planned emission targets: The cap or the target
setting system under this mechanism creates a possibility for regulators/
companies to put out scientific and planned targets for emitters that align with
the NDCs and the Paris Agreement.

• Following the polluter pays principle: If an emitter surpasses the established

target or cap for emissions, they are required to purchase carbon credits, or
face a penalty.

• Promotes cooperation and low-carbon initiatives: Carbon markets provide

a platform for cooperation amongst emitters, thus increasing the playfield for
emission reduction and promoting investment in low-carbon initiatives.

• Cost-effective: The mechanism is considered cost-effective compared to direct

command and control compliance measures.

• Provides flexibility: Carbon markets provides the flexibility to emitters to

take the time to develop and adopt the required technologies for emission
reduction.

• Possible source of financing decarbonization: Markets are also looked at as

a possible source of finance for decarbonization initiatives.

• Competition as a tool: In a well running market with a good carbon price,

this mechanism uses competition as a tool to incentivize emission reduction.

1.4 Types of carbon markets: compliance and voluntary

There are two types of carbon markets—compliance and voluntary. Compliance
markets are created and regulated by national, regional, supranational or
international governments or bodies, where the regulated entities (companies/

12
units/sectors) have a legal target or cap to their emissions but can buy or sell
allowances with other regulated entities to meet their targets (sectors such as
steel, cement etc. and their units are included in the cycle). Voluntary markets are
national and international markets where companies and individuals can choose
to offset their emissions by buying credits generated by carbon offset projects like
biogas plants, improved cook stoves for households etc. These markets usually
function outside of compliance markets and enable the purchase of carbon credits
or offsets on a voluntary basis with no intended use for compliance purposes.7,8

Compliance offset market credits may, in some instances, be purchased by

voluntary, non-regulated entities, but voluntary offset market credits, unless
explicitly accepted into the compliance regime, are not allowed to fulfil compliance
market demand. Both markets are said to play a role in addressing climate change
by incentivizing emission reduction and supporting climate mitigation projects,
but they operate under different regulatory frameworks and motivations.
Table 1: Compliance and voluntary markets
Compliance market Voluntary market
Purpose Established to help entities meet legally They are based on voluntary actions by
binding emission reduction targets that are companies and industries to mitigate their
set under regulations. carbon footprint, and are not driven by
legal mandates.
Regulation They are heavily regulated and typically They are less regulated compared to
operate under a ‘cap-and-trade’ or ‘baseline compliance markets. They are often
and credit’ mechanism set by government facilitated by third-party organizations,
bodies or international organizations. standards bodies, or market platforms,
The authorizing body makes compliance and participants voluntarily choose to
mandatory for all entities covered in the engage in carbon offset projects.
market.
Penalties Entities that do not meet the reduction Participants in voluntary markets are
targets may face legal consequences or not legally obligated to offset emissions.
penalties. Therefore, there are typically no penalties.
Type of credit/offset Generally, in compliance markets, entities In voluntary markets, participants
that emit greenhouse gases (GHGs) can purchase carbon credits or offsets as
purchase carbon credits or offsets to meet a means to compensate for their own
a portion of their emissions reduction emissions. These credits come mostly
obligations. These credits are generated from private entities that generate it
from real emission reductions achieved from projects that reduce or remove
through various emission reduction projects carbon emissions, such as reforestation,
and activities within the company/industry, renewable energy projects, or methane
and they are subject to rigorous monitoring, capture from landfills.
accounting and verification standards.
Examples The European Union Emissions Trading An international voluntary carbon market
System (EU-ETS) is an example of already exists. The Verified Carbon
a compliance carbon market, where Standard (VCS) and the Gold Standard are
regulated entities are required to obtain examples of standards used in voluntary
and surrender emission allowances to cover carbon markets to certify and verify
their emissions. carbon offset projects across the world.

13
 AN INTRODUCTION TO CARBON MARKETS

Figure 2: Broad framework of existing carbon markets

Source: CSE, 2024

1.5 How do compliance markets function through

emission trading systems?
As this report focuses on compliance markets and their mechanisms, it is crucial
to understand the various types of compliance markets worldwide and their
operational dynamics. Typically, compliance markets are instituted within an
emission trading scheme, which can operate in two primary ways: cap-and-trade
or baseline-and-credit. These trading systems or mechanisms are defined as9:
• Cap-and-trade is a system where a central authority, usually a government body,
limits the aggregate emissions from a group of emitters by setting a 'cap' on
maximum emissions. Additionally, it sets limits on the number of emissions
permissible for each industry in that group. The cap and targets are based
on grandparenting and/or benchmarking sectoral and individual emissions.10
In this system, the government grants the right to emit pollutants through
emission allowances, which are initially distributed, usually for free or through
auctions, for the amount of emissions equivalent to the cap. In the beginning,
each firm is allotted or required to hold a number of permits (or allowances
or carbon credits) equivalent to their targets. Based on the achievement of
their targets, the entities can trade these allowances/credits in the market. The
total number of permits/allowances or credits cannot exceed the cap, therefore
limiting the total emissions below or equal to the designated cap.11,12,13

14
Figure 3: Mechanism of a typical cap-and-trade system

Emission allowance

C
surplus Shortage Auction
Emission
allowance

Free allocation
A B C

Emissions

Source: European Court of Auditors Special Report -- The EU’s Emissions Trading System: free allocation of allowances needed better targeting, 2020

Graph 1: Mechanism of a typical baseline-and-credit mechanism

Baseline GHG emission intensity

Purchase
CCC
GHG Emission
Intensity Target Achieved SE>
Target SE
Achieved SE<
Target SE Compliance
PX
CCC
Issued

Sell
CCC

Obligated Entity A Obligated Entity B

Source: Bureau of Energy Efficiency, 2023

• Baseline-and-credit system is a system where there is no fixed cap or limit

on the overall total emissions, but it sets a baseline on emissions; reducing
emissions below this level generates credits that can be sold to entities that
have emitted beyond their baseline. Baseline emission levels are set for a group
of individually regulated entities. It has been noted that at times, within the
baseline-and-credit system, the baseline might be defined based on emission
intensity rather than an absolute figure. Growing economies typically adopt

15
 AN INTRODUCTION TO CARBON MARKETS

this system because overall emissions tend to increase under it, but the rate of
emissions growth decreases thanks to targets focusing on emission intensity.
This system is also referred to as the 'intensity-based emission cap scheme'.14
There are some fundamental differences between the two mechanismsthat
have been listed in the table below:
Table 2: Cap-and trade and baseline-and-credit systems
Cap-and-trade Baseline-and-credit
Methodology There is an overall cap on the total number of Baseline emission limits are set for individual entities, and
emissions and, based on that, targets/limits are are defined in terms of emission intensity. The system
set for individual entities does not have an overall cap.
Credit allocation It is an absolute framework. Firms are It is a relative framework. Firms/entities are given
allocated credits/allowances at the start of the performance standards or emission intensity benchmarks.
compliance cycle. One credit equals one tonne Credits are for entities if their emission intensity deviates
of CO2 /CO2e emissions. Cleaner firms can sell from the standard or baseline. Cleaner firms that
unused credits to a polluting entity who has outperform the baseline target are allocated credits and
surrendered all allocated credits, i.e., used the underperforming entities can then buy credits to comply
limit of emissions allocated to them and require with the target. In some cases, pre-allocation of credits
more to meet their target. may also happen based on the previous years’ emissions
which is accounted for at the end of the cycle. Like in the
case of China ETS, which partially follows the baseline
and credit system.
Target setting Grandparenting: Companies are allocated allowances based on their historical emissions from a baseline
year or from a specific period. For example, in Phase I of South Korean ETS, most sectors received free
allowances based on the average GHG emissions of the base years (2011 to 2013).

Benchmarking: benchmark or performance standard is set by regulators for entities to comply with. For
example, in Phase I of South Korean ETS, three sub sectors (grey clinker, oil refining and aviation) received
allowances following benchmarks based on previous activity data from base years.

Both grandparenting and benchmarking are used as a process to set targets in both types of systems, e.g.
South Korean ETS. Although some ETS might use only one of them, e.g. the Indian PAT scheme uses only
benchmarking.
In cap-and-trade, the target for an individual Under the baseline credit system, the target is usually
entity is set based on the overall emission cap. emission intensity-based, therefore the increase in overall
emissions does not matter.
Pricing Under cap-and-trade, different carbon markets Usually, under this system carbon credits are allocated
have allocated majority credits for free. Only to entities that outperform the benchmarks at the end
older markets like EU (57 per cent in Phase IV) of the cycle. Although, in markets like the China ETS,
and Korean ETS (10 per cent in phase III) have which partially follows this system, pre-allocation of free
been auctioning a certain percentage of credits. allowances also happen. These credits/allowances are
then traded on exchange portals. Here also, ETS often
Annual average carbon price in EU-ETS was sets floor prices. For example, the PAT scheme in India
around USD 90 in 2022. Many ETS also set a had a floor price for ESCerts (credits) and entities could
floor price to prevent the market from falling then trade credits above or at the floor price of INR 1,
below a certain price. 8t40 (22.11 USD). The average annual price for China’s
ETS was USD 9.62 in 2023.15

16
 Cap-and-trade Baseline-and-credit
Emission The emission reduction target is calculated The emission reduction is calculated ex-post, at the end of
reduction and set as a cap ex-ante, i.e., at the start of the compliance cycle. Individual entities and sectors emit
the compliance cycle. Sectors and individual according to benchmarks and total emission reduction
entities are given targets based on the overall can be calculated based on performance of individual
cap on emissions. entities.
Distribution Allowances or credits are distributed at the Usually, emission intensity baselines are given to the units
of allowances/ start of the compliance cycle. at the start of the compliance cycle. Underperformance
credits For example, for a cap of 100 tonne CO2e or overachievement of which will decide how credits will
emissions, 100 credits (1 credit = 1 tonne CO2e) be allocated to the unit at the end of the cycle
will be allocated to the emitter, which they For example, if the target intensity is set at 0.62 CO2e/
can use in the compliance cycle. If the unit tonne of product, and a unit achieves a target of 0.61 they
exhausts all the credits, and fall short of them, are entitled to credits.
they can buy from other entities.
Although, in the case of China, based on grandparenting a
certain number of allowances are pre-allocated, and once
the cycle is complete, they are adjusted as per the entity’s
achievement of the target.
Example EU-ETS, Kazakhstan ETS, California ETS, RGGI China ETS (partially), Saitama ETS, Indian PAT scheme
etc.

Figure 4: Framework of the emission trading scheme

REGULATOR
Monitoring Monitoring

Allocation
Allocation

Permit Emissions
Allocation Monitoring

POLLUTION Permit Trading POLLUTION Permit Trading POLLUTION

SOURCE SOURCE SOURCE
(INDUSTRY) (INDUSTRY) (INDUSTRY)

Allocation
1 2
Trading
3
Monitoring
4
Compliance
Regulator sets overall Industry buys more Regulator monitors Regulator checks
cap and allocates permits or sells excees total emissions of that all sources have
permits. and adjusts emissions targeted pollutant. enough permits for
to be below permit emissions.
holdings.

Source: Down to Earth, 201216

17
 AN INTRODUCTION TO CARBON MARKETS

The European Union Emission Trading System (EU-ETS) is the world’s first
international compliance carbon market. It was set up in 2005 in the aftermath
of the Kyoto Protocol and is in its fourth phase now. Since then, multiple national
and sub-national markets have come up in Canada, China, Japan, New Zealand,
South Korea, Kazakhstan, Switzerland and the United States.17 While California’s
cap-and-trade programme was launched in 2013, China went on to set up the
world’s largest ETS that came into force in 2021. In terms of GHGs, China’s ETS
only covers CO2 for trading, on the other hand the EU-ETS covers CO2 and per
fluorocarbons (PFCs), and Korea’s ETS covers CO2, CH4, N2O, PFCs, HFCs and
SF6. The rest of them mostly cover only CO2 like China, at present. Globally, the
major sectors in focus under the various ETS are power, industry and the aviation
sector.

In its Energy Conservation (Amendment) Act, 2022, the Government of India

announced the formation of an Indian carbon market (ICM). The formation of
carbon markets comes at a crucial time with India’s commitment to the updated
Nationally Determined Contributions (NDC) submitted to the UNFCCC in
August 2022. The revised NDC includes a 45 per cent reduction target in emission
intensity of GDP by 2030, compared to the 2005 level. The Indian Carbon Market
is expected to be instrumental in meeting the NDC targets.

The national carbon market will be regulated by the Bureau for Energy Efficiency
(BEE). It is being planned that the market would cover CO2 emissions from multiple
sectors and PFC emissions from processes like Aluminium smelting. Furthermore,
in June 2023, a Carbon Credit Trading Scheme (CCTS) was notified, along with
the formation of a National Steering Committee tasked with establishing the
regulatory framework for the Indian carbon market and overseeing its operations.
Before exploring the potential of the Indian carbon market, the upcoming chapter
will examine prominent national and international experiences with Emission
Trading Schemes (ETS) through case studies.

18
CARBON MARKETS GLOSSARY

In this section, we have defined terms that are related to emission trading schemes and will appear in the following
chapters.

• Grandparenting/grandfathering: Allocation of emission allowances to regulated entities based on their historical emissions
or production levels, typically provided for free.
• Benchmarking: Setting a standard or benchmark against which the emissions of individual entities are measured. This
benchmark is often based on historical emissions, industry averages, or other predetermined criteria.
• Market liquidity: Market liquidity is the degree to which a market allows assets to be bought and sold with minimal price
disturbance. In emission trading systems, market liquidity refers to the ease with which emission allowances or credits
can be traded in the market. It also refers to the number of credits available in the market.
• Market stability mechanism: Measures implemented within an emission trading system to stabilize the market and prevent
extreme price fluctuations. This can include mechanisms such as price floors, price ceilings, reserve allowances, or other
regulatory interventions.
• Banking: Allowing entities to save or “bank” unused emission allowances for future use. This enables entities to carry
over allowances from one compliance period to another.
• Borrowing: Allowing entities to borrow emission allowances from future compliance periods to cover current emissions.
Borrowing is usually subject to certain conditions and repayment obligations.
• Emission allowances: Emission allowances are the unit of a carbon market. These are permits or authorizations issued by
a regulatory authority that allow the holder to emit a specified amount of greenhouse gases within a given time period.
These allowances are often tradable within an emission trading system. One allowance or carbon credit is equal to one
tonne of carbon dioxide
• Cap: The overall limit set on the total amount of emissions allowed within a specific jurisdiction or sector over a certain
period. This cap is usually gradually reduced over time to encourage emission reductions.bb
• Backloading: Delaying the auction or issuance of a portion of emission allowances to a later point in time within an
emission trading system. This can be done to address issues of oversupply or to manage market stability.
• Auctioning: The process of selling emission allowances to the highest bidder through a competitive bidding process.
Auctioning is one method of distributing allowances within an emission trading system.
• Carbon leakage: The phenomenon where emission reduction policies in one jurisdiction leads to an increase in emissions in
another jurisdiction with less stringent regulations. This can occur due to shifts in production or diverting operations to
regions with weaker climate policies.
• Offset credits: Credits earned by implementing emission reduction projects outside the regulated sector or jurisdiction.
These credits can be used to offset emissions within the emission trading system.
• Market-based-mechanism: Policies or systems that use market forces, such as supply and demand dynamics and price
signals, to achieve environmental objectives, such as reducing greenhouse gas emissions. Emission trading systems are
an example of a market-based mechanism for tackling climate change.
• Compliance period: The timeframe during which regulated entities are required to meet their emission reduction targets
or surrender a corresponding number of emission allowances.
• Allocation: The process of distributing emission allowances to regulated entities, either for free or through auctioning, to
cover their permissible emissions within the emission trading system.
• Monitoring, reporting, and verification (MRV): The process by which regulated entities measure, report, and have their
emissions independently verified to ensure compliance with their obligations under the emission trading system.
• Baseline: A reference level against which emission reductions are measured. It represents the expected level of
emissions in the absence of emission reduction measures.
• Compliance/obligated entity: Any entity subject to the emission reduction obligations and requirements of the emission
trading system, typically including large industrial facilities, power plants, and other significant emitters.

Source: International Carbon Action Partnership and European Commission

19
 TPP COMPLIANCE STATUS WITH SOx NORMS

CASE STUDIES OF
MAJOR CARBON
2
MARKETS
As of March 2023, global emission trading systems (ETS) cover
8.91 GT CO2e across 36 markets, with 14 more under development,
valued at over $850 billion in 2021.

The EU-ETS, the first carbon market launched

in 2005, holds the highest carbon price ( $ 83.10 as of 2022)
across allmarkets, has evolved with reforms like the Market Stability
Reserve, innovationand modernization fund, increased auctioning
and banning of offset credits.

The South Korean ETS covers 89% of Korea's national emissions

which is the largest share of emissions being covered under an ETS,
including multiple GHGs. China's ETS, is the largest by absolute
emissions, covering five billion tonnes of CO2 annually with intensity-
based benchmarks.

20
Over time more and more countries are adopting emission trading systems (ETS)
in order to achieve their climate goals. As of March, 2023, the ETS initiatives cover
8.91 GT CO2e representing 17.64 per cent of the global GHG emissions (which
includes implemented, scheduled and under consideration schemes/systems),18
up from just five per cent in 2005. There are 36 compliance markets in force, 14
under development globally.19 Compliance carbon markets have been operating
worldwide and together these markets have reached a value of more than 850
billion dollars as of 2021,20 a 164 per cent increase from 2020.21

As India gets ready to enter this list, the share of emissions covered under carbon
markets would again take a leap as it did drastically when China kick started its
carbon market. EU-ETS is the first carbon emission trading scheme which started
in 2005 followed by a number of other ETS around the world (see Figure 5: A
timeline of compliance carbon markets in the world)

As India prepares, it’s crucial to examine existing emission trading systems

worldwide, both old and new, and draw insights from their experiences to
effectively implement one tailored for India’s needs. In this chapter, we will be
looking at some of the major emission trading systems (ETS) of the world. To
develop a comprehensive understanding, a diverse set of case studies have been
chosen for this research. The four case studies covered in this chapter are from
the European Union, China, South Korea and Surat in India. The third chapter in
this report is dedicated to a detailed analysis of the Indian Perform, Achieve and
Trade (PAT) scheme as it will become the basis for the upcoming Indian carbon
market. These case studies were chosen based on their diverse nature, in terms of
operational time period (old and new), type of scheme and scale and region of the
market.

As discussed in the previous chapter, carbon markets or ETS usually function

in two ways, namely cap-and-trade and baseline-and-credit. A cap-and-trade
mechanism is more viable when the overall production of industries has peaked
and is expected to see a downward trend, but with countries where production
levels are growing, it is difficult to set an overall or sector-wise cap on emissions as
GHG emissions are directly linked to production levels. Hence, developing regions
or countries often adopt a baseline-and-credit system, which prioritizes reducing
emission intensity rather than overall emissions. The table below illustrates some
of the major trading schemes currently in operation, detailing their respective
functioning systems and the total emissions they cover.

21
 CASE STUDIES OF MAJOR CARBON MARKETS

Map 1: Emission trading systems around the world as of 2023

Source: International Carbon Action Partnership, 2024

Figure 5: A timeline of compliance carbon markets in the world

Source: Compiled by CSE, 2024

22
Table 3: Major carbon markets of the world
ETS and Region Year of Type of system Total emissions covered Sectors covered by ETS (as
commencement Cap-and- Baseline- (as of 2023) of 2023)
trade and-credit
EU-ETS 2005 ✔ 38 per cent of EU’s total Industry, power, aviation,
emissions from 2021 maritime
South Korea ETS 2015 ✔ 89 per cent of South Maritime, waste, domestic,
Korea emissions aviation, transport,
buildings, industry, power
China ETS 2021 ✔ 40 per cent of national Power
emissions
Saitama ETS, Japan 2011 ✔ 18% of the prefecture’s/ Buildings, industry
region’s 2020 emissions
Tokyo cap-and-trade 2010 ✔ 20% of the metropolitan Buildings, industry
program, Japan area’s emissions.
California cap-and- 2012 ✔ 75% of state’s GHG Transport, buildings,
trade system emissions industry, power
India PAT scheme 2012 ✔ PAT Cycle II, which Industry, power, railways,
covered 621 designated buildings
consumers amounted to
energy consumption of
226.76 Million tonnes of
Oil equivalent 22
Kazakhstan ETS 2013 ✔ 47% of national CO2 Industry, power
emissions
Regional Greenhouse 2009 ✔ 14% of the aggregate Power
Gas Initiative participant states’
(RGGI) (11 states in emissions
United States)

2.1 Case study 1: European Union ETS (EU-ETS)

Background and evolution

In the 1990s, prior to the Kyoto Protocol, the European Union was sceptical
regarding the idea of using flexible instruments, such as emissions trading, in the
context of climate change policy. Later in 1998, the EU changed its approach after
the failure to get an internal carbon tax adopted, along with some other factors,
and it started developing an EU-ETS. In March 2000, the EU presented a green
paper with initial ideas on EU-ETS. Numerous stakeholder discussions helped
shape the design further.

The EU-ETS directive was adopted in 2003, and rules were designed for the pilot
phase (2005 to 2007) and the subsequent Kyoto commitment phase (2008 to
2012). The system was launched in 2005, making EU the first carbon emission

23
 CASE STUDIES OF MAJOR CARBON MARKETS

market in the world. The EU-ETS has had three phases (2005–07, 2008–12 and
2013– 20) and is currently running in its fourth phase (2021–2030).

Initially, the system covered around two billion tonnes of CO2 i.e. roughly 40 per
cent of EU’s CO2 emissions.23 The initial design was decentralized; considerable
power was given to member states for implementing the system, and permits or
allowances were handed out for free. Power and other key energy intensive sectors
were the main target groups. To increase flexibility, CDM credits were included in
the pilot phase in 2005 and JI credits were included 2008 onwards.

Initially, the carbon price was generally low as allowances were handed out for
free and often very generously by the member states. It even reached a near zero
price in 2007. Therefore, in 2008, a significantly changed design was adopted for
the third phase (2013 to 2020). The reform introduced a single EU wide emission
cap with a common Linear Reduction Factor (LRF). This was intended to make
the system more centralized and auction based from 2013. However, the financial
crisis had hit Europe around the same time which led to lower production and
emissions, thereby the issue of surplus allowances came in and the carbon price
remained low. Oversupply of international carbon credits and overlap with
renewable energy policies also played a role.24

Therefore, as a response to this, a further reform process was initiated in 2012. The
first element of the reform was the postponement of auction or back loading of 900
million allowances from 2014–16 to 2019–20. The second and more important
reform was the introduction of the Market Stability Reserve (MSR). The MSR
is seen as a market thermostat which automatically releases allowances in the
market if the number of allowances drop below 400 million, and it withdraws
allowances if the number exceeds 833 million. The MSR was adopted in May,
2015 and following the pressure from ambitious member states, the operational
start was shifted from 2021 to 2019. Instead of being auctioned in 2019–20, the
900 million allowances backloaded in 2014–16 were transferred to the Market
Stability Reserve (MSR). Any unallocated allowances would also go to the reserve.
In Phase III, the EU-wide cap was set to decrease by 1.74 per cent annually, a
departure from the no-reduction path observed in previous phases. This reduction
factor was to be further increased to 2.2 per cent in Phase IV under the Fit for 55
packages. EU was also successful in reducing free allowances to 43 per cent during
Phase III and Phase IV.

With respect to offset credits, although unlimited JI and CDM credits were
allowed, none were used in Phase I, most probably due to excess free allowances.

24
In Phase II most categories of CDM/JI credits were allowed (except LULUCF
and nuclear power) along with strict requirements for large hydro projects. Phase
II also saw the beginning of limitations being put on offset credits under which
a certain percentage limit was applied to CDM and JI credits in the National
Allocation Plans of the member states.

Phase III brought in more conditions and limitations on offset credits. Entities
could use international credits from CDM and JI to fulfil their obligations
under EU-ETS until 2020, but this was subjected to qualitative and quantitative
restrictions. The use of new project credits from CDM and JI projects after 2012
was prohibited, unless the generated international credits originated from the
least developed countries25. Credits for emission reduction that occurred during
the first commitment period of the Kyoto Protocol (2008–12) had to be exchanged
to EU allowances by March 2015. During the third phase, the total use of credits
for Phase II and III was capped at 50 per cent of the overall reduction under the
EU-ETS during that period. Finally in Phase IV, the use of offsets is not allowed
for obvious reasons, the integrity of these credits being the centre of it.26

Against the backdrop of the “European Green Deal,” initiated in 2019, the European
Commission proposed reforms to the EU-ETS in 2021. These reforms were aimed
at aligning the system with the EU’s revised 2030 target of achieving at least a 55
percent net reduction in emissions compared to 1990 levels. The reforms were
adopted in the EU-ETS Directive of 2023. These reforms included27:
• Raising sectoral emission reduction targets for 2030 to 62 per cent from 2005
levels
• Increasing the linear reduction factor
• Rebasing the cap for 2024 (by 90 million) and 2026 (by 27 million)
• Updating the parameters for Market Stability Reserve
• Gradually phasing out free allocations for CBAM sectors over 2026 to 2032
and for the aviation sector by 2026.
• Including the maritime sector by 2024
• Increasing the size of innovation and modernization funds
• Establishing a separate emission trading system, ETS 2, for fuels used in
buildings, road transport and additional sectors, that are mainly small industry
not covered by the existing EU-ETS. Expected to be fully operational by 2027.

More recently, in February 2024, the EU Commission further announced its

target of achieving a 90 per cent net greenhouse gas emissions reduction by 2040,
compared to the levels in 1990.28

25
 CASE STUDIES OF MAJOR CARBON MARKETS

Figure 6: EU-ETS timeline

Source: Compiled by CSE, 2024

EU-ETS operational design

The EU-ETS compliance cycle starts in January with the start of the monitoring
period for the current year, followed by the allocation of allowances (free or
through auctioning) at the end of February. By the end of March, the regulated
entities need to submit their verified emissions report for the previous year to their
competent authority (CA), and these verified emissions are then entered into a
registry. The emissions report is verified and emitters surrender allowances for the
previous year by 30 April. If an installation has reduced their emissions, they can
keep the allowances for future use or sell them to other installations that are short
of allowances. In case an emitter fails to surrender enough units, they are to pay
a penalty. The penalized companies may face more backlash in terms of national
fines. By 30th June, any improvement or non-conformity report on the previous
year needs to be submitted to CA (if applicable). By the third quarter the verifier
needs to start the verification process for the current year and prepare an annual
emissions report for the current year by December. By the end of December, the
monitoring period for the current year ends and with this any changes in installation
has to be submitted to CA. With the beginning of the new year, the monitoring
period for the new year starts. The trading keeps happening throughout the year.
The detailed compliance cycle can be seen in the figure below.

26
Figure 7: EU-ETS compliance cycle

31 December 1 January
End of monitoring period Start of monitoring
of the current year. Submit period of current year
changes in installation to CA Seeking approval for
significant changes
to monitoring plan
throughout the year 28 February
December Receiving free
Prepare annual allowances
emissions report (if applicable)
for the current year for current year
Continous

3rd Quarter 31 March*

Verifier to start Submit verified
verification process for emissions report to
the current year Trading CA for previous year
throughout Entries of verified
the year emissions data in
Registry

30 June 30 April
Submit improvement/non-confirmity report Surrender allownces in
on the previous year to CA (if applicable) Registry for the previous year

*Operators and aircraft operators may be requested by their CA to submit verified emissions report of the previous year as early as
28 February
Source: BEE Indian Carbon Market: draft blueprint for stakeholder consultation

Graph 2: EU-ETS carbon price timeline: 2005 to current

$/ton

100

80

60

40

20
EU ETS

0
01/01/2010 01/01/2015 01/01/2020 01/01/2024

Source: ICAP allowance price explorer, 2024

27
 CASE STUDIES OF MAJOR CARBON MARKETS

Graph 3: EU-ETS emission allowances timeline

3000 CERs and ERUs

Supply of allowances
Auctioned or sold EUAs
Free allocations scope correcte
2500
Emission allowances (million t CO2)

2000 Emissions

1500

1000

500

0
2005 2008 2013 2017 2020

Source: Stefan P. Schleicher, 2018

Major challenges
It is important to understand the challenges encountered overtime and the
strategies adopted to overcome these challenges from time to time, particularly
when considering the world’s oldest carbon market. Some of the major challenges
were:
1. Decentralization: Initially, the EU-ETS operating as a supranational system,
was decentralized to a considerable extent, granting EU member states greater
authority over the implementation of the system. There wasn’t even a common
central emission cap decided for the entire European Union. Authority to
make specific decisions (like allotment of allowances) was given to the member
states, who implemented the same system differently, leading to a number of
issues in the initial phase.

2. Free and excess allocations of allowance: In the initial phase, member states
were given the authority to allocate allowances under the National Allocation
Plans (NAPs), to which they ended up handing out free allowances and that
too quite liberally. Consequently, the allowances issued exceeded the total
emissions from the covered sectors29. There was also no banking of allowances
allowed at the time, leaving no room for saving allowances from the pilot phase

28
 to the next phase. This led to the plummeting of the carbon price to near zero
in 2007. The total EU allocations were based on a business-as-usual scenario
(BAU) and initially, the allocations turned out to be just one per cent below the
overestimated BAU scenario. Previous trading schemes like the US sulphur
dioxide training programme had allocation levels at 50 per cent below the
baseline emissions.30

3. Lax emission targets, low pricing of allowances and no pricing mechanism

in the initial stage: In the initial phase, the intense lobbying among member
states led to relaxed emission targets. Concerns about carbon leakage prompted
member states to allocate excessive free allowances during the pilot phase. The
excess allocation ultimately brought the carbon pricing to near zero by 2007.
Even after the 2008 reforms, the economic crisis and other factors kept the
carbon price in EU-ETS pretty low. It was only after 2018 that the carbon
prices in EU-ETS improved and became more stable. The introduction of the
market stability mechanisms helped in recovering carbon prices at a fast pace
post-COVID, along with other factors like tightening of the regulations

4. Offset credits: At one point, the EU-ETS was flooded with offset credits. Over
time, it identified major issues around the integrity of offsets followed by the
challenges around being able to monitor how genuine they are and identifying
the problems that occur while measuring the actual emission reduction. This
was also a factor affecting their compliance market.

5. Effective implementation of CBAM: The whole idea behind increasing the

share auctioning of allowances further between 2026 and 2034 depends upon
the effective operationalization of CBAM and its effectiveness in preventing
carbon leakage. The biggest challenge here would be to ensure authenticity
of the information being provided by foreign exporters and the authenticity
of foreign based verifiers. Ensuring authentic reporting from across the globe
will be a big challenge for CBAM, and subsequently for the ETS.

Measures to deal with challenges

Some of the significant measures that were brought in to deal with the prominent
challenges of this scheme, along with improving the conditions and operations of
the market were:

1. Market stability reserve: MSR was adopted under the reforms initiated
in 2012 for Phase III. In 2019, the Market Stability Reserve (MSR) became
operational. Based on a predefined set of rules, it withholds a certain volume

29
 CASE STUDIES OF MAJOR CARBON MARKETS

of auction allowances based on the total number of allowances in circulation.

The MSR mechanism ensures reduction in the surplus of emission allowances
in the market and makes the market ready for future shocks and market
instability. The amount of reserve between 2019 and 2023 will reach 24 per
cent (from 12 per cent) of all the allowances in circulation.

2. Reduced free allowances and increased auctioning of allowances: Similar

to Phase I, 90 per cent of the allowances in Phase II were done for free. It was
in Phase III that 57 per cent of the allowances were auctioned and the same
share was auctioned in Phase IV. In Phase III, the power sector was subjected
to 100 per cent auctioning with an optional derogation for 10 lower-income
member states (which continued in Phase IV as well), whereas the industry
sector received a lot of free allowances. The sectors that were at risk of carbon
leakage were given 100 per cent free allowances, whereas sectors with a low
risk of carbon leakage had their free allocation reduced from 80 per cent of the
benchmark in 2013 to 30 per cent by 2020. The demand for free allowances
exceeded the supply and hence a cross-sectorial correction factor was brought
for free allocation volumes. Ultimately, the EU gradually plans to phase out
free allocations for the CBAM sectors between 2026 and 2034.

3. Backloading allowances: Backloading is a short-term measure under which

emission allowances are discontinued temporarily to rebalance supply and
demand in the market. It does not reduce the overall number of allowances.
Due to the excess allowances during Phase II, the EU-ETS postponed the
auctioning of 900 million allowances from 2014–16 to 2019–20.

4. New entrant reserve: This was established in Phase III and IV, under which
five per cent of the cap was reserved for new installations or for installations
that increased significant capacity. Around 300 million allowances were
allocated for this from the reserve in Phase II, which became 331 million in
Phase IV.

5. Innovation and modernization funds: These funds are financed by revenues

from auctioning emission allowances under the EU-ETS. Usually, it is 2 to 2.5
per cent of the total quantity of ETS allowances auctioned. The fund supports
investment in six priority areas that are:
• energy generation and use from renewable resources
• heating and cooling from renewable resources
• reduction of energy use through energy efficiency

30
 • energy storage and modernization of energy networks, demand side
management, district heating, grids for electricity transmission and
increasing interconnections between member states
• support low-income households, include rural and remote areas, to address
energy poverty, modernize heating systems and create infrastructure for
zero-emission mobility
• Just transition in carbon-dependent areas.

A maximum of 20 per cent of the modernization fund can be used to support non-
priority investments. If the proposal is not from a priority sector, it goes through
technical and financial assessment by the European Investment Bank (EIB).

6. Restricting and banning offset credits: The EU-ETS went from allowing
unlimited offset allowance in Phase I, to meeting emission reduction targets
through 50 per cent offset credits in Phase II and III, to finally allowing no
offset credits in Phase IV.

Table 4: Summary of major challenges and measures

S. No. Major challenges Measures taken
1. Decentralization Overall EU cap and more centralization.
2. Low carbon pricing and no market stability mechanism Market stability reserve, backloading
for a long time auctions and stringent regulations/
policies.
3. Free allocation and excess allowances Increased share of auctioning of
allowances, market stability reserve and
backloading of auctions.
4. Offset credits Initially restricting and finally banning
offset credits in ETS in Phase IV.
5. Upcoming challenge: Effective implementation of CBAM N.A.

Table 5: Summary of the EU-ETS

European Union emission trading system
Status Started in 2005, ongoing, Phase IV (2021–2030)
Type of system Cap and Trade
ETS Brief EU emission trading system is the oldest emission trading system, the
inception of which was laid after carbon market became the central
theme of Kyoto Protocol in 1997. Started in 2005, it has completed
three phases and is now in its fourth phase. It operates in all EU
countries plus Iceland, Liechtenstein and Norway (EEA-EFTA states).
Sectors Energy, industry, aviation and maritime (included in Phase IV)
No. of units covered 10,000 stationary installations31
GHGs covered CO2, N20, PFCs

31
 CASE STUDIES OF MAJOR CARBON MARKETS

Emissions covered 38 per cent of EU’s total emissions as of 2021

Cap In Phase IV, the cap for 2021 from stationary installations is fixed at
1,571 million tCO2e which is subject to an annual linear reduction of
2.2 per cent
Allowance price EUR 78.91 ($ 83.10)32 (average auction price, 2022)
Penalty EUR 100 per tonne of CO2
Compliance cycle Annual
Reduction target European Union: 55 per cent GHG emission reduction by 2030 from
1990 level.
Net zero by 2050
EU-ETS (emissions covered by EU-ETS) reduction target: 62 per cent
GHG emission reduction by 2030 from 2005 level.
Emission reduction* Since 2005, the EU-ETS has helped bring down emissions from power
and industry plants by 37 per cent.
HIGHLIGHTS
High carbon price -Highest globally
-Took 18 years to reach there
Market stability mechanisms - In 2019, the Market Stability Reserve (MSR) became operational.
- It kicks in if the allowance goes below 400 million or above 880
million
- The amount of reserve between 2019 and 2023 will reach 24 per
cent of all the allowances in circulation.
Large and Diverse Sectors Covered Power, industry, buildings, aviation, maritime etc.
New Entrant Reserve Facilitating capacity expansion or the establishment of new units
which is particularly pertinent for developing countries.
EU-ETS 2 A new ETS for emissions from buildings and road transport and
certain industries not covered in the existing system was announced in
December 2022 where fossil fuel emissions from these sectors will be
covered. This will be separate from the existing ETS.
Innovation and Modernization Fund The power sector of eight EU member states (countries) with per
capita GDP below EU average were allocated free allowances to
support modernization of their electricity production.
*Emission reduction from emission trading system

Effectiveness of EU-ETS and its sectoral impacts

As the oldest carbon market in the world, EU-ETS is also the main reference point
for assessing the effectiveness of an ETS in terms of emission reduction. CSE
analyzed a few studies that have tried to establish the role EU-ETS has played in
reducing EU’s overall emissions (see Table 6: Studies on role of EU-ETS in emission
reduction). This section also looks at other factors (events and regulations) along
with EU-ETS which were responsible for the drop in EU emissions along with
unwinding the sectoral impacts of the EU-ETS.

32
Table 6: Studies on the role of EU-ETS in emission reduction
Source Overall reduction in GHG GHG emissions from GHG emissions from
emissions electricity generation industrial sectors

EU Commission33 Reduction of 15.5 per cent in EU The emissions from Industrial sectors had
ETS emissions in 2023, compared electricity production a dip of 7 per cent from
to 2022 levels reduced 24 per cent in 2022 whereas aviation
2023 compared to 2022. emissions increased by
This can be primarily around 10 per cent in one
attributed to the increase year from 2022–23. 34
in renewable, especially
wind and solar, electricity
production.

Study by Bayer et al, 2020 35 EU Emissions Trading System The overall reduction in the second phase may not
Publication: Proceedings of (ETS) had a significant impact in directly translate to a similar decrease in global emissions
the National Academy of reducing CO2 emissions beyond due to the potential for carbon leakage. There is a
sciences of the United States what could be attributed solely possibility that some emissions may have been shifted to
of America (PNAS) to the decrease during the 2008 regions with less stringent regulations,
financial crisis. Calculations
from the study indicate that the The analysis suggests substantial reductions in emissions
EU carbon markets contributed from electricity generation due to their non-possibility of
to a cumulative reduction of carbon leakage.
approximately 1.2 billion tons
of CO2 emissions from 2008 to
2016, representing approximately
3.8 per cent of total EU wide
emissions during this period.

Study by Dechezleprêtre et Analysis of EU ETS in the The study also reveals Of the industrial sectors,
al 202336 period of 2005–2014 shows that higher free allowances the study reveals chemical
significant 10 per cent reduction in the power sector and sectors having significant
Publication: Journal of in emissions from the EU industries correlate with reductions.
Environmental Economics ETS sectors. Most reductions lower GHG emission
and Management occurred during the second reductions.
trading phase (2008–2012),
driven by large installations.

Study by Colmer et al, The study estimates that

202337 regulated firms reduced
Publication: Social Science emissions by 14 per cent in phase
Research Network (SSRN) 1 (2005-2007) and 16 per cent in
phase 2 (2008-2012). Between
2005 and 2012, aggregate
emissions without EU ETS would
be higher by 5.4 million tonnes
per year. The study suggests
no evidence of outsourcing to
unregulated markets.

33
 CASE STUDIES OF MAJOR CARBON MARKETS

When we assess the effectiveness of the EU-ETS in reducing emissions covered

by the system, the graph below clearly shows that the decline in greenhouse gas
emissions from the EU-ETS closely aligns with the decreasing trend of the EU-ETS
cap. There is a 42 per cent decrease in the overall EU-ETS emissions from 2005
to 2022. The gap between the cap and total ETS emissions can be attributed to
market stability reserve, maintaining a new entrant reserve and the backloading of
emissions. There was a sudden drop in emissions in 2009 because of low economic
activity due to the economic recession of 2008-09. We see a rise in the cap in
2012 due to the introduction of the aviation sector in Phase III; the cap increased
from 2,105 MtCo2 in 2011 to 2,302 MtCo2 in 2012. Corresponding emissions also
increased from 1,904 MtCo2 in 2011 to 1,953 MtCo2 in 2012. The cap has followed
a linear reduction factor in Phase III.

As the share of freely allocated allowances started to drop in 2013, the emissions
also dropped from 1,950 MtCo2 in 2012 to 1,800 MtCo2 in 2014. In the third
phase, the cap has decreased from 2,294 MtCo2 in 2012 to 2,026 MtCo2 in 2020.
Corresponding emissions have also fallen from 1,950 MtCo2 to 1,350 MtCo2. As

Graph 4: EU-ETS cap and emissions

2400
Start of phase 4, New
regulation tightens cap

2200

Introduction of
the aviation sector in
ETS increased cap
2000
News of EU declaring
net-zero target for 2050.
Introduction of MSR
tCO2 (Millions)

1800

Share of Freely
allocated allowances
decreased
1600
Low economic Price of
activity due to allowances starts
economic recession to increase COVID-19

1400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Year
Emission Cap

Source: Sandbag EU-ETS dashboard, prepared by CSE, 2024

34
the price of emissions started to increase from EUR 5 in 2017 to EUR 15 in 2018
and EUR 25 in 2019, the emissions also began to drop more steadily. This was also
the period when significant developments such as the introduction of the MSR,
the European Climate Law, and the EU’s net zero target were either implemented
or were on the verge of being introduced. There was a sudden dip in emissions in
2020 owing to the pandemic. The cap has also been tightened in the fourth phase
starting from 2021. The cap was decreased by 400 Mt CO2 (from 2,000 MT CO2
in 2020 to 1,600 MT CO2 in 2021). Since the emissions in 2020 were at a low due
to the pandemic, there was only a slight decrease in emissions from 1,381 Mt Co2
in 2020 to 1,364 MT CO2 in 2021.

When we analyzed the sectoral reduction of the sectors under EU-ETS as presented
in Graph 5 (See Graph 5: EU-ETS sectoral emissions), we can see that:
• The overall EU-ETS emissions from EU 27 countries stood at 1,750 MtCO2e

Graph 5: EU-ETS sectoral emissions

Source: Data from EU-ETS Viewer, ICAP Allowance Price explorer. Prepared by Centre for science and Environment, 2024

35
 CASE STUDIES OF MAJOR CARBON MARKETS

in 2005 following which the scope of ETS was increased. This has decreased
to 996 MtCO2e in 2023. We can also see that as the level of free allocation has
decreased significantly after 2013 there has been a corresponding steep fall in
emissions since.

• Emissions have fallen steadily after 2017. The price of allowances has
also started to rise from 5 Euro in 2017 to 15 Euros in 2018 and even more
significantly to 53 Euros in 2021. With the rise in price, emissions have fallen
correspondingly. This is also the phase when new regulations were introduced
including, MSR, and there was increased public knowledge of banning offset
credits. Additionally, the EU also announced its 2050 net zero target in the
same timeframe.

• The low point of overall emissions from stationary installations in 2020 is also
attributed to low economic activity during the COVID-19 pandemic, which
then begins to pick up post 2020 due to revival of the same.

• The overall reduction in the ETS years starting from 2005 is proportional to
the reduction of emissions in the power sector. The emissions from the power
sector (combustion of fuels) in EU countries have dropped from 1,428 Mt
CO2e in 2005 to 592 Mt CO2e in 2023.

• Reduction from the industrial sector does not account for much. We only see
a reduction of 119 Mt CO2e from 2005 to 2023. These reductions may not
be concrete as part of the emissions were outsourced to other countries with
weaker regulations (carbon leakage).

• Emissions from the aviation sector, included in Phase III, saw a big reduction
in its first year. The CO2 emissions decreased from 70 MtCO2e in 2012 to 45
MtCO2e in 2013. But they have been stagnant since then and currently stand
at 46 MtCO2e in 2023.

• The steep decline in ETS emissions from 2022 to 2023 is due to the increase
in the share of renewables in the power sector. The Russia-Ukraine War
severed gas supplies in major EU countries, as a result of which investment in
renewables rose significantly.

Therefore, it is right to say that EU-ETS has been most effective in the power
generation sector.

36
An analysis of the reduction in CO2 emissions covered under EU-ETS suggests
that ETS, along with other factors, has contributed to reduction in emissions from
the sectors included. Out of the three sectors—power, industry and aviation—
emissions from the power sector have seen the most reductions. The three major
reasons that contributed to effective emission reduction through EU-ETS:
• High carbon price: The emissions from sectors have fallen down more steadily
after the carbon price started to rise from 2017, 2018. A high carbon price is
necessary for an effective emission trading system as it accounts for abatement
costs and makes polluters pay. It also incentivizes the cleaner firms as they get
rewarded by trading allowances.

• Decreasing share of freely allocated allowances: With the decrease in

free allowances, emissions also reduced. The EU-ETS plans to reduce freely
allocated allowances further in the future. High carbon price coupled with
decreasing share of free allocation have reduced emissions effectively in the
last decade.

• Stringent measures within ETS: EU-ETS implements linear reduction factor

in the overall cap. This is also in line with the net zero target. According to the
current LRF, the cap will be zero by 2039, meaning EU-ETS emissions will be
net zero by 2039. Continuous amendments and directives like strengthening
the cap every year and banning offset credits are measures that have proved
successful in reducing EU-ETS emissions

Apart from the ETS, other regulations and events that have contributed to both
momentary and permanent reductions in GHG emissions in the EU are:
• European Green Deal: The European Green Deal represents an umbrella
policy of ambitious commitment by the European Union to transform its
economy into a sustainable and carbon-neutral model by 2050. Under the
deal, the union commits to net zero by 2050. Through comprehensive policies
and investments, it aims to foster green innovation, tackle climate change,
and promote environmental sustainability while ensuring a just and inclusive
transition for all citizens.

• Russia-Ukraine War: The invasion of Ukraine by Russia starting in 2022

created an economic ripple in the EU as the EU depended largely on Russia
for natural gas which was used for power generation. The sudden increase
in renewable energy profile for electricity generation in EU is due to the fact
that their supply of gas from Russia was hampered. Therefore, there has been
considerable decrease in power sector emissions in 2023.

37
 CASE STUDIES OF MAJOR CARBON MARKETS

• Economic crisis: The economic recession of 2008–09 impacted the whole

of the world and EU economies were also affected. This is clear when we see
a sudden dip in emissions in 2009 due to low economic growth and activity
during the period.

• COVID-19: In 2020, as in 2009, there is a dip in emissions as the pandemic

resulted in closure of industrial activities and low economic activity during the
year.

2.2 Case study 2: Korea ETS

Background and evolution
South Korea was a non-Annex I country under the Kyoto Protocol in 1997, but
in the following decades, due to its economic growth, it came in the list of top ten
GHG emitting countries in the world, which led to increased pressure upon them
to act on climate mitigation. Therefore, South Korea launched the ‘Low Carbon,
Green Growth Strategy’ in 2008. Just a year later, South Korea made its first
climate pledge to reduce 30 per cent of its GHG emissions below the business-
as-usual scenario by 2020. The Low Carbon, Green Growth Framework that was
adopted in 2010, required large emitters and energy consumers to report their
GHG emissions and energy consumption every year to the GHG Inventory and
Research Centre (GIR), which was also established in 2010.

The Low Carbon, Green Growth Act had put forth three options for climate
mitigation: a GHG-Energy Target Management System (TMS), a carbon
tax and a GHG ETS. The carbon tax didn’t perform as expected, but the TMS
was implemented, followed by the establishment of the South Korea ETS. In
November, 2012, the Enforcement Decree on allocation for Greenhouse Gas
Emissions Allowance Act (ETS Act) was adopted and the South Korean ETS was
launched in 2015.

The TMS acted as a preparatory exercise for the ETS in South Korea. It introduced
an infrastructure for monitoring and verification of set GHG emission targets
before the ETS came in. All installations that emitted more than 20 kt CO2e per
year or consumed more than 90 TJ per year were required to submit their annual
GHG emissions and energy consumption data to GIR. Broadly, seven sectors
were included and given targets based on grandfathering. The same method was
adopted for ETS initially. The governance structure of TMS built the basis for ETS
in South Korea.

38
The ETS Act was adopted by the South Korean Parliament with a vast majority in
2012, although the Act faced fierce criticism from its Ministry of Trade, Industry
and Energy and from business groups mainly due to increased costs of production
and international competition. Despite the opposition ETS was adopted but only
after certain concessions, primarily involving the postponement of its start from
2013 to 2015. The Master Plan for the Emissions Trading Scheme and the Phase
I National Allowance Allocation Plan were announced in 2014 to implement the
ETS Act.

The ETS has an overarching cap based on the business-as-usual (BaU) forecast.
This overall cap is broken into sectoral caps. The ETS has undergone three phases,
with the first two lasting three years each (2015–17 and 2018–20), while the current
third phase, which is ongoing, spans five years (2021–25). The fourth phase is set
to begin in 2026. South Korea’s NDC was increased from 30 per cent reduction
by 2020 to 37 per cent reduction by 2030 from the BaU scenario, which is the
guiding target for the ETS. Out of the 37 per cent reduction, Korean government
plans 25.3 per cent through domestic reductions and 11.3 per cent through the
international carbon market. During the first phase the allowances were allocated
for free with auctioning being phased in by three per cent in the second phase
and 10 per cent in the third phase. The K-ETS covers 684 of the country’s largest
emitters, from power, industry and buildings to waste, transport and domestic
aviation sectors.

The Ministry of Environment, South Korea was the lead organization guiding the
administration and implementation of the South Korean ETS, while the Ministry
of Strategy and Finance hosted the Emissions Allowance Allocation Committee.
In June, 2016, the lead responsibility was shifted to the Ministry of Strategy and
Finance.

KETS allows three types of allowances/credits in its market. They are:38

- Korean Allowance Unit (KAU): Emission allowance subjected to businesses

under KETS

- Korean Credit Unit (KCU): Emission allowance converted from Korean

Offset Credits

- Korean Offset Credit (KOC): Emission allowance issued and certified by

the South Korean government for reducing, absorbing, and removing GHG
emissions outside KETS

39
 CASE STUDIES OF MAJOR CARBON MARKETS

Only domestic offsets, i.e. Korean Offset Credits (KOCs) and domestic CDM
credits (CERs) were allowed in Phase I with a quantitative limit of up to 10 per
cent for each entity. KOCs and international offset credits were allowed in Phase
II. It only allowed international CERs from international CDM projects generated
by June, 2016, developed by companies that had at least 20 per cent of ownership
rights owned by a Korean company or is supplied with a low carbon technology
by a Korean company that is at least 20 per cent of the total project cost. The
quantitative was continued to be 10 per cent, out of which only five per cent could
be international offset credits. In Phase III, offsets were allowed under the same
qualitative criteria as Phase II but certain limitations were added. Set time periods
were allotted for the conversion of GHG reduction projects to KOC and KOC to
KCU. Along with this the share of offsets was reduced to five per cent of an entity’s
compliance obligation. Both domestic and international offset credits must be
converted to KCUs to be used for compliance.

The price began at EUR 6.3 in 2015 and moved up to EUR 21.5 in February 2016
but then experienced a slight decline. It is also important to note that the trading
volume for 2015 was zero, it remained low throughout 2016 and only picked up in
2017. Initially, the major reason for low market liquidity was the lack of restrictions
on the banking of allowances between cycles. To stimulate the market, the
government released some allowance credit reserve to the market but that too led
to further hoarding of allowances rather than encouraging participation.39 Even
with low emission traded volume between 2015–2017, the market still showed a
consistent positive trend.40 The average carbon price as of 2022 is higher than
other markets (except EU) i.e. almost USD 18 but still far below the European ETS
carbon price which touched above 100 USD per credit in 2022.41 As of 2024, the
prices have been going down due to excess availability of free allowances.

For the purpose of market stability, a reserve of 89.4 Mt CO2e for early action and
new entrants was utilized within the first phase. In the second phase, along with 14
million allowance reserve for market stability, a system called “Market Maker” was
introduced and five million allowances were allotted to the market makers which
were institutions like federal banks that could draw on government held reserves
in a bid to increase liquidity in the market. This reserve went up to 20 million in
Phase III. There were two market makers appointed in 2019, three new financial
firms were appointed in 2021 and two more were appointed in 2022, making it a
total of seven market makers as of 2023.42

Another unique feature of the Korean market is that it covers multiple GHGs—
CO2, N2O, CH4, PFCs, HFCs and SF6 under its ambit. Other large carbon markets

40
Figure 8: South Korean ETS timeline

Source: CSE 2024

in the world such as EU-ETS and China ETS only cover CO 2, PFC and N2O
respectively. The South Korean ETS is also known for its large share (approximately
89 per cent)43 of coverage of the total emissions of the country. There is lack of
information as to how much real reduction has happened due to presence of the
ETS.

In 2022, the South Korean Government did a consultation process with stakeholders
and announced some near-term changes in the ETS in November, 2022, which
included, giving incentives to reduce emissions, opening up ETS to more firms,
facilitating conversion of international offset credits to KCUs, strengthening MRV
system and increasing support for small businesses and new entrants.44

K-ETS operational design

The Korean ETS has an annual compliance cycle and the covered entities have
to follow certain steps to comply with the ETS. The period between January to
December of a year is known as the ETS reporting period during which obligated
entities perform their business activities and also undertake any emission reduction
measures they can. The trading of allocated emission credits also happens during
this period. The next step comes in March of the following year, which is called the
time for reporting and verification. In March, the annual emission report needs to
be submitted and the report needs to be verified by a third-party auditor. The next
step comes in May in the following year, under which emission reports are reviewed
and certified by the Certification Committee of the Ministry of Environment. In
the following month of June, the surrendering of allowance, borrowing (excess
allowance borrowed from next year) and banking (excess allowance saved for

41
 CASE STUDIES OF MAJOR CARBON MARKETS

Figure 9: Korean ETS compliance cycle

Source: Asian Development Bank publication on Korea ETS,45 Prepared by CSE, 2024

Graph 6: South Korea ETS carbon price trajectory

$/ton

30

25

20

15

10
South
Korea
5

0
01/01/2016 01/01/2018 01/01/2020 01/01/2022 01/01/2024
Source: ICAP allowance price explorer, 2024

42
future years) takes place.

Major challenges
- Initial adoption of ETS by industries and businesses: When the ETS Act was
set to be passed in the South Korean Parliament, it faced significant resistance
from businesses and manufacturing industries. This opposition stemmed from
concerns regarding the increased production costs it would entail, particularly
in comparison to major competitors such as the US and China, which had no
such comparable national regulations. Due to international competition, this
can pose a challenge for countries planning to come up with carbon markets.

- Banking allowances and low market liquidity: At the outset of market

operation, the high uncertainty surrounding carbon pricing, coupled with the
absence of restrictions on banking allowances, resulted in minimal activity
within the market. Participants were reluctant to sell their unused allowances,
wanting to bank them for future compliance periods. This resulted in raised
carbon prices. The government released some additional allowances through
its reserve, but they were unsuccessful in stimulating trade in the market as
much. This clearly showed that balancing supply and demand is not always
enough when it comes to handling low liquidity. Instead, the larger uncertainty
around overall policy direction, the market and carbon price need to be
addressed.46

- Multiple coordinating agencies/ministries and unclear market signalling:

During Phase I, and especially after the KETS management was restructured
in 2016, the scheme was being managed by four sectoral ministries along with
the Ministry of Environment and the Ministry of Strategy and Finance. This led
to the absence of clear signalling and hence uncertainty over decision making
about the market and its future. This uncertainty led the KETS participants
to hold allowances for future safety rather than actively trading them in the
market.

- Biggest polluters aren’t paying for their emissions: Plan 1.5, a Seoul-based
climate advocacy group found that the 10 biggest emitters of the country had
sold almost 22 million tonnes of excess credits from 2015 to 2022. The cap-
and-trade system which covers almost 700 entities has had a combined surplus
of 39.2 million tonnes in 2021 and 2022, which is equivalent to almost six per
cent of Korea’s GHG emissions in 2022. Their study highlights how the largest
Korean emitter and steelmaker POSCO was left with unused carbon credits in
2022. The think tank recommends a reduction of around 30 per cent of the

43
 CASE STUDIES OF MAJOR CARBON MARKETS

allocations by 2030 from the current levels.47, 48

- Challenges in the power sector: The major challenge faced with respect to the
power sector in KETS was the lack of any significant reduction in emissions in
the sector. According to an Issue Paper dated March 2023 from the Asia Society
Policy Institute, there has been no reductions in emissions in the power sector.
This has been largely attributed to the fact that carbon costs were not factored
into power stations’ dispatch decisions within the economic merit system of
the overall market. The cost paid by power generators to purchase carbon
allowances were refunded to them monthly (as electricity is subsidized), thus
leaving no economic incentive for decarbonizing their power sector. Also, there
was no passing down of carbon costs to electricity consumers which could have
had some behavioural impact on electricity consumers. Usually, it is said that
the ETS works well in a more liberalized power sector whereas in Korea, it’s
mostly government controlled, with KEPCO (a public utility) being the largest
power generator.

Measures
- Market Stability Reserve and Market Makers: Learning from the EU
experience, the Korean ETS established an allowance reserve from the first
phase itself. In the second phase the concept of Market Makers was also
introduced. Existing financial Institutions like federal banks were made
Market Makers. These institutions could draw on government held reserves
to simulate market liquidity. However, these measures struggled to increase
the market liquidity.

- Allocation committee: An allocation committee was tasked with creating an

allocation plan across various phases and implementing market stabilization
measures under specific conditions. These conditions include instances where
the market price remains at least double the average price of the two previous
years for six consecutive months, or if the price falls below 60 per cent of the
average price of the previous two years. In 2018, the allocation committee
had put up an additional 5.5 million allowances from the stability reserve for
auction in order to ease the market before the 2017 deadline of Phase I. In
2021, the allocation committee had also set a floor price of around USD 9.98
per tonne in April and USD 7.31per tonne in June.49

- Restriction on banking of allowances and increase in borrowing

allowances: After the initial no-restriction on the banking of allowances, in

44
 April 2017, The Ministry for Strategy and Finance announced that allowances
would be deducted from an entity’s future free allowances if they have
excessive carryover. Entities were now allowed to bank 10 per cent of their
annual average phase one allowances plus an additional 20,000 allowances.
Any entity having more than that will have them deducted in the next phase.
The change in banking restrictions came along with an increase in borrowing
provisions. Now any entity could borrow up to 10 percent of its next year’s
allocation.

- Limiting offset credits but simplifying its processes: This may not be a
direct challenge faced by K-ETS but based on learnings from the EU case,
the K-ETS allowed only domestic offset credits in its inception phase. The
second phase did allow use of international offset credits (only up to 5%) but
with conditionalities of having Korean ownership involved to be able to hold
someone accountable for the same. But due to rising challenges around offset
credits, in its third phase the share of offsets for an entity has been reduced to
5 per cent overall. There is no separate limit for international offset credits.
Although in 2022, the Korean government proposed to simply the processes
for international offset credits. All CDM generated credits have to be converted
to Korean Offset Credits for compliance and the process for these involved
reviews of multiple ministries thus making it complicated. In 2022, the
government had proposed to simplify these processes.50

- Environment merit order dispatch for power sector: In 2021, Korea

planned to adopt an environmental merit order dispatch so that the carbon
cost can be reflected in the energy retail tariff for 2021. However, it is said
that the adoption of an environmental merit order may not be enough for
fuel switching and low carbon investments, as the real issue rests with the
government-regulated electricity market structure.51

- Revenue used for small businesses and new entrants: Through a stakeholder
consultation process in 2022, it was proposed that revenues generated from
auctioning allowances will be directed to small companies, new entrants
and low-carbon research and development. It also includes expansion of
exemptions on value added taxes.

- Incentives to reduce emissions: The Korean government has decided to

issue more free allowances to the top 10 per cent of the most efficient entities
in every sector and to those who have installed new energy efficiency measures
in their facilities. It will also support low-carbon production and products. 52

45
 CASE STUDIES OF MAJOR CARBON MARKETS

- Improving monitoring, reporting and verification: In order to enhance

the efficiency of the MRV system and ensure international compliance, it was
proposed that covered entities adopt international MRV standards, such as
the IPCC guidelines. Additionally, entities were not required to submit a new
report annually unless significant changes had occurred in the industry.

2.3 Case study 3: China ETS

Table 7: Summary of major challenges and measures

S. No. Challenge faced Measures taken
1. Banking of allowances and low market liquidity The release of allowances from the reserve
by the allocation committee, introduction
of market makers, setting the floor price,
restriction on banking allowances, easing
processes for international offset credits
2. Biggest polluters aren’t paying for their emissions No direct measure taken. Seoul think tank
due to excess free allowances recommends that the auction of allowance be
increased to almost 30 per cent by 2030
4. Hot and cold on offset credits Offset credits have been limited to just five per
cent and its processes are being made efficient
to help increase market liquidity
5. No substantial emission reduction in the power Korea planned to adopt an environmental
sector merit order dispatch, incentives to reduce
emissions

Table 8: Korean ETS summary table

Korea emission trading system
Status Started in 2015, ongoing- phase 3(2021-2025)
ETS Brief Emission trading in the Korean ETS market started in 2015. In the first phase, all the
allowances were allocated for free, which reduced in later phases. Korean ETS was
the world’s second largest such market in scale when launched.
Sectors Power, Industry, Buildings, Transportation, Waste, Domestic Aviation
GHGs CO2, N20, Methane, HFCs, PFCs, SF6
Emissions covered 89 per cent
Cap In Phase 3, the cap is set at 2,902 million tCO2e and 180Mt reserve
Allowance price KRW 23,243 ($ 17.99) (average auction price, 2022)
Penalty The penalty for non-compliance shall not exceed three times the average market price
of the given compliance year or KRW 100,000 per tonne.
Compliance cycle Annual
Reduction target To reduce GHG emissions to 40 per cent below 2018 levels by 2030.
Net zero by 2050
Emission No data available on ETS linked emission reduction
Reduction*

46
 HIGHLIGHTS
Market Makers Introduced in Phase 2, market makers, are institutions who can accrue credits from
the government reserve and ensure market stability through liquidity. There are
currently seven market maker institutions in the K ETS.

Restriction on banking Allowances have been allocated for free in the K ETS for the most part.
of allowances Phase 1: 100 per cent free allocation
Phase 2: 97 per cent free allocation
Phase 3: 90 per cent free allocation
For hard-to-abate sectors called energy-intensive, trade exposed (EITE) sectors, 100
per cent allowances are allocated for free.
Limited use of offsets Entities under K ETS can trade a maximum of five per cent of their compliance
obligation through Korean offset credits (KOCs) which are domestic credits
generated through offset. This limit in Phase 3 has been reduced from 10 percent in
earlier phases. CERs generated from CDM projects are allowed to be converted to
KOC with a set rule. The offset credits need to be converted to Korean Credit Unit
(KCU) in order to be used for compliance.
Restriction on banking The banking of tariffs was one of the major challenges in KETS’ initial phase,
of tariffs therefore introducing restrictions on banking was essential.
Environmental dispatch Was proposed to bring in carbon costs in the power tariffs.
order for power sector

Emission reduction Incentives to give 10 per cent free allowances to top energy efficient entities along
Incentives and revenue with providing support to low-carbon products
for small businesses
*Emission reduction from emission trading system

Background and evolution

China has seen unparalleled growth over the years driven largely by energy intensive
industries. Coal has been the primary source of energy in the country. The share
of coal in the primary energy consumption of the country has been around 70 per
cent between 1978 and 2012. It is only since 2012 that the share has been coming
down, and at 2022 the share stood at 55 per cent.53

At the start of the millennium, China was unwilling to accept any emissions cap, as
it considered itself a developing country. Despite increasing energy consumption,
China experienced a decline in energy intensity from 1980 to 2001. It was between
2002 and 2005 that energy intensity rose unexpectedly due to a surge in industrial
development, rapid urbanization and rise in coal usage. Therefore, in its eleventh
five- year plan, China addressed the issue of energy intensity by setting a target to
reduce energy intensity by 20 per cent within those five years. The following year
China surpassed the United States as the largest CO2-emitting country in total
terms. The implementation of this energy intensity reduction target was not easy
and many units were shut down in the process in 2009–10. This made the Chinese
administration realize that old command and control measures would be tough to

47
 CASE STUDIES OF MAJOR CARBON MARKETS

implement.

In 2011, China officially announced its plan to gradually develop a carbon emission
trading scheme, approving seven jurisdictions as carbon market pilots. The first
emissions trading scheme was piloted in China in the 1980s for SO2 emission
trading, with additional pilots for SO2 emissions starting from 1999 onwards.
Between 2007 to 2016, the Ministry of Environmental Protection (MEP) and
Ministry of Finance ran 11 pilots on SO2 and chemical oxygen demand (COD)
in China. The experience with SO 2 trading was mixed due to difficulties in
implementation. Despite this, China even tried market mechanisms such as Clean
Development Mechanism (CDM), and by 2007, accounted for 60 per cent of all
CDM projects in the pipeline, primarily focusing on renewable energy projects.
After the 2011 announcement, the carbon regional ETS pilots began operations
in 2013–14 and had a sort of aim to test out designs and provide lessons for the
national market.

In 2017, China announced a plan to implement a national ETS. The national

ETS became operational in January, 2021, following the publication of key policy
documents by the Chinese Ministry of Ecology and Environment (MEE). This
required over 2000 major emitters in the power sector to report their emissions
for the years 2019 and 2020. The compliance period spans two calendar years.
The scope of ETS as of 2022 covers more than five billion tonnes of CO2 per year
or almost 40 per cent of China’s total carbon dioxide emissions.54 China’s national
ETS does not have a cap but is based on emissions intensity-based benchmarks
of CO2. The coal power plant benchmarks are divided into three categories i.e.
0.8177 tCO2/MWh for conventional coal fired plants over 300 MW, 0.8729 tCO2/
MWh for conventional coal fired power plants below 300 MW and 0.9303 tCO2/
MWh for unconventional coal fired power plants. Apart from this, the gas-based
power plants had a separate benchmark of 0.3901tCO2/MWh.55 These benchmark
figures are for 2022, and they have been revised every year since 2019–20.

In 2021, the launch year, the activity in China’s ETS was limited with an overall
trading of around 412 million tonnes56 of allowances (including trade volumes of
regional pilots and domestic offsets known as CCERs), out of which 178 million
tonnes were in national ETS, 63 million tonnes were in regional markets and
around 169 million tonnes were through CCERs. This is not unusual to begin
with as EU-ETS in 2005 traded around 321 million tonnes of allowances but has
gradually increased its volume to 12 billion by 2021 and around 12.5 billion in
2022.57 As of 14 July 2023, the cumulative transaction volume of carbon emission
allowances had reached 240 million tonnes in China’s national ETS. The regional

48
pilots have also been running parallel to the national ETS. Currently all allowance
allocations in China’s national ETS are free. Allowances, which are called China
Emission Allowances (CEA), can be traded on a dedicated trading platform
managed by the Shanghai Energy and Environment Exchange. After the first
cycle, the MEE states that 1,833 companies handed in enough allowances from
July to December 2021 to cover their emissions from 2019 and 2020, while 178
firms partly covered their emissions. It further stated that the compliance rate of
allowances reached 99.5 per cent in the first cycle.

In May 2021, the MEE announced the setting up of a market regulation and
protection mechanism. This was to enable MEE to take steps like buy-back,
auctioning, adjusting CCER rules etc. to respond to any unusual fluctuations in
the market. The specifics of this mechanism are yet to be defined.

China’s new emission trading scheme is the world’s largest carbon market and is
thrice the size of Europe’s. With China’s intention to include heavy industry and
manufacturing sectors, its carbon market is projected to expand by 70 per cent,
solidifying its position as the most extensive climate policy covering emissions,
exceeding the collective scope of all other carbon markets worldwide.58 The MEE
has launched many studies looking into the possibility of bringing in several sectors
into the fold, including iron and steel, non-ferrous metals, building materials,
petrochemicals, chemicals and aviation sector. However, no specific timeline for
their inclusion has been disclosed as of now.

The old CCER scheme for offset credits was suspended in 2017 due to low trading
volumes and lack of regulation for some projects. Around 80 million tonnes of
credits were issued between 2012 and 2017 which were used in China’s regional
and national ETS. As per MEE, entities under the national ETS could use the left
over CCER credits to offset five per cent of their verified emissions. In January
2024, the Chinese government re-launched the CCER scheme after a six-year
suspension and reform period. The re-launch will allow project owners to apply
for CCER projects and generate offset credits that can be used in national ETS.
It is expected that the CCER scheme will begin operating in 2024 and will be
open to projects like offshore wind farms, solar thermal power plants, mangrove
development and forestry. Under this relaunched scheme, CCERs can be used by
entities covered under the national ETS to offset up to five per cent of their verified
emissions, up to a total of approximately 250 million tonnes across the scheme.59

According to the latest update, as of February 2024, the State Council of China,
under the leadership of the Chinese Premier, announced a new set of regulations

49
 CASE STUDIES OF MAJOR CARBON MARKETS

for the national ETS. These regulations aim to elevate the governance of the China
Emission Trading Scheme (ETS) from ministerial oversight to the state council
level, thereby establishing a solid framework and foundation for the national ETS.
These regulations will be effective from May, 2024. Under the regulation some of
the major measures that have been taken are:
- The ETS governance framework will have new authorities like National
Development and Reform Commission, The Civil Aviation Administration
of China etc. join the MEE in taking decisions regarding ETS. China’s
Ecological Environment Department has been given responsibility for
supervising and managing China’s carbon emissions trading

- Enhanced financial and non-financial enforcement measures to

prevent obligated entities from falsifying reported emissions, failure to
submit samples for inspection, etc. The fine and penalty amount was
increased substantially, which ranged five to ten times the market value of
the gap. Deductions will be made from entities’ next year’s allocation, along
with potential suspension if they refuse to surrender their allowances after
a warning.

- Penalties and enforcement measures were brought in for third party

verifiers, consultants involved in emission data frauds, which was up to 10
times their illegal gains.

- It also mentions that China will bring in the auctioning of allowances

gradually which will be expanded, although no clear timeline has been
specified.

- Offset credits are allowed in the national ETS, although this regulation
does not specify any limits. The current ministerial-level regulations
have a limit of five per cent of the verified emissions. The MEE will be
responsible for developing specific rules.

- According to this regulation the regional markets will have to improve

their market management rules. The State Council won’t allow any new
regional emission schemes in China.

Design and operation of China’s national ETS

Although the general rules of an ETS regarding allocation, compliance, MRV

50
Figure 10: China ETS timeline

Source: Prepared by CSE, 2024

Graph 7: China ETS carbon price trajectory

Source: ICAP carbon price explorer, 2024

51
 CASE STUDIES OF MAJOR CARBON MARKETS

etc. have been followed in designing China’s national ETS, it differs in certain
ways. For example, it covers only the power sector and has an emission intensity-
based benchmarking system to maintain a balance between economic growth and
emission reduction.

MEE laid out the steps for the first compliance cycle of China’s national ETS.
By the end of March 2021, the pre-allocation of emission permits to all 2,225
entities for 2019 and 2020 took place (70 per cent of their 2018 output) and all
entities opened accounts in the Shanghai Environment and Energy Exchange.
By the end of April, 2021, the obligated power generation sites had to complete
their online reporting of emissions for 2020. By the end of June, 2021, the power
sector conducted the verification of GHG emissions of 2020 and reported the
results to MEE. From the end of June 2021, the trading period began for the
power sector. Further, by the end of September, 2021, the other seven selected
sectors (petrochemicals, chemicals, building materials, steel, non-ferrous metals,
paper and domestic aviation) had to complete the online reporting of their
2020 emissions. Parallelly, MEE completed the verification and made the final
allocations of emission permits for the power generation sector in 2019 and 2020.
By the end of December, 2021, the other seven selected sectors completed their
verification of GHG emissions and reported it to the MEE. The end of December
was also the compliance deadline of the first round of implementation. Therefore,
power plants surrendered allowances covering their emissions in 2019 and 2020.
The power sector also includes captive plants.

The table below shows the step-by-step details of the first compliance cycle.

Major challenges
- Low and seasonal market liquidity, shortage of supply, and low-carbon
price: These issues are closely interconnected and are commonly observed
during the initial phases of market establishment. The liquidity of China’s
national carbon market has been noted to be low and seasonal, with
transaction levels typically remaining subdued. This pattern may stem from
companies engaging in allowance purchases and sales primarily to meet their
compliance obligations. As a result, most transactions occur towards the end
of the compliance period, leading to imbalanced market activity throughout
the year, with minimal activity observed for much of the year. Because of
this there won’t be enough supply of allowances throughout the year. Recent
stricter MRV rules have also led to delay in release of new allowances, adding
to the shortage of supply in the market. The design of the cycle is such that the
trading window is also short when compared to markets like EU-ETS. Trading

52
Table 9: China national ETS compliance cycle
Deadline Monitoring, reporting and Emission permits
verification (MRV)
30 March, 2021 Pre-allocation: All 2,225 regulated
power generation sites received
their preliminary allocation of emission
permits for 2019 and 2020, and opened
a trading account in the Shangai
Environment and Energy Exchange.
30 April 2021 Reporting: Power generation sites
complete the online reporting of emissions
in 2020.
30 June, 2021 Verification: The power sector completes
verification on the GHG emissions in 2020
and reports the results to the MEE.
Confirmation of coverage: MEE's provincial
subsidiaries submit a list of regulates sites
in the power generation sector.
From end of Online trading starts for the power
June 2021 generation sector.
30 September, 2021 Reporting: All other seven selected Allocation: MEE completes the
sectors complete the online reporting of verification and makes final allocations
GHG emissions in 2020. of emission permits for the power
generation sector in 2019 and 2020.
31 December, 2021 Verification: All other seven selected Compliance deadline of the first
sectors complete the verificaion on the implementation cycle: Regulated power
GHG emissions in 2020 and report to the generation sites surrender permits
MEE. covering their emissions in 2019 and
2020.
Source: Carbon Brief,60 2021

activities have further slowed down in the second year compared to the first
year of trading in the national ETS. This also affected the carbon price of the
market. On 8 March, 2024, China ETS achieved a record high carbon price
of Yuan 83.33/ Mt Co2e ($11.74/ Mt Co2e). This was the highest price it had
achieved since its inception in 2021, when its price was Yuan 51.23/ Mt Co2e
or USD 7.22/ Mt Co2e as per Shanghai Environment and Energy Exchange
(SEEE). The price hike on 8 March can be attributed to the announcement of
the new regulation. The price has gone as low as USD 5.84/ Mt Co2e in 2021 as
well. Even with the slight rise in the price over the few years, the carbon price
is still almost one tenth of the carbon price of EU-ETS.61

- Data accuracy: China’s national ETS has various issues with data integrity.
Within the initial period, a power plant emitting around 10 million tonnes of
CO2 was caught doctoring its emissions data. This case affected almost one
million tonnes of emission allowances which was worth seven million USD.62

53
 CASE STUDIES OF MAJOR CARBON MARKETS

The MEE has highlighted that there is a widespread problem of data fraud
among power plants and consultancies that have helped emitters manipulate
their data.

- MRV challenge for small companies: China has a large number of small-
scale generators and manufacturers which, at some point, will be included
in the national ETS. The larger companies have experience and a proper
system developed in terms of data collection and management whereas MRV
compliance with smaller entities which lack experience, instrumentation and
systems in place will make it challenging.

- Issues around offset credits (CCERs): CCERs, which is China’s version of the
Kyoto Protocol’s Certified Emission Reduction, was launched in 2012, but was
halted in 2017 due to small transaction volume and lack of standards in carbon
audits.63 The mechanism before 2017 featured 200 methodologies64 (difficult
to monitor) and various projects with poor economic returns which could be
amongst the reasons for policy suspension.65 The decision to suspend offset
credits was taken by NDRC as they wanted to reform the scheme, but soon the
responsibility of the scheme shifted from NDRC to MEE, which took time to
relaunch the scheme.

- Low penalty amounts: The lack of a comprehensive climate change law has
resulted in penalties not being sufficiently severe. Ministry regulations have
restrictions and therefore, penalty amounts in China have been lower than
the amount of money companies would have to spend on buying allowances.
The maximum fine on a company is only 30,000 Yuan (USD 4,200), which is
a fraction of what a company could save by breaking the rules by not buying
allowances. This has been addressed in the new regulation that has come in
May 2024.

- Lack of effective overarching legislation: China lacks an overarching law on

climate change or a law for reducing GHG emissions. Therefore, the country
has to follow an internal set of regulations prepared by MEE and usually,
ministerial data has certain restrictions in place. Although with the recent
regulation coming directly from the State Council, more policy strength has
come to the China ETS.

Resolution measures
- Tightening benchmarks but with exemptions: Compared to the first

54
 compliance cycle in 2019–20, the benchmarks were tightened by 6 to 18 per cent
and 7 to 19 per cent for coal power generators in 2021 and 2022 respectively,
and 0.5 percent for gas fired plants. This was done mainly to eliminate the
surplus of allowances observed in the first cycle.66 This tightening came but
with exemptions; for example, their target obligation has a cap of 20 per cent
above verified emissions, companies with a shortfall of 10 per cent or more
can apply to borrow allowances (up to 50 per cent of the shortfall) from their
pre-approved allocation for 2023 to fulfil obligations of 2021 and 2022, and
special relief packages for certain plants which are important for livelihood
reasons and couldn’t meet their obligations.67, 68

- Actions to improve data integrity: In March 2022, MEE sent out a notice
for companies to carry out monthly inspections in the key parameters of their
emissions and to submit the results online. It also launched a research project
in June 2023, to build a long-term mechanism to help manage data quality.69

- Introducing the auctioning of allowances: In the latest regulation issued in

February 2024, there were plans to introduce and expand auctions within the
market, although a specific timeline for implementation has not been specified.

- Stricter MRV rules: The MEE is amending and strengthening the MRV
guidelines almost every year for the national ETS, to prevent any form of data
fraud or manipulations from occurring any more.

- Stricter penalties: The new regulation sets stricter penalties for obligated
entities as well as consultants and third parties involved in the evaluation
processes. The penalties for failures or cheating in reporting range from CNY
500,000 (USD 70,582) to ten times the illegal gains. Non-compliance penalties
range from 5 to 10 times the market value of the gap, while consultants and
MRV (Monitoring, Reporting, and Verification) verifiers can face penalties of
up to 10 times the illegal gains for data fraud.64

- Relaunching CCER scheme: In January 2024, the CCER scheme was relaunched
after a reform period which will allow projects to generate offset credits for
national ETS. The MEE has publicized four methodologies that would be used to
quantify net emission reductions from four types of projects i.e. forestation, solar
thermal power, offshore wind power generation and mangrove revegetation. The
authorities expect that this will help in increasing market liquidity.

Table 10: Summary of major challenges and measures

S. No. Major challenges Measures taken

55
 CASE STUDIES OF MAJOR CARBON MARKETS

1. Low and seasonal market Tightening benchmarks, relaunching CCERs, introducing auction
liquidity, shortage of supply and of allowances, market regulation and protection mechanisms.
low carbon price
2. Data quality Monthly inspection and reporting of key parameters, continuous
strengthening of MRV system, research project to develop long-
term mechanism for data quality.
4. Offset credits Relaunch of reformed CCER (offset credit) system after a six-year
suspension
5. Low penalty amounts Introduction of stricter penalties based on illegal gains or market
gap for not only market entities but also consultants and third-
party verifiers

Table 11: China national ETS summary

China emission trading system
Status Started in 2021 without specific phases; the current rules apply to both the
first compliance period (2019 and 2020) and the second compliance period
(2021 and 2022)
ETS Brief China’s ETS is the world’s largest ETS in terms of covered emissions,
estimated to cover around five billion tCO2, accounting for 40 per cent of the
country’s CO2 emissions. It has been established that eight pilot ETS projects
ran in different regions of the country from 2013. The pilots are operational
parallelly and will gradually integrate into the national ETS
Sectors covered Currently includes the power sector (including combined heat and power and
captive power). Will gradually include seven more sectors
GHGs CO2
Emissions covered 40 per cent of the country’s emissions
Cap In this market, cap is the sum of bottom-up total allowance allocation to
individual entities. Cap changes according to actual production levels. It adds
up to a cap of 5,000 million tCO2 in 2021 and 2022
Aallowance price Completely free allocation
Penalty China’s interim regulation which would come in effect from May, 2024 has
increased fines from CNY 10,000 to 30,000 to CNY 50,000 to 200,000, and
for failing to comply fines have increased from CNY 20,000 to 30,000 to
five to ten times the market value of missing allowances
Compliance cycle Two years
Reduction target No specific target for the market. Will contribute to country’s target of 18
per cent reduction in carbon intensity per unit of GDP compared to 2020 by
2025 and to achieve carbon neutrality by 2060.
Emission reduction* Data not available
HIGHLIGHTS
Strict penalties Higher and more stringent penalties in multiples of illegal gains and market
gaps have been brought in under China’s new interim regulation.

56
Re-launch of CCER scheme MEE has publicized four methodologies for four types of projects under the
re-launched scheme, thereby drawing a clear boundary compared to the
previous scheme.
Combatting data manipulation To combat data manipulation, monthly monitoring is being done and the
and continuous improvement of MRV system is being reformed every year
MRV rules

2.4 Case study 4: Surat Emission Trading System

Background and evolution

In a step towards tackling air pollution, the Ministry of Environment, Forests and
Climate Change (MoEFCC), the Central Pollution Control Board, and the Gujarat
Pollution Control Board collaborated with researchers from J-PAL South Asia, the
University of Chicago and Yale University and designed the world’s first Emission
Trading Scheme (ETS) for reducing Particulate Matter from the industrial point
sources.
In 2019, the ETS-PM (Emission Trading Scheme for Particulate Matter) was
introduced among 342 highly polluting textile industries in Surat, Gujarat, as a
first of its kind in the world for mitigating particulate emissions. Surat is one of the
major industrial hubs in India with 52,252 registered industrial units. Some of the
main industries are textiles, chemicals, dyeing and printing, diamond processing,
zari (silver) making, and engineering related activities (including manufacturing
machines and equipment). The maximum number (nearly 24,000 units) of small
and medium scale enterprises are related to the textile industry in the district
followed by repairing and the service industry with more than 11,000 units.70

Industries under ETS-PM have been selected using the following criteria:
1. Industries belonging to the “red” category of high polluting industries
2. Industries with at least one stack and diameter >24 cm for CEMS installation
3. Industries using solid/liquid fuels, ranked by their PM emissions
4. All large and medium sized industries ranked by capital investment from (3)
5. Small industries with PM emission capacity above predetermined threshold71

An emissions inventory study conducted under Surat Municipal Corporation by

WRI India for Surat city showed the breakdown of emissions from different sources
in 2019. Road dust, transport and industry were the three highest contributors to
PM emissions. Industry was also amongst the highest contributors when it came
to SOx, NOx and CO emissions (See Table 12: Surat industrial area profile: Total
Emissions from pollutants in Surat city). As per the study, industrial sector was
contributing 23 per cent of the PM10 emissions and 27 per cent of the PM2.5
emissions of the city. Industries in Surat are predominantly from the textile sector

57
 CASE STUDIES OF MAJOR CARBON MARKETS

(94 per cent). Most of them use solid fuels such as coal (37 per cent) or lignite (27
per cent) but some are reportedly using liquid fuel such as diesel (14 per cent).72

The inception of CEMS in India opened the doors for a market-based scheme like
the one in Surat. The figure below illustrates the timeline of CEMS’ inception and
how the Surat and Ahmedabad ETS subsequently followed suit.

Design and operation

Target setting
Industries participating under the ETS scheme are given a target for PM emissions.
GPCB in consultation with the Market Oversight Committee sets appropriate
parameters of market design such as a level of cap, PM emission monitoring from
each of the point sources, amount of trading deposits, amount to be deducted from
trading deposits in case of excess PM emission or unavailability of data etc. The
cap is based on the CPCB particulate emission standard of 150 mg/Nm3.74

Permit distribution
According to the scheme, industries must possess emission permits equivalent to
Table 12: Surat emission inventory study: Sector-wise emissions for each
pollutant in Surat
Sector Emissions (kt/year)
PM10 PM2.5 SO2 NOx CO
Industry 8.1 3.87 3.59 4.46 40.42
Transport 4.31 4.19 0.09 32.86 85.78
Road dust suspension 19.55 4.73 - - -
Solid waste burning 0.27 0.23 0.01 0.09 0.87
DG sets 0.02 0.015 0.017 0.258 0.056
Residential cooking 1.14 0.68 1.21 0.76 9.29
Eateries 0.111 0.073 0.042 0.072 1.14
Landfills 0.13 0.089 0.008 0.049 0.686
Construction 1.67 0.29 - - -
Crematoria 0.156 0.077 0.003 0.021 0.783
Aircraft 0.004 0.004 0.262 0.02 0.543
Total 35.461 14.248 5.232 38.59 139.568
Source: Surat Municipal Corporation and World Resources Institute India, 2021

58
Figure 11: Surat ETS timeline

Source: ETS success story booklet73

their current PM emissions. At the beginning of the scheme, industries are pre
allocated 80 per cent of their total PM emissions. The rest of the 20 per cent is
adjusted based on whether industries fall short or over achieve their emission
targets.75

Compliance period
According to CSE’s discussion with the experts, it is clear that the industries are
given either one or two months depending on the size of the unit as a compliance
period. At the end of each compliance period, GPCB shall compare the total
pollution released by each industry to their permit holdings. Industry shall be
considered in compliance with the scheme if they hold emission permits that are
equal to or greater than their actual mass of emissions released during the whole
of the prior compliance period.

For example, an industry that emitted 35,000 kg of particulate matter but held
permits for only 30,000 kg, at the close of a compliance period, would be non-
compliant and is subjected to pay penalty

Trading mechanism
The transfer of permits is referred to as a trade. Industries trade the emission
permits on a trading platform hosted by the commodity trading marketplace—
National Commodities and Derivatives Exchange e-Markets Ltd (NeML). In
effect, the buyer is paying a charge for polluting, while the seller is being rewarded

59
 CASE STUDIES OF MAJOR CARBON MARKETS

Figure 12: Functioning of ETS

Emission Cap

Gujarat Pollution
Control Board
Allocation

Monitoring

Monitoring

Allocation
Permit Emissions
Allocation Monitoring

Permit Permit
Emitter A Trading Emitter B Trading Emitter C

Source: Booklet on Particulate Matter ETS, Gujarat, Sep 2022

for having reduced emissions, thus, following the polluter’s pay principle,

Penalty for non-compliance

All industries participating in the market are required to deposit an environmental
bond called Environmental Damage Compensation Deposit (EDCD) at the
beginning of the scheme. At the end of the compliance period, if the industry
seems to not have enough emission permit, they are liable to pay a penalty called
Environmental Damage Compensation (EDC). The price of the penalty is set
greater than the maximum permit price in the market. The penalty would be
deducted from the initial deposit made by the respective industries.76

What has the achievement been?

According to the September 2022 report titled “Gujarat Emission Trading Scheme
for Particulate Matter—A Paradigm Shift in Environmental Regulation,” by GPCB,
the Gujarat ETS scheme introduced in 2019 claims to have reduced PM emissions
from industries by 20–30 per cent. The overall cap was initially set at 280 tonnes
during the compliance period-1, but was gradually decreased over time because it

60
was not stringent i.e. the supply of permits was higher than the demand.77

Following consultations with the Market Oversight Committee, the emissions cap
has been revised and has been trading at approximately 170 tonnes per 30 days in
the later compliance cycles after 2021.78.

Challenges

1. Low price of emission permits: As understood from the records, GPCB

has set a floor price for emission permits at INR 5/kg. This condition most
probably persists because the availability of emission permits has exceeded the
demand. According to the ETS Success Story Booklet, GPCB have themselves
stated that they have decreased the cap for emissions because of the excess
availability of the emission permits.

A similar situation existed with respect to PAT scheme where the Energy
Savings Certificates (ESCerts) were available in excess. The same might be the
case for this ETS scheme; availability of excess emission permits may be due
to setting less ambitious targets for reducing the particulate emissions. Low
targets make industries achieve targets very easily and have higher emission
permits for trade, therefore reducing the price of the permits.

If the price of the permit is low, non-compliant industries would prefer

purchasing emission permits rather than making efforts to reduce their PM
emission by installing suitable air pollution control devices (APCDs).

As per GPCB, the latest overall cap under the last few compliance cycles was of
170 tonnes Suspended Particulate Matter. Given there are 342 industries, this
translates to an average cap of 497 kgs SPM for each industry. Upon failure to
meet the targets, the companies/units are obligated to purchase PM credits.

Analysis of the highest bids for emission permits in the latest compliance
cycles—26,27 and 28 as available on the GPCB Surat Clean Air Dashboard—
reveals an average highest bid price of INR 35/kg of PM permit.

For instance, a 10 per cent increase from the average individual cap of 497 kg
SPM would mean the company has to buy 50 kg worth of permit. The price of
buying these 50 kg PM permits at INR 35/KG would be INR 1,750.

The Surat textile manufacturing hub is the second largest in the country, and
these companies have turnovers that are in multiples of crores. Therefore, such

61
 CASE STUDIES OF MAJOR CARBON MARKETS

a low price does not account for any significant effect for the companies. Even
if these companies do not abide by the cap given to them for all compliance
periods in a year, the cost of installing APCDs is way higher than buying
emission permits.

2. Data reliability on CEMS: CSE analyzed Gujarat’s Continuous Emission

Monitoring System data and found that out of 704 industries connected to
CEMS, only 491 were active, 192 showed their status as inactive and 21 as
delayed. In addition, industries that display an online status in the image below
do not show any data once clicked. These scenarios questioned the reliability
of the CEMS data. Apart from this , our country also grapples with issues like
no CEMS certification system, installation of CEMS at inappropriate locations
in industries, unreliable manufacturers and others. Since the ETS scheme,
considering the CEMS data as a means of check mechanism, GPCB should
take additional measures to ensure the reliability of the CEMS data.

3. Lack of transparency: Unlike the CEMS system, the ETS monitoring system
is not available in the public domain as of now. Only the concerned officials
involved in the ETS scheme have access to the PM emissions data. Gujarat ETS
scheme is currently being monitored by the regulators by the online monitoring
system. It is clear from the CSE’s discussion with Gujarat PCB officials that the
industries under ETS are maintaining a separate online monitoring system
for PM monitoring. GPCB also claims that the stack PM emissions have been
reduced by 24 per cent in these industries between 2019 and 2022, but there
is no proper source apportionment study in public domain or other evidence
to back this study. Moreover, there is lack of data on change in ambient air
quality, therefore there needs to be a clear transparent study on the same.

Measures
CSE had a discussion with the Gujarat PCB officials and they informed that
the industries under ETS scheme have made several efforts to reduce their
particulate emissions. The efforts are of three types such as:

1. Cleaner fuel shift: Industries are found shifting towards cleaner fuel such as
agro-residue to achieve emission target.

2. Improving combustion efficiency: In an attempt to improve the combustion

efficiency, industries are found adopting different technologies like auto-fuel

62
Figure 13: GPCB CEMS dashboard

Source: GPCB CEMS dashboard as of December, 2023

feeding system, improving air-fuel ratio, and operation and maintenance

improvements.

3. Installing air pollution control devices (APCDs): As the monitoring

strengthened after the Gujarat ETS, more and more industries were found to
install APCDs.

Although a study should be conducted of the obligated entities and clear data on
the above three measures should be shared in public domain to bring clarity on
how much of this has actually happened on the ground and that industries are not
delaying such measures by buying permits which are available at low rates.

Table 13: Surat emissions trading system

SURAT EMISSION TRADING SYSTEM

63
 CASE STUDIES OF MAJOR CARBON MARKETS

Figure 14: Measures to reduce particulate emissions

Shift to cleaner fuels

Improving combustion efficiency

Installing air pollution control devices

Source: CSE, 2024

Status In 2019, ETS-PM was introduced among 342 highly polluting industries in Surat in
Gujarat as a first of its kind in the world for mitigating particulate emissions.
ETS Brief Firms are required to hold a number of permits (or allowances or carbon credits)
equivalent to their emissions. The total number of permits cannot exceed the cap,
limiting total emissions to that level.

Industries under ETS-PM have been selected using the following criteria:
1. Industries belonging to “red” category of high polluting industries.
2. Industries with at least one stack and diameter >24 cm for CEMS installation.
3. Industries using solid/liquid fuels, ranked by their PM emissions.
4. All large and medium sized industries by capital investment from (3).
5. Small industries with PM emission capacity above predetermined threshold.
Sectors Textile
Pollutant Particulate matter (PM)
Target/Cap The cap was initially set at 280 tons during the compliance period–1, but was
gradually decreased over time because it was not binding.

Allowance price latest compliance cycles—26,27 and 28 reveals an average highest bid price of INR
35/kg of PM permit.
Penalty Companies that do not possess enough emission permits are to pay a penalty called
Environmental Damage Compensation. The price is set greater than the maximum
permit price in the market.

Compliance cycle One to two months

HIGHLIGHTS

64
Lapse in monitoring CSE analyzed the Gujarat’s Continuous Emission Monitoring System data and found
that out of 599 industries connected to CEMS, only 491 were active and 192 showed
their status as inactive and 21 as delayed. Apart from that, industries showing status
as active are not showing any data. This scenario questioned the reliability of the
CEMS data.
Low floor price and Analysis of the highest bids for emission permits in the latest compliance
permit price cycles—26,27 and 28 as available on the GPCB Surat Clean Air Dashboard—reveals
an average highest bid price of INR 35/kg of PM permit.
The price of permits fluctuate in the range of Rs. 5/KG to Rs. 100/KG, this price is
very low. The floor price of Rs. 5/KG is also set low.

2.5 Overall summary

Some important design elements come forward after analysis of all Emission
trading systems. CSE has analysed the ETS with different scopes and scales. The
key takeaways from design elements are summarized in the table below.

Table 14: Design and operation of ETS Case Studies

ETS case studies EU-ETS Korean ETS China ETS Surat ETS
Type of system Cap-and-Trade Cap-and-Trade Baseline-and– Credit Cap-and-Trade
Year of 2005 2015 2021 2019
commencement
Allocation Initially allocated Mix of free All free allocations Auctioning at floor
mechanism freely, the share allocation and price of INR 5/kg of
of free allocations auctioning PM emissions
reduced and
auctioning increased

Coverage 37 per cent of GHG 77 per cent of GHG 40 per cent of 340 textile
Emissions emissions of the country’s GHG industries from
country emissions Surat
Offsetting and No offset emissions 5 per cent of the 5 per cent of the No offsetting
linking allowed after 2020 verified emissions verified emissions
Emission reduction As reported by EU Data not available Data not available It has claimed to
achieved commission in April, have reduced PM
2024, ETS emissions emissions by 24 per
in 2023 are 47 per cent between 2019
cent below 2005 and now. No study
levels79 in public domain to
back these claims.
Carbon price USD 90 (average USD 17.99 USD 11.74 (as of PM permit price-
achieved auction price 2023) March 2024) INR 5/kg

65
 CASE STUDIES OF MAJOR CARBON MARKETS

ETS case studies EU-ETS Korean ETS China ETS Surat ETS
Penalties applied EUR 100 per tonne Three times the Failures or cheating Not specified
of CO2 average market in reporting starting
price of the given from 500,000 CNY
compliance year or (USD 70,582) to
KRW 100,000 per 10 times the illegal
tonne. gains.
Consultant firms
and carbon verifiers
involved in MRV
data fraud to face
penalties up to 10
times of the illegal
gains
Total market value 834.18 billion80 245.4 million 2.49 billion 81 Data not available
(in USD)
Revenue generated 206 billion 901 million82 No revenue Data not available
(in USD) generation

66
LEARNINGS FROM THE
PAT SCHEME
3
Initiated in 2012, India's Perform, Achieve, and Trade (PAT) Scheme
covers 1,333 designated consumers (DCs) from 13 energy-intensive
sectors, setting specific energy reduction targets over three-year
cycles.

PAT's overall CO2 reductions are marginal and most industrial

sectors in the initial PAT cycles overachieved the targets, resulting in
an excess of more than 2 million ESCerts during PAT II.

Challenges include excess ESCerts availability, low market activity,

lenient targets, increased non-compliance, and delayed compliance.
The newly proposed Carbon Credit and Trading Scheme (CCTS)
which aims to build on PAT's framework, needs to address these
shortcomings.

67
 LEARNINGS FROM THE PAT SCHEME

3.1 The PAT scheme: An introduction

India’s National Action Plan on Climate Change (NAPCC) was introduced in
2008 with the aim of outlining various strategies and measures to address climate
change challenges. It consisted of eight national missions that focused on different
aspects of climate change mitigation and adaptation. These missions were aimed at
enhancing the country’s resilience to climate change impacts while also promoting
sustainable development. Some of the key missions included the National Solar
Mission, National Mission for Enhanced Energy Efficiency, National Mission for
Sustainable Agriculture, National Water Mission, and others.

The Ministry of Power and Bureau of Energy Efficiency were given the responsibility
of implementing the National Mission for Enhanced Energy Efficiency (NMEEE).
Four initiatives were rolled out under the NMEEE, of which Perform, Achieve and
Trade Scheme (PAT) was one.83

Perform, Achieve and Trade (PAT) was set up in 2012 as a competitive mechanism
for reducing energy use in large industries. It was introduced as a market-based
mechanism to increase energy efficiency in the industrial sector. In 2023, the
Ministry of Power, Government of India, notified the Carbon Credit and Trading
Scheme (CCTS) for India. The newly proposed CCTS (which will be discussed
in detail in the next chapter) in India is being built upon the experience and
framework of the ongoing PAT scheme as PAT is the only national level market-
based mechanism currently operating in India.

The direct relation between energy efficiency and reduction in carbon emissions
also make them very relatable. Henceforth several design elements of the new
carbon emission trading scheme are similar to the framework of existing PAT
scheme. This makes it essential to closely examine the experiences and learnings
from the PAT scheme to incorporate the same in the upcoming CCTS scheme.

Under PAT, the government shortlists industries, limits the amount of energy they
can consume, and defines a time limit for the achievement of targets. Industries
have to, in turn, work towards improving their energy efficiency. Industries that
are given targets in the scheme are called designated consumers (DCs). The
industries that overachieve their targets are issued energy savings certificates (or
ESCerts) that can be traded with industries that have not achieved their targets.
The table below shows a brief comparison of the two schemes in terms of design
and framework.

68
Table 15: Comparison of PAT and CCTS design
Particulars PAT CCTS
Objective Energy efficiency Carbon emission reduction
Target intensity Specific energy consumption (SEC) Specific GHG emission (SGE)
Unit of credit measurement Tonnes of oil equivalent (TOE) Tonnes of CO2 equivalent (tCo2e)
Compliance cycle 3 years 1 year
Issuance of certificates Ex-post Ex-post
Entity Designated Consumers (DCs) Obligated entity (OE)
Monitoring and verification Accredited Energy Auditors Accredited Carbon Verifiers
Administrator Bureau of Energy Efficiency Bureau of Energy Efficiency
Certificate Energy Saving Certificates (ESCerts) Carbon Credit Certificates (CCCs)
Target Unit-wise targets Unit-wise targets
Registry POSOCO Grid Controller of India
Trading regulator CERC CERC

Under the PAT scheme, energy-intensive industries, such as thermal power plants,
cement, steel, aluminium, and pulp and paper, are given specific energy efficiency
targets to achieve over a certain period. These targets are set based on their
historical energy consumption and production levels. Participating industries are
required to implement energy-saving measures and technologies to meet their
targets. Industries are given three years to achieve the targets set by the agency.

Industries that exceed their energy efficiency targets are awarded Energy Savings
Certificates (ESCerts), while those that fail to meet their targets are required
to purchase ESCerts to comply with the scheme. This creates a market-based
mechanism where industries can trade ESCerts, providing an incentive for energy
efficiency improvements.

Non-achievers have to buy the ESCerts after the three years. This period of time
given to comply with the energy-reduction targets is called one cycle. After the
first cycle, PAT announcements for eight cycles have been made so far since 2012;
PAT has covered 1,333 DCs from 13 energy-intensive sectors until now. Sectors
included are thermal power plants, cement, aluminium, iron and steel, pulp and
paper, fertilizer, chlor-alkali, petroleum refineries, petrochemicals, DISCOMs,
railways, textile and commercial buildings (hotels and airports). PAT-I started
in 2012 and ended in 2015 but PAT-II onwards, cycles are being implemented
on a rolling basis i.e. subsequent PAT cycles were notified annually, to accelerate
coverage and include more DCs.

The Bureau of Energy Efficiency (BEE), selects the sector and industry on which
targets are placed. Accredited BEE-empanelled energy auditors are engaged by

69
 LEARNINGS FROM THE PAT SCHEME

Figure 15: Design of the PAT framework

Establishing the
Boundary setting Target Setting
baseline

Measurement Verification and

Reporting
Issue or Requirement of ES Certs
• Energy audits
- Depository or Registry Function
• Form 1 and Normalisation
- Book keeping of ES Certs
• Verification and cross check
• Reporting processes Form 1,
Form 2, Form 3, Form A,B,C,D

Market
Enforcement of
Mechanism for
Compliance
trading

Source: BEE Impact of Energy Efficiency measures, 2020-21

the industry to present the audit statements post the cycle. The auditors scrutinize,
monitor and verify to ascertain achievements and target shortcomings. Based on
the verification results, industries trade on power-exchange portals, i.e., online
market platforms where energy certificates are bought and sold by designated
consumers.

The process is long due

Sectors are selected on the basis of the BEE feasibility study. Under this study,
BEE-empanelled accredited energy auditors survey the number of units in a
sector and study the energy consumption pattern to set the minimum threshold
of energy consumption limit for the selected sector for the purpose of shortlisting
the designated consumers in the sector. After completion of the PAT cycle,
measurement and verification of achieved energy savings is carried out by the
empanelled accredited energy auditors and the year in which it is performed is
referred to as an assessment year (see Table 16: Baseline year, assessment year and
number of DCs listed and current status of each PAT cycle).

70
Table 16: Baseline year, assessment year and number of DCs listed in each PAT cycle
The majority of industries were included in the beginning of PAT cycles
PAT cycle Baseline Assessment No. of Sectors added No. of DCs Energy Status of cycle
year year Sectors involved saving
involved target (in
Mtoe)
Cycle 1 2007–10 2014–15 8 Aluminum, Cement, 478 6.68 Trading of ESCerts done
Chlor-Alkali,
Fertilizer, Iron &
Steel, Pulp & Paper,
Textile, Thermal
Power Plant
Cycle 2 2014–15 2018–19 11 Petroleum Refinery, 621 8.86 Trading of ESCerts
DISCOM, Railways started in 2021
Cycle 3 2015–16 2019–20 6 116 1.06 ESCerts Under evaluation

Cycle 4 2016–17 2020–21 8 Petrochemical, 109 0.69 M & V compliance phase

Buildings
Cycle 5 2017–18 2021–22 8 110 0.51 M & V compliance phase

Cycle 6 2018–19 2022–23 6 135 1.27 Ongoing

Cycle 7 2018-19/ 2024-25 9 707 8.48 Ongoing

2019-20
Cycle 8 2021-22 2025-26 6 138 - Targets notified

Total 13 1333
Source: Data from Bureau of Energy Efficiency, 2021. Compiled by CSE, 2024

PAT scheme covers 1,333 DCs from 13 energy-intensive sectors of the country.
PAT is in its sixth cycle and targets for PAT VII and VIII have already been notified
for FY25 and FY26.

These two cycles will likely be operational parallelly to the CCTS scheme. The BEE
might plan to transition the CO2-intensive sectors from the PAT scheme to the
CCTS, which would come with its own set of challenges. It is also to be noted that
the entities under previous PAT schemes that will complete their cycles will not be
continued in PAT. They will be given targets under the CCTS scheme which may
not be the best way to transition as it will also come with certain challenges.

71
 LEARNINGS FROM THE PAT SCHEME

HOW BEE CALCULATES CO2 EMISSIONS FROM EACH SECTOR

In order to calculate CO2 emissions, fuel mix for each sector is considered and specified by BEE as given in Table 17

Table 17: Fuel mix for PAT sectors

Fuel mix %
Sector Coal Oil Gas Electricity
Aluminium 94% 4.50% 0.50% 1%
Cement 97% 1% 0% 2%
Chlor-Alkali 75% 2% 13% 10%
Fertilizer 8% 0% 90% 2%
Iron and Steel 83.50% 2% 1.50% 13%
Pulp and Paper 80% 5% 0% 15%
Textile 71.80% 0.90% 2.60% 24.70%
Thermal Power Plant 99.50% 0.50% 0% 0%
Petroleum Refinery 15.90% 24.30% 50.20% 9.60%
Railways 0% 69% 0% 31%
DISCOM 0% 0% 0% 100%
Source: BEE Impact of Energy Efficiency measures, 2020-21

With the amount of energy consumption, calorific values and CO2 emission factors of each fuel, CO2 emissions
can be calculated. GCV and emission factors are mentioned in Table 18

Table 18: kcal value and CO2 conversion factors for fuels
Gross calorific values kcal/kg kcal/kWh CO2 emission factors
kg of CO2/kg of fuel kg of CO2/kWh
Coal 4500 1.52
Oil 10050 3.13
Gas 9500 2.69
LPG 11900 2.89
Electricity 860 0.79
Source: BEE Impact of Energy Efficiency measures 2020-21

3.2 Steel sector: Analysis of CO2 emission reductions

According to the Ministry of Steel, a total of 163 DCs from the steel sector have
been covered under the PAT scheme. As reported in PIB,84 the steel sector has
achieved total targeted energy savings (from PAT I, II and III from 2012–2020) of
5.5 MTOE and corresponding CO2 reduction of 20 million tonnes. On an average,
the 20 million tonnes can broken down into 2.5 million tonnes of CO2 emissions
reduction per year from 2012–2020.

72
Table 19: Steel sector performance in PAT I and II
PAT cycle No. of DCs Total energy Energy- Target achieved CO2 emission Percentage
consumption saving target (million TOE) reduction (Mt increase in
(million TOE) (million TOE) Co2e) achievement
from target
PAT I 67 25.32 1.486 2.1 6.51 41.3
(2012–15)
PAT II 71 40.44 2.14 2.913 12.74 36.12
(2016–19)
Source: Compiled by CSE, 2024

The total emissions from the steel industry, as per the Third Biennial Update
Report (BUR-3) to the United Nations Framework Convention on Climate Change
(UNFCCC) stood at 135 million tonnes of GHG equivalent for 2016. This means
that there was only around 1.85 per cent reduction in CO2 emissions from the steel
industry in 2016. This is a marginal reduction in CO2 emissions when compared
to the contribution of the steel sector to India’s overall emissions. Steel sector is
one of the biggest industrial sectors, emissions reduction from this sector can have
a positive impact on India’s emission profile. Steel sector had overachieved their
targets set by BEE in the first two cycles.85 (see Table 19: Steel sector performance
in Pat I and II)

3.3 Cement sector: Analysis of CO2 emission reductions

In the first two cycles of PAT, CSE’s analysis revealed that the cement sector
overachieved their target by 81.6 and 41.82 per cent in PAT I and II, respectively.
The total number of cement sector entities were 85 in PAT I and 111 in PAT II.
The sector achieved a total emission reduction of 11.92 million tonnes CO 2 from
both the cycles (2012–2019). According to BUR reports, the total CO2 emissions
from the sector in 2016 stood at 160.1 million tonnes CO2. On an average, the sector
reduced 1.70 million tonnes of CO2 emissions per year. This is less than one per cent
reduction as compared to total emissions of 160.1 million tonnes in a year (2016).

Like the steel sector, the cement sector also overachieved their targets in the
first two cycles. The sector outperformed as it overachieved the target by 81 per
cent in the first cycle. In the second cycle, the sectoral coverage was increased.86
The number of DC’s increased from 85 in PAT I to 111 in PAT II. Notably, the
total energy saving target for PAT II is still lesser (1.1 MToe) than the sector’s
achievement in the first cycle (1.48 MToe). There can be an argument that the
energy saving target in the second cycle is higher than the target of the first cycle.
Given the sector had already overachieved the target of the first cycle by more than
80 per cent, it can be questioned as to why the subsequent target was not made
more ambitious.

73
 LEARNINGS FROM THE PAT SCHEME

Table 20: Cement sector performance in PAT I and II

PAT cycle No. of DCs Total Energy Energy- Target achieved CO2 emission Percentage
consumption saving target (million toe) reduction (Mt increase in
(million toe) (million toe) CO2) achievement
from target
PAT I 85 15.01 0.816 1.48 4.34 81.6
(2012–15)
PAT II 111 21.43 1.1 1.56 7.58 41.82
(2016–19)
Source: Compiled by CSE, 2024

A study of the PAT scheme by Oak and Bansal (2022),87 underlines that the cement
industry had been going through linear energy and emission intensity reductions
from the 1990s. During 2005–2015, several factors like change in technology from
wet process to dry process of manufacturing, increase in production of blended
cement, installation of waste heat recovery systems contributed significantly to the
emission intensity reduction of the sector. Moreover, the study by Oak and Bansal
suggests that the energy efficiency increase in the sector in these years is due to
two reasons—declining trend in energy intensity and additional decline in energy
intensity of DCs due to PAT scheme. The study breaks down the contribution of
both the factors. Total energy saving achieved in PAT I stands at 9.8 per cent from
the baseline energy consumption of 15.01 million TOE. Of this, the contribution
of PAT scheme is 2.7 per cent. This shows that the contribution of PAT scheme
in cement sector, in terms of energy efficiency and emission reduction is marginal
when you compare it to the reductions in the BAU scenario.

Therefore, it is clear that the PAT targets were met by cement sector DCs without
much difficulty hence they had overachieved the target by a large margin in both
the initial cycles. The energy saving and corresponding emission reduction from
the scheme are also marginal, as seen in the steel sector.

3.4 Power sector: Analysis of CO2 emission reductions

Thermal power plants were the biggest sector covered under PAT. Electricity
generation is also the highest contributor to India’s GHG emissions, at almost 40
per cent of the countries emissions as reported in BUR-3.

TPPs were the only sector that failed to achieve the energy saving targets in PAT-
I, whereas they achieved the target in PAT-II.88 When compared with the overall
energy consumption of the sector, the targets assigned were also very low in both
the cycles (see Table 21: Power sector performance in PAT I and II).

74
Table 21: Power sector performance in PAT I and II
PAT cycle No. of Total energy Energy- Target achieved CO2 emission Percentage
DCs consumption saving target (million TOE) reduction (Mt increase in
(million toe) (million toe) CO2e) achievement
PAT I (2012-15) 144 104.56 3.211 3.06 13.6 -5.00
PAT II(2016-19) 154 120.16 3.13 3.519 11.57 12.96
Source: Compiled by CSE, 2024

The cumulative reduction in CO2 emissions from thermal power plants during
PAT Cycles 1 and II amounts to 13.64 million tonnes and 11.57 million tonnes,
respectively. The combined emission decrease from these plants totals 25.21 million
tonnes of CO2, constituting merely 2.3 per cent of the overall CO2 emissions from
this sector in a single year of 2016, that too, over a span of six years. If one looks at
the emission reduction achieved in a single year, the figure would probably be less
than one per cent. The reduction targets set for all the sectors were very lenient.

The first PAT cycle was notified in 2012. The scheme has been in force for more
than a decade. CSE had done a critical analysis of the PAT scheme (PAT I and II)
for the power sector back in 2021. Some of the major shortcomings of the PAT
scheme were:

1. Lenient targets, overachieved by most: In PAT I, thermal power plant sector

was the major sector with 30 per cent of total DCs. The overall energy reduction
in absolute number for the sector was 3.211 million tonnes oil equivalent which
translates to 3.07 per cent when compared to the sector’s baseline energy
consumption. For other sectors in PAT-1, the target percentage is nearly double.
Most sectors overachieved their targets by 41 to 142 per cent (see Table 22: Sector-
wise energy consumption and target reduction set by BEE in PAT Cycle I).

Excess availability of ESCerts, cheaper price of certificate: Prayas Energy

Group’s 2023 analysis highlights the trading of ESCerts, revealing that 57 lakh
ESCerts were issued for PAT Cycle II, while the demand was only 36.68 lakh.
Thermal power plants and DISCOMs had a share of 38 per cent of the issued
ESCerts whereas they are obligated to purchase 78 per cent. Meaning that the
power sector has to buy more ESCerts than they have generated. 40 sessions of
trading have been conducted so far from till October 2023 for PAT II where a total
of 21.89 lakh ESCerts have been traded, amounting to almost 60 per cent of the
demand.

The price of one ESCert during PAT I and starting sessions of PAT II varied
between INR 200 to 1,200 after which a floor price of INR 1,840 was set for PAT

75
 LEARNINGS FROM THE PAT SCHEME

Table 22: Sector-wise energy consumption and target reduction set by BEE in
PAT Cycle I
Sr. PAT cycle I No. of Energy Energy- Energy CO2 Target
No. sector identified consumption saving saving emissions reduction
DCs (Mtoe) targets achieved reduction assigned
set under in PAT I (MtCO2e) against
PAT-I (M (Mtoe) energy
toe) consumption
(per cent)
1 Thermal power 144 104.6 3.211 3.06 13.64 3.07
plants
2 Iron and steel 67 25.32 1.486 2.1 6.51 5.87
3 Cement 85 15.01 0.816 1.48 4.34 5.44
4 Aluminium 10 7.71 0.456 0.73 3.1 5.91
5 Fertilizer 29 8.2 0.478 0.78 0.93 5.83
6 Paper and pulp 31 2.09 0.119 0.289 1.24 5.69
7 Textile 90 1.2 0.066 0.129 0.62 5.50
8 Chlor-alkali 22 0.88 0.054 0.093 0.62 6.14
Total 478 6.686 8.661 31.00
Source: CSE 2021, BEE document on impact of energy efficiency measures for the year 2019–20

Table 23: Sector-wise energy consumption and target reduction set by BEE in
PAT Cycle II
Sr. PAT cycle II No. of Energy Energy-saving Energy CO2 Target
No. sector identified Consumption targets under saving emissions reduction
DCs (Mtoe) PAT-II (Mtoe) achieved reduction assigned
in PAT II (MtCO2e) against
(Mtoe) energy
consumption
(per cent)
1 Thermal Power 154 120.16 3.13 3.519 11.57 2.6
plants
2 Iron and Steel 71 40.44 2.14 2.913 11.85 5.3
3 Cement 111 21.43 1.1 1.56 5.45 5.1
4 Aluminium 12 10.66 0.47 0.573 4.2 4.4
5 Fertilizer 37 8.25 0.447 0.383 1.18 5.4
6 Paper and pulp 29 2.68 0.15 0.315 1.35 5.6
7 Textile 99 1.48 0.087 0.136 0.66 5.9
8 Chlor-alkali 24 1.77 0.102 0.136 0.55 5.8
9 Petroleum 18 18.5 1.009 1.48 5.19 5.5
Refineries
10 Railways 22 1.39 0.077 0.196 1.0 5.5
11 DISCOMs 44 - 4.67 2.077 25.44
Total 621 13.382 13.28 68.43
Source: CSE 2021, BEE document on impact of energy efficiency measures for the year 2019–20

76
Table 24: Delays in PAT cycle as of November 2023
PAT Cycle Target Year Deadline Deadline Actual Timelines
for MoP for DCs to
to issue buy ESCerts
certificates and report
compliance

I 2014-15 31/12/15 31/07/17 ESCerts trading completed in January 2018

ESCerts issued in August 2021, delay of 20

II 2018-19 31/12/19 31/07/21 months; Trading of ESCerts completed on 31st
October 2023

III 2019-20 31/12/20 31/07/22 ESCerts still not issued, delay of 35 months to date

IV 2020-21 31/12/21 31/07/23 ESCerts still not issued, delay of 23 months to date

V 2021-22 31/12/22 31/07/24 ESCerts still not issued, delay of 11 months to date

Source: Prayas (Energy Group), 2024

II. All ESCerts during PAT II have been traded at the floor price since there was
excess availability.89

Increased non-compliance: The trading cycle for PAT II started in 2021 and
there have been multiple extensions from the Bureau for the trading of ESCerts,
but even after repeated extensions of the trading window, 40 per cent of the
ESCerts which were necessary for compliance were not purchased, DCs have failed
to comply and the Bureau is yet to penalize the DCs. The trading of ESCerts was
concluded in October 2023. Total volume of 21.89 lakh ESCerts have been traded,
whereas the demand was of 36.68 lakh.

Delayed compliance: For PAT II, the official deadline for DCs to buy ESCerts
was set as 2021, which was finished in October 2023, a delay of two years. There
is even a delay in issuing of ESCerts for subsequent cycles because trading of
previous cycles remained unfinished for longer than their set timelines (see Table
24: Delays in PAT cycle as of February 2024).

Low market activity: Once the MRV phase of PAT cycle is finished, there needs to
be trading of ESCerts. ESCerts for PAT cycle II had not been traded by DCs when
the trading window opened. As a result, BEE had extended the trading window
multiple times. The ESCerts compliance that was supposed to finish by July 2021,
got delayed and ended in October 2023. There has been low market activity as
DCs did not trade. The price of certificates has also been low.

77
 LEARNINGS FROM THE PAT SCHEME

Minimal CO2 reductions: It is evident from the sectoral analysis of power,

cement and steel sectors that CO2 reductions are marginal in the first two cycles
of PAT. The scheme’s low annual reductions in achieving emission reductions are
attributed to its unambitious targeting and extended compliance periods. The
total CO2 emission reduction from PAT cycle I (2012–15) is just 31 million tonnes
of CO2 emissions90 that translates to an annual average reduction of 10.3 million
tonnes. Moreover, when compared to India’s GHG emissions in 2014 (as reported
in BUR-2), the reduction from PAT-I is only 0.5 per cent of total national CO2
emissions. Reduction from PAT-II (2016–19) is 71.47 million tonnes CO2,91 when
compared to India’s GHG emissions in 2016 (as reported in BUR-3), the reduction
from PAT-II is about 3.2 per cent of total national CO2 emissions. Even with such
a large coverage of industries and thermal power plants, PAT struggles to achieve
any significant reductions in CO2 emissions.

78
 OVERVIEW,
CHALLENGES AND
4
RECOMMENDATIONS
Based on analysis of global and domestic emission trading schemes,
PAT scheme and India's proposed carbon market landscape, CSE
identifies several challenges and provides recommendations for the
upcoming Indian Carbon Credit Trading Scheme (CCTS).

Challenges include low carbon prices, unambitious target setting,

dependency on the PAT scheme, lack of revenue generation, data
quality issues, absence of a market stability mechanism, and
exclusion of the thermal power sector.

Recommendations emphasize bringing a single nation-wide

scheme for carbon-intensive sectors, ensuring a high carbon price,
data quality and transparency, introducing revenue generation
mechanisms, supporting MSMEs, and advocating for the inclusion of
the thermal power sector to enhance emission reduction efforts.

79
 THE INDIAN CARBON MARKET POLICY

4.1 Overview
In October 2021, BEE had released a draft blueprint of the Nation Carbon
Market for stakeholder consultation. Based on some critical inputs provided by
stakeholders, this draft blueprint was further worked upon and another policy
paper on Indian carbon markets was released in October, 2022. Following this
the Energy Conservation (Amendment) Act was passed in the Indian Parliament
in December, 2022, which proposed the formation of an Indian Carbon Market.
Additionally, a Carbon Credit and Trading Scheme (CCTS) was notified by the
Ministry of Power in June, 2023. The notification highlighted the regulatory
framework of the Indian carbon market. In November, 2023, a policy document
on the detailed procedure for compliance mechanism under CCTS and draft
document on accreditation eligibility criteria and procedure for accredited carbon
verification agency were released. In December 2023, an amendment to the
notification was made which brought in the offset mechanism as a part of the
proposed CCTS. (see Figure 16: Timeline of ICM policy)

As per the notification, the government has planned to bring in the Indian Carbon
Markets to facilitate the achievement of India’s enhanced NDC targets. It mentions
that it will mobilize new mitigation opportunities through demand for emission
reduction credits from both public and private entities. It further mentions that
ICM is envisioned to accelerate decarbonization and mobilize finance towards
achieving India’s NDCs. The purpose of ICM is also seen as a step to match up
with the emerging carbon border adjustment tax policies and the new carbon
markets coming up around the world.

Figure 16: Timeline of ICM policy

Source: CSE, 2024

80
Graph 9: Issuance of CCC, compliance mechanism
Baseline GHG Emission Intensity

Purchase
CCC
GHG Emission
Intensity Target Achieved SE<
Target SE
Achieved SE<
Target SE
PX
CCC
Issued Penalty
on non
compliance

Sell
CCC

Obligated Entity A Obligated Entity B

Source: BEE draft compliance mechanism, 2023

The essential elements of the proposed carbon market scheme which have been
proposed under its regulatory framework and other policy documents released
until March, 2024 have been discussed briefly to give a clear picture of how the
Indian Carbon Markets policy is going to function

4.1.1 Compliance mechanism

The compliance mechanism specified in the Bureau of Energy Efficiency draft
policy document in 2023, within the Carbon Credit Trading Scheme, sets a
framework for monitoring and ensuring compliance with GHG emission intensity
targets.

Registered entities designated as ‘obligated entities’ are required to meet GHG

emission intensity targets specified by the Ministry of Environment, Forest
and Climate Change (MoEFCC). Carbon Credit Certificates (CCC) are issued as
incentives for exceeding targets, while entities falling short can trade CCC to offset
deficiencies.

As recent as June 2024, the scheme is scheduled to cover 9 industrial sectors with
significant Scope 1 and 2 emissions, the scheme’s first cycle targets sectors including
petrochemical, iron and steel, aluminium cement, and pulp and paper. Obligated
entities from these sectors will be subject to compliance measures, although clarity
regarding the extent of coverage and emissions share remains pending.

81
 THE INDIAN CARBON MARKET POLICY

The illustration given below shows that obligated entity ‘A’ have been issued CCC
on achieving the GHG emission intensity greater than the target GHG emission
intensity while the obligated entity ‘B’ is entitled to purchase the CCC to meet
their GHG emission intensity targets from the Indian Carbon Market. Obligated
entity ‘A’ can sell their CCC, and the obligated entity ‘B’ can purchase the CCC
over the trading exchange.

4.1.2 GHG emission intensity trajectory and targets

The identification of obligated entities by the Central Government is based on

criteria such as energy consumption, the investment needed for energy-efficient
equipment, and the industry’s capacity to invest. Greenhouse gas (GHG) emissions
are converted to CO2 equivalent (CO2e) using the Global Warming Potential
(GWP) specified in India’s Biennial Update Report (BUR 3) under the UNFCCC.
This conversion allows for standardized and consistent measurement of different
GHGs based on their warming potential relative to carbon dioxide. This will
further strengthen reporting of our emission profile of all greenhouse gases.

It is understood that the GHG emission intensity trajectory and targets will
be developed by the National Steering Committee (NSC) for specific sectors in
line with India’s Nationally Determined Contributions (NDC) commitments.
Moreover, according to stakeholder consultations, the NSC has set up sectoral
technical committees which will consider factors like the potential for fuel switch,
non-fossil fuel use, and sectoral decarbonization. Targets for each obligated entity
will be tailored to the reduction trajectory for the sector and the average rate of
reduction across all obligated entities.

Emission sources will include direct energy, process (non-energy), and indirect
energy-related emissions, with exclusions such as certain energy sources,
emissions from renewable sources, captured or utilized emissions, and emissions
from specific activities.

The draft compliance procedure lays down a comprehensive process to set targets
for the sector. The recommendation and notification process will involve the
technical committee preparing a report with obligated entity targets, which is
examined by the Bureau before final recommendations are submitted to the sub-
working group under NSCICM. The NSCICM will then recommend targets to the
central government for notification under the Environment Protection Act, 1986,
with the MoEFCC responsible for notifying annual GHG emission intensity targets
and penalizing entities for non-compliance. BEE, under the ministry of power has

82
taken over as the administrator as they have prior experience in executing a target
based scheme in form of PAT but MoEFCC, being the concerened ministry for
climate change negotiations, should be playing a larger role in the policymaking
and have involvement at various levels of policy implementation.

4.1.3 Monitoring and reporting process

According to the draft document, obligated entities will be mandated to establish
transparent, independent, and credible monitoring and reporting arrangements
for greenhouse gas (GHG) emissions and production. Within three months from
the start of each compliance cycle, they must submit a monitoring plan to the
Bureau. This plan should include detailed descriptions of activities, emission
sources, and monitoring methodologies.

Direct and indirect GHG emissions are to be converted into a single unit (tonnes of
CO2e) using standard emission calculation methodologies. All direct energy, non-
energy, and indirect energy-related GHG emissions within the entity’s boundary
must be reported. Biogenic emissions are to be reported separately and excluded
from the overall emissions tally.

It’s emphasized in the document that the purchase of Renewable Energy

Certificates (REC) cannot be considered a claim towards renewable energy use
and should not be factored into calculations of renewable energy consumption.

4.1.4 Verification and assessment of performance

Obligated entities will be required to submit a performance assessment document
and a certificate of verification within three months of the conclusion of each
compliance cycle. The verification process is conducted by an accredited carbon
verification agency appointed by the obligated entity.

Verification procedures encompass site visits, data assessment, sampling, and a

thorough review of monitoring and reporting processes. The accredited carbon
verification agency then submits a comprehensive verification report detailing the
assessment procedures and findings.

Positive verification results indicate compliance with GHG emission norms,

affirming that the obligated entity has met the required standards. This verification
process needs to be robust and free of any fraudulent activities by any party.

83
 THE INDIAN CARBON MARKET POLICY

4.1.5 Check-verification process

The Bureau retains the authority to commence an independent review of compliance
reports in response to complaints or identified issues. Upon initiation, notices are
issued to both the obligated entity and the accredited carbon verification agency,
inviting their comments.

The independent review will entail a thorough assessment aimed at ensuring

compliance with GHG emission norms. The findings of this review are compiled
into an independent review report, which presents either a positive or negative
opinion.

A positive opinion denotes compliance with the established norms, affirming the
obligated entity’s adherence to the requisite standards. Conversely, a negative
opinion prompts further investigation into the matter to address any identified
discrepancies or non-compliance issues.

4.1.6 Carbon credit certificates

The issuance of Carbon Credit Certificates will involve a thorough verification
process conducted by the Bureau, ensuring the accuracy and correctness of
compliance reports. Once verified, the Bureau will recommend the issuance of
carbon credit certificates based on compliance. Subsequently, the NSCICM will
provide recommendations for issuance, followed by seeking approval from the
Central Government. Carbon credit certificates will then be made available for
trading through registration on the ICM registry, and subsequently on Power
Exchanges. Any unused certificates can be stored for future use (banking),
providing flexibility within the system.

Trading of Carbon Credit Certificates will be a regulated process requiring the

registration of both obligated and non-obligated entities on the ICM Registry
within a specified timeframe. This registration is mandatory for entities wishing
to engage in trading activities on Power Exchanges, as per the procedures outlined
by the Central Electricity Regulatory Commission (CERC).

Additionally, non-obligated entities interested in the voluntary purchase of carbon

credit certificates must also register on the ICM registry. The trading of CCC
follows procedures defined by CERC, ensuring transparency and accountability
within the market.

Banking of Carbon Credit Certificates allows for the storage of unused certificates
for future compliance cycles. These banked certificates can either be sold or utilized

84
for compliance purposes, providing a mechanism for entities to manage their
carbon credit assets effectively. Currently, there is no limit on banking mentioned
in the draft policy documents.

In terms of compliance with GHG emission norms, obligated entities are required
to develop long-term action plans for GHG emission reduction within a stipulated
time frame. The administrator should make sure that all obligated entities submit
their long-term plans without fail.

Annual planned activities and revised long-term action plans are subject to verification,
ensuring alignment with emission reduction goals. Compliance status is reported
through a ‘Compliance Assessment Document’, enabling oversight of compliance
efforts. Entities must adhere to compliance requirements and furnish the status of
compliance after verification and trading processes within a specified timeframe.

Figure 17: CCTS compliance cycle

OEs to submit
MoEFCC will OEs will submit performance
specify GHG monitoring plan assessment
emission to Bureau within document and
intensity targets 3 months (Q1) certification of
verification within
3 months (Q4)
of completion of
cycle

Trading to Bureau will Bureau can

start on power recommend intiate an
exchange CCC issuance, independent
portals CCCs will be review
registered on
ICM registry
Yearly compliance

OEs to submit OEs to finish

long-term compliance, trade
action plans for CCCs within
GHG emission 9 months of
reduction completion of cycle

Source: CSE 2024

85
 THE INDIAN CARBON MARKET POLICY

4.1.7 Obligations of the obligated entities

Obligated entities need to comply with certain standards and practices under the
compliance of CCTS. All the industries involved need to ensure that they actively
engage accredited carbon verification agencies for performance assessment,
ensure implementation of compliance measures with the utmost integrity. The
formation of long-term action plans for GHG emission reduction is mandatory
for all OEs under CCTS. The entities should also be pro-active in making long-
term action plans for GHG reduction. These action plans should include
measures like implementing energy efficient measures, introducing low-carbon
technology, increasing resource efficiency and other levers that are important for
decarbonization. The long-term action plans should have a roadmap for the entity
to rely on.

The OEs for CCTS will be the entities that would complete their PAT cycle,
therefore the participation of entities in CCTS depends on the cycles of the PAT
scheme which may not be the best strategy to achieve the goals of CCTS.

4.1.8 Offset mechanism

The offset mechanism was introduced in an amendment to CCTS dated 19
December, 2023. Through the offset mechanism, companies are allowed to offset
emissions—compensate for the emission reduction through CO2 savings projects
elsewhere. As of June 2023, there has been multiple stakeholder discussions and
NSCICM meetings in which the offset mechanism has been discussed. There is
lack of clarity as to how and to what extent the obligated entities will be able to use
offset credits.

According to the proposed mechanism discussed in stakeholder consultations, the

different project activities will be divided into ten sectoral scopes. These are in line
with the current seventeen sectoral scopes under UNFCCC, CDM and other major
Voluntary Carbon Market registries like Verra and Gold Standard. The seventeen
categories seem to have been funged into ten. For example, the first three sectoral
scopes under UNFCCC -- Energy (renewable/non-renewable sources), energy
distribution and energy demand have been converted to one overarching scope
of Energy. The ten proposed sectoral scopes under ICM offset mechanism are: -
1. Energy
2. Industries
3. Waste Handling and Disposal
4. Agriculture
5. Forestry
6. Transport

86
7. Construction
8. Fugitive Emissions
9. Solvent Use
10. CCU

Analysis by BEE suggests that the top 6 sectoral scopes, as of May 2024,
amount for more than 90 per cent of current VCM projects under CDM and
other major registries in India. Out of these, Energy industries (scope 1 under
UNFCCC) contributes about 74 per cent with high mitigation potential. These
are project activities like power generation through renewable energy sources,
plant retrofitting and fuel switching. Demand side energy efficiency measures
like pumping systems, lighting systems and household appliances and buildings
makes up for about 10 per cent of current activities under CDM and VCM with
medium mitigation potential.

Some other features in the proposed mechanism are:

• Non-obligated entities can register their decarbonizing projects and generate
carbon credits.

• The Bureau will publish sectoral scope and methodologies for these projects.
It will also develop standards and processes for project registration under the
offset mechanism.

• The Bureau has proposed to maintain a meta-registry where all national level
offset projects will also be listed along with the projects under offset mechanism
of ICM.

• The Bureau will also be responsible for validation and verification of these
projects. It will build capacity of Accredited Carbon Verifiers (ACVs) which
would build from the the existing capacity of PAT Energy Auditors, Voluntary
Carbon Market Verification and Validation Bodies. These ACVs responsible
for offset mechanism project validation and verification will have a different
qualification criteria from the ACVs involved in MRV of Obligated Entities.

• New Methodologies will be formulated under ICM which will follow the
Updated Article 6.4 (Paris Agreement) methodologies.. Baseline setting,
additionality and double counting procedures will be followed as per the updated
Article 6.4 methodologies. The Bureau, is set to release these methodologies
in a phased manner. According to the stakeholder consultations of May-June
2024, methodologies for project activities that are high mitigation potential

87
 THE INDIAN CARBON MARKET POLICY

Figure 18: Offset mechanism project cycle

Source: BEE Overview of Offset Mechanism, 2024

and high demand (like projects under Energy demand) will be released by the
end of August 2024 and other methodologies with low mitigation and less
demand will be released by January 2025.

The proposed offset mechanism project cycle is shown in the Figure below.

ETS schemes worldwide have limited the share of offsetting to less than ten per
cent of the verified emissions and even banned it in markets like the EU-ETS. The
proposed mechanism in India has not yet specified any such limit.

4.2 Necessary design elements for an ideal carbon

market
Having analyzed existing ETS in the world and learning from implemented policies
at the domestic level, CSE has attempted to list down conditions and features that
would be necessary to have an effective emission trading market that is successful
in achieving its objective of reducing emissions/emission intensity. Although a
market with such conditions and features is yet to be seen and documented, this is
what an ETS should aim for.

88
Table 25: Elements for a Model ETS
Elements for a Model ETS

Actual emission/emission intensity reduction

Significant carbon emission coverage of country’s/region’s total CO2 emissions

Robust MRV framework to ensure no data manipulation and fraud

Data transparency to ensure public scrutiny and full knowledge to all stakeholders

Market stability mechanism to stabilize the market in the case of sensitive economic downturns or other knee
jerk situations

Cap-and-trade mechanism with annual reduction in the absolute cap, ultimately setting the cap at zero
(growing economies should aim for an absolute emissions cap once the demand and production of industrial
sectors, and corresponding emissions have peaked)

Ambitious targets that push the boundaries and help countries meet their net-zero commitments

Revenue generation in order to aid decarbonization initiatives and vulnerable sectors, social groups and
communities suffering from the impacts of climate change

A high carbon price that accounts for the abatement cost and makes the polluter pay

Limited offset credits under robust check mechanism and transparency

Market liquidity should be maintained through trading activities across the year. This also ensures a fair carbon
price.

Strict penalties need to be applied in accordance with the magnitude of fraud/non-compliance

Market should mature to pricing every tonne of carbon dioxide emissions and move away from any free
allocation and subsidies

Equal opportunity to players of all scale and sectors that are key to GHG mitigation

Setting up targets for methane and other GHGs to mitigate overall GHG emissions
Source: CSE, 2024

4.3 Challenges and recommendations

Based on the analysis of the diverse global and domestic carbon market case studies,
understanding of the currently proposed and evolving Indian Carbon Market
landscape and the larger context of decarbonization and energy transition related
policies coming up in India, CSE has come up with a certain set of challenges
that the proposed Indian carbon market might face and has also provided certain
recommendations for the upcoming scheme to facilitate a better functioning and
more effective carbon market in the country.

4.3.1 Challenges
1. Low carbon price and low market liquidity: All markets around the world
in their initial phases have had low carbon prices and often faced low market
liquidity due to different reasons. Even the PAT scheme faced the issue of low
pricing and low market activity due to over achievement of targets, excess supply
of ESCerts and non-compliance by entities who were required to buy ESCerts.

89
 THE INDIAN CARBON MARKET POLICY

If the targets set by the CCTS are consistently exceeded, then the CCTS will
encounter similar challenges. Markets in countries like Korea faced the issue
of low liquidity due to uncertainty around carbon price, low participation by
industries and banking of allowances, whereas a country like China had only
seasonal activity because too many exemptions were given to power plants and
hence, the need to trade remained low and only at the time of compliance. In
the case of Europe, the issue of low liquidity was not as prominent due to the
large influx of offset credits, which has its own set of challenges. Therefore,
the upcoming scheme in India needs to take steps and prepare mechanisms to
generate market activity throughout the year at a good carbon price which then
pushes participants to accelerate decarbonization pathways. According to the
High-Level Commission of Carbon Prices under the Carbon Pricing Leadership
Coalition supported by World Bank, countries need to set a strong carbon price,
with the goal of reaching USD 40–80 per tonne of CO2 by 2020 and USD 50–
100 per tonne by 2030 to deliver the goals of the Paris Agreement.

2. Unambitious target setting: So far, the PAT scheme has faced criticism for
its goal-setting, which was perceived as lacking ambition which led to the
overachievement of targets and an oversupply of ESCerts leading to a poor
market price. As CCTS plans to come out based on the framework of the PAT
scheme, it is crucial for it to not repeat the same mistake. Target setting under
the CCTS is being done for individual entities as well as the overall sector.
Consideration of the sectoral best practices, individual company targets and
previous policy targets is essential to raise the bar higher for the market to
be able to achieve what it is meant for rather than becoming a compliance
formality.

3. Dependence of CCTS on PAT Scheme: One of the biggest challenges that

Indian authorities face is the dependence of CCTS on the existing PAT Scheme.
Some difficult questions that need to be explored are:
- How to prevent the new CCTS and its processes from being affected due
to the ongoing PAT scheme – especially the restriction of involving limited
and specific entities in the new CCTS due to majority of entities being
involved in the ongoing PAT cycles.

- Is the PAT scheme worth continuing or should there be a clear single year
deadline and a single CCTS scheme for all carbon-intensive sectors?

- Currently, there are plans underway for entities completing their PAT
cycles to receive CCTS targets. Is this the best way to shortlist entities to

90
 be able to achieve maximum emission reduction from CCTS? Shouldn’t
the targets be assigned to the most carbon-intensive entities from a sector
at the beginning itself? Additionally, shouldn’t a large number of entities
from a sector be involved in CCTS since the beginning to achieve maximum
impact and market activity?

- Will entities under a CCTS sector (which will be covered under the scheme
in the coming years), but still under the PAT cycle have incentive enough
to decarbonize until their CCTS cycle comes? Will they be prepared in that
later year to achieve a higher target?

These questions clearly point out that the ongoing PAT scheme is becoming a
hurdle in the way of the CCTS being able to achieve its full potential.

4. No revenue generation: The proposed Indian Carbon Market does not have a
clause for revenue generation through the scheme. ETS cap and trade systems
around the world have a way of generating revenue. Most of this revenue is
collected by the government through auctioning off allowances/credits. A part
of the revenue generated from the sale of allowances in EU-ETS is used to
generate revenue for renewable energy, energy efficiency improvements, low-
carbon technologies and other such areas. There is also an innovation and
modernization fund made out of it. Similarly, in South Korea the revenue is
being used to support small businesses and new entrants of the market. As
international grant financing opportunities diminish, global discussions are
increasingly focused on private sector funding and carbon markets for financing
decarbonization efforts. However, the proposed Indian carbon market model
does not foresee revenue generation through carbon markets. The primary
anticipated activity would involve entities buying and selling credits, with no
planned revenue generation.

5. Challenge of data quality: Authenticity of data is the key for any market
mechanism to work in actuality. Amongst the case studies that CSE analyzed,
data quality came up as a big issue in the China national ETS and the Surat
ETS. In China, there have been instances where entities and third-party
verifiers were found to have manipulated data. It’s commendable that Chinese
authorities acknowledged the issue and implemented strict penalties, which
can be five to ten times the illegal gains made by the involved parties. It has
also launched research to develop a long-term mechanism to help manage
data quality. In the case of Surat ETS, the issue lies with the dependence of
the market on the data gathered from CEMS. Based on CSE’s analysis of the

91
 THE INDIAN CARBON MARKET POLICY

CEMS data published online on the GPCB portal, as of April 2024, out of 704
industries connected to CEMS in Gujarat:
• 491 industries were active,
• 192 industries were inactive,
• 21 industries were delayed in status.

The portal did not show data for many industries once they were clicked on.
This clearly raises question on the kind of data on which such a market is
depending upon.

Major data issues have not been widely reported in the PAT scheme. However,
one contributing factor to this may be the lack of transparency in the scheme,
specifically the unavailability of data to the general public.

Apart from the above, there will be a specific challenge as to how small and
medium scale industries will be able to provide authentic data especially as
their sources of raw material and fuels are not organized and that well tested
and approved. This will be a big challenge for the authorities of CCTS.

6. Absence of a market stability mechanism: Until now the proposed CCTS

hasn’t mentioned any market stability mechanism being brought in. The PAT
scheme in India suffered from market instability due to excess certificates but
never had a market stability mechanism in place, which could have improved
the situation to some extent. Markets like EU-ETS and K-ETS have come up
with different concepts like the Market Stability reserve, Market Maker system
etc. Although such systems may not have been able to fully resolve the market
liquidity issues as different factors affect it, but have surely played a role every
now and then in stabilizing market activities. Even China ETS has come up
with its market regulation and protection mechanism. This absence in the
Indian market framework will reduce the options of stabilizing the market
from time to time which is always required due to changing conditions.

7. Non-imposition of penalties: The penalties during the PAT scheme could

be strict or not but there was no point as they were hardly imposed. Even
if penalties are strict and if regulators won’t levy them on entities, the whole
purpose gets lost. This is what happened with the power sector defaulters under
the PAT scheme who were mostly defaulters but no penalties were imposed on
them. If a similar practice continues under the CCTS, entities would not care
to buy credits even if they are supposed to.

92
8. The challenge of offset credits and other credit schemes: The proposed
CCTS will also include credits from the offset market. Markets like EU-ETS,
which had given a free hand to buying offset credits in its initial phases, faced
severe challenges at one point due to over surge of offset credits that too with
integrity issues. Over the time a number of organisations including CSE have
flagged the transparency and integrity issues around the offset credits and if
not allowed under a strict regulatory framework, they might pose a serious risk
to the effectiveness of the upcoming carbon market in India.

In India, various other market-based mechanisms are also present or underway,

aiming to promote environmental sustainability and energy efficiency. Several
schemes are emerging, each with its own currency or credit system. Older
schemes like Perform, Achieve, and Trade (PAT) generate Energy Saving
Certificates (ESCerts), which currently face oversupply, with a surplus of 44
lakh ESCerts in PAT I and II. The fate of these surplus certificates is a pressing
concern, as their potential impact on the upcoming Indian carbon market
remains uncertain. There are other crediting schemes that are being rolled out
parallely in the country It would be crucial to see the impact of other schemes
and the interrelations between them and ICM. The challenge here is how to
prevent the double counting of any GHG linked project in different credit
schemes, especially, as the registries and the nodal agencies for all schemes
are different. Another question arises about the potential interaction between
these schemes and their influence on each other, especially on the upcoming
CCTS. In such scenarios, implementing check mechanisms may be necessary
to prevent manipulation and ensure integrity.

9. The MSME challenge: The CCTS plan to initially cover large industrial
sectors, but some of these sectors also include production shares from small-
and medium-scale units, or are reliant on them. Therefore, some MSMEs
might also become part of the CCTS initially and the number might increase
in the coming years. The biggest challenge is generating authentic data from
MSME units. Usually, the sources of their fuels and raw material are informal
which then deprives them of necessary information to be able to report their
emissions properly. The second challenge would be to be able to provide a level
playing field between MSMEs and larger players. As we know, the majority of
MSMEs might be carbon intensive due to use of inefficient technologies and
dirty fuel and then it shouldn’t be the case that most MSMEs end up buying
credits from large players because they may not be able to afford the price to be
able to meet the targets set by CCTS. For example, in the steel sector itself, the
coal-based sponge iron units are mostly small and medium scale and largely

93
 THE INDIAN CARBON MARKET POLICY

they do not have the technology and resources to incorporate low-carbon

solutions. Therefore, it’s challenging to push them to decarbonize without
providing them the required support.

10. Exclusion of thermal power sector: Why is it problematic? While most

of the carbon markets around the world had chosen to begin with the power
sector, it seems Indian carbon market plans to exclude the power sector
from the market for the time being. This exclusion may have been driven by
challenges related to financing, energy security and existing policies aimed
at decarbonizing power plants. However, there are compelling reasons why
excluding the power sector from CCTS could pose problems. They are:

Missing out a large part of the country’s emissions: The Indian thermal
power sector is the biggest contributor of greenhouse gas emissions in India.
According to India’s Third National Communication to the UNFCCC, the
electricity sector contributed 39.2 per cent to the total GHG emissions of
the country. Leaving the biggest emitting sector out of the carbon market
will largely cut short the chances of a carbon market being able to contribute
effectively towards achieving India’s updated NDCs. Emission trading systems
across the globe have included thermal power plants including developing
nations like China and Indonesia as the electricity generation sector makes up
for the biggest emissions contributor in these countries too. The challenges
the power sector faces shouldn’t become a reason for them to be exempted
from contributing to India’s decarbonization effectively. If India needs to rely
on coal power in the upcoming years, it needs to ensure that its coal power
plants are cleaned up and efficient.

ETS schemes around the world cover a large share of their respective country’s
national emissions—South Korea (74 per cent), EU-ETS (38 per cent), China
(40 per cent). The Indian carbon market, even if it covers all the industries in
the country by 2030, will be covering only 20 to 22 per cent of the country’s
emissions. Currently, only a few sectors are being considered in the initial
cycles, which would cover close to 10 per cent of national GHG emissions.
Excluding the power sector, significantly reduces the covered emissions and
the possible reductions from them would be marginal.

Subpar performance of current schemes: Currently, the thermal power sector

entities have to comply with the PAT scheme and are also mandated to co-fire
biomass of up to five to seven per cent in the subsequent year. The power sector
in the PAT scheme has been the only sector that has not been able to achieve its

94
targets (in PAT I) and no penalties have been applied on them for non-compliance.
The overall CO2 reduction achieved during the first six years of PAT was less than
2.5 per cent of a single year’s (2016) CO2 emissions from the electricity sector. This
clearly indicates that the PAT scheme, as an energy efficiency initiative, cannot
be relied upon to achieve significant CO2 reductions in the sector. So, if BEE is
planning to not include the power sector in CCTS and continues with the PAT
scheme for the power sector, not much benefit is likely to be seen in terms of CO2
emission intensity reduction.

The implementation of the biomass co-firing mandate is also progressing very

slow. As of 2023, out of the 11 coal-fired power plants in Delhi-NCR, none had
co-fired even one per cent of biomass in their plants.92 Very recently two plants in
NCR have been able to reach two to three per cent co firing but the majority have
not even begun even when 2024–25 is the first year for compliance. The country-
wide situation is no better, the national timelines set by the Ministry of Power
order for biomass co-firing have already been exceeded.

The thermal power plants will also be given targets and deadlines under the
upcoming Renewable Generation Obligation (RGO) scheme. Due to inclusion in
CCTS, the thermal power plants would have an incentivised target to meet, with
a penalty for non-compliance which would push for better implementation of the
RGO and biomass co-firing policy. Without any regulation and penalty in place,
the power plants might flout the individual policy deadlines as they have in the
past for other policies (SOx emission norms).

Disparity in emission intensity among thermal power plants: CSE’s analysis

of India’s thermal power plants reveal that as of 2022, close to 93 per cent of
the coal plant’s power generation is attributed to two technologies—subcritical
and supercritical. As per the analysis, subcritical plants (largest in number in
the country) having a plant load factor of more than 50 per cent, have emission
intensities ranging from as high as 1.57 tCO2/MWH to as low as 0.74 tCO2/MWH.
Similarly, amongst supercritical plants emission intensity variates between
1.04tCO2/MWH to 0.83 tCO2/MWH. This shows that Indian thermal power
plants have a large scope of reducing their emission intensity within the same
technology, especially the subcritical plants that are the largest in the country.
This scope remains even if factors like age and varying fuel quality are considered.

95
 THE INDIAN CARBON MARKET POLICY

Table 26: Emission intensity disparity among Indian power plants.

PLF ≥ 50 capacity emission factor /intensity Average emission factor /intensity
(tCO2/MWH) (tCO2/MWH)
Subcritical unit <250 MW highest–1.45 1.07
least–0.74
≥ 250 MW highest–1.57
< 660 MW least–0.87
Supercritical unit ≥ 660 MW highest–1.04 0.92
< 800 MW least–0.83
CSE analysis from CEA data, 2022

4.3.2 Recommendations

1. Reduce complexity and have a single nation-wide scheme for carbon-

intensive sectors: Currently, the BEE-operated PAT scheme is running
its third, fourth, fifth, sixth and seventh cycle parallelly in different stages
of operation (with substantial delay), and has already notified the PAT VIII
(2025–26) cycle for different industrial sectors. Alongside this, based on the
PAT model, BEE is set to launch the CCTS. The CCTS will take up only those
entities which will end their respective PAT cycle. Instead of including a large
number of entities, and especially the ones with high emission intensities,
CCTS will choose its obligated entities based on the PAT scheme cycles.

Therefore, CSE suggests it is essential to free the carbon-intensive sectors

from the PAT scheme so that CCTS is the only nationwide scheme for these
sectors, leaving no room for mismanagement and confusion. This will enable
a large number of entities to be given CCTS targets from the beginning. A
single deadline should be set to phase out the PAT scheme for carbon intensive
sectors. In any case, currently all units of the essential carbon-intensive sectors
(like steel, cement etc.) have to be monitored either under the CCTS or under
PAT, then why not all under CCTS at the same time. This will bring a collective
zest and coherence in the sector as a whole and within individual companies,
and the feeling that all are moving towards a single goal.

2. Ensure a high carbon price: For any emission trading scheme to be successful,
it is imperative to have a high credit price. Without a competitive price, the
purpose of an ETS is quite likely to be jeopardized. A lower pricing means that
the obligated entities would always prefer buying credits than making actual
emission reductions. To ensure a stable and high carbon price in the Indian
carbon market, it is essential for the upcoming carbon market to ensure that
following steps/actions are taken:

96
• Setting ambitious targets: Emission targets set under the CCTS will
be crucial to ensure a high carbon price. It is important for them to set
ambitious targets for individual units as well as the sector as a whole, that
raises the bar beyond the previously set national targets (like the National
Steel Policy 201793 etc.) and the targets set by individual companies. Along
with the world and in India (sector and technology-wise), best practices
should also be considered while setting the targets to push obligated
entities towards achieving the best levels, already achieved on the ground.
The current targets should be such that the ambition and innovation in the
industry stays above the current levels.

• Establish a market stability mechanism: Just like EU-ETS and K-ETS,

the new CCTS scheme should put a market stability mechanism in place
to be able to avoid the situation faced during the PAT scheme. One of
the prominent features of this mechanism is the market stability reserve
(MSR). CCTS should establish one with well prescribed limits of when to
release and when to buy credits based on stabilizing the market liquidity
and the carbon price. It can regulate supply and demand through which
carbon pricing can be stabilized. A market maker system on lines of the
Korean ETS can also be considered, which then involves multiple entities
responsible for maintaining the market stability.

• Setting a high carbon floor price: A high carbon floor price is essential
to prevent the market prices from falling below a level that would make it
entirely ineffective in its purpose. EU-ETS had set a carbon floor price
at 12.3 Euros/tonne of CO2 in 2020, which is planned to progressively
increase to 31 Euros/tonne of CO2 by 2030. Similarly, the Korean ETS also
set a carbon floor price of USD 9.98 in 2021.94 The PAT scheme had a floor
price of around INR 1,840 during PAT II cycle, which went up from INR
200–1,200 in PAT I cycle.95 The issue in the PAT scheme was that due to
the oversupply of ESCerts, all the trading happened at the floor price itself
which is not the best scenario. It worsened in the case of Surat ETS which
had set a floor price of INR 5, which is equivalent to having no price at all.
Therefore, it is important to keep a high floor price in the market which
will help in creating a good carbon price which is competitive with respect
to decarbonization costs.

• Effective implementation of sizable penalties: A major reason behind

low prices in the PAT scheme was the non-implementation of penalties on

97
 THE INDIAN CARBON MARKET POLICY

a number of non-compliant obligated entities. Often, even if penalties are

imposed, they are not effective due to their low quantum. Recently, China
ETS faced irregularities in data authenticity, reporting and compliance.
Therefore, it has come up with a new ETS regulation which has made the
penalties heavier, covering all major stakeholders involved and increasing
the quantum of penalties in multiples of market value gaps and illegal
gains made by non-compliant entities. Therefore, it is important that
CCTS in India also considers fixing sizable penalties based on illegal
gains and market value gaps, and ensures that this time the penalties
are implemented, and paying or dodging a penalty doesn’t become more
lucrative than complying with the given targets.

• Limiting voluntary credits: As the CCTS has already released the

amendment to include voluntary carbon offset credits, CSE would strongly
recommend to keep it restricted to not more than five per cent of the
verified emissions and that too for a very limited number of projects that
bring sizable emission reductions and follow a reliable, well-defined and
transparent verification methodology. EU-ETS has banned offset credits
and Korea and China allow only five per cent, therefore without a well-
defined transparent framework in place, it could adversely impact the
current CCTS, like it did in the EU-ETS in the past.

Many other credit systems are being introduced in the country. CSE
advocates against establishing an interactive system between CCTS
and other credit schemes to prevent potential manipulation within the
upcoming carbon market. There should also be a check on the financial
additionality of these projects. Maintaining a combined registry of projects
for different credit schemes so that credit doubling doesn’t happen is also
recommended. This registry should be open to the public for regular
scrutiny and check.

3. Ensuring data quality and improving transparency: Within two months

of the launch of China ETS, a power plant was caught doctoring its data.96
This was followed by data tampering and false reporting charges by MEE
on multiple entities under the China ETS.97 As China faced issues with data
quality, it sent out notices to companies to carry out monthly inspections of
key parameters and to submit the data online on their portal. It even launched
a research project to develop a long-term data management system. Recently,
it also came up with increased penalties for all those involved in any form of
misreporting or non-compliance.

98
 To avoid any such discrepancies in the proposed Indian CCTS, it is essential
to firstly build the capacity of carbon verifiers, increase their numbers
substantially, introduce data reporting at short intervals, and then create a
random inspection system to ensure that no fraud practices are being followed.
Currently, as seen on the BEE website, there is a list of 300 Accredited Energy
Auditors under PAT. This number represent both independent auditors and
auditing firms98. These auditors will participate in capacity building exercises
to certify as ACVs. They will face the burden of MRV of both PAT and CCTS,
as these cycles are planned to run parallel. As the new scheme comes to force,
there will be a need to build capacity of the ACVs further at a large scale.
Concurrently, bringing in automation and technology during various stages of
MRV can reduce the burden on both the carbon verifier and the administrator
(during review and verification).

Along with all this, it is essential to share reporting data in the public domain
which would then make it very difficult for any entity to manipulate data as
it would be open to scrutiny. Moreover, the long term decarbonisation plans
of the obligated entities should be made available in the public domain for
transparency. Bringing in transparency could largely solve this issue.

4. Introduce revenue generation to support MSMEs: The current Indian

carbon market model lacks revenue generation mechanisms. Therefore, it is
crucial to devise methods to generate revenue from the scheme, which could
fund an MSME fund. This fund could address significant challenges such as
improving data quality among MSMEs and supporting their initiatives for
decarbonization. Since the proposed CCTS does not auction , may be a small
percentage of every market transaction could be dedicated to this fund which
could be used to support the MSME sectors to have a level playing field under
the scheme.

Some form of support system (technological and financial) needs to be developed

to support the MSME sector under CCTS and to create a level playing field for
them. Countries like Korea are dedicating their market revenues to support
small businesses and something similar is required in India as well. In terms
of target setting, it is essential that while setting an ambitious target for them,
it should be ensured that there are enough support schemes to enable them to
achieve those targets.

5. Consider inclusion of thermal power sector: To address the significant

contribution of the power sector to greenhouse gas emissions and to ensure

99
 THE INDIAN CARBON MARKET POLICY

effective progress towards India’s Nationally Determined Contributions

(NDC) targets, it is imperative to include the power sector in the carbon
market scheme. Currently, the Indian carbon market plans to cover only 20 to
22 per cent of emissions by 2030, which would leave out a substantial portion
of national emissions. This exclusion hampers the potential for significant
emission reductions and undermines the effectiveness of the scheme.

We also believe that the inclusion of the power sector in an effectively operating
carbon market would push the implementation of the current biomass co-
firing policy for thermal power plants, which is picking up quite slowly. This
would also push for better implementation of the Renewable Generation
Obligation which includes biomass co-firing as one of the routes. From past
experiences it is also clear that the amount of CO2 emission reduction achieved
under the PAT scheme is not substantial, so the PAT scheme cannot be relied
upon to achieve CO2 reduction from the thermal power sector. The increase in
renewable capacity might reduce our dependence on thermal power plants but
will not have a major impact on decarbonizing the operation of existing thermal
power plants. With increasing electricity demand, managing and improving
the current coal-fired power fleet will be key to our energy transition. It is
essential to include the thermal power sector from the outset of the scheme to
expedite decarbonization efforts in thermal power plants.

Under an effective ICM, thermal power companies and plants would have
incentive to implement the low-hanging fruits of decarbonization and increase
efficient units in the company’s fleet. It can also incentivize companies to
invest in supercritical and ultra-supercritical plants. Currently, India only has
19 ultra supercritical units and no advanced ultra-supercritical units.

Failure to include the power sector in the carbon market scheme would delay
decarbonization efforts and limit the effectiveness of emission reduction
initiatives. Therefore, it is recommended that the government take proactive
steps to prepare a plan on inclusion of the power sector in the carbon market
scheme to achieve significant emission reductions and meet India’s climate
commitments effectively.

100
REFERENCES

101
 REFERENCES

1 Jørgen Wettestad and Lars Gulbrandsen 2018. The Evolution of Carbon

Markets Design and Diffusion, Routledge, New York

2 Anon 2010. The Kyoto Protocol Mechanisms, United Nations Framework

Convention on Climate Change, Bonn

3 Ibid

4 Emission Trading. Available at https://unfccc.int/process/the-kyoto-protocol/

mechanisms/emissions-trading, as accessed on 17 July 2024

5 Ricardo Martinez, Val Srinivas and Jill Gregorie 2023. The world needs carbon
markets. Here’s how to make them work better. Deloitte Insights, United
States. Available at https://www2.deloitte.com/us/en/insights/industry/
financial- services/future-of-carbon-market.html, as accessed on 17 July 2024

6 Katherine Jack and Hannah Clarke 2022. Understanding the two types of
carbon market. Agriculture and Horticulture Development Board, Coventry.
Available at https://ahdb.org.uk/news/understanding-the-two-types-of-
carbon-market, as accessed on 17 July 2024

7 Anon 2022. What are carbon markets and why are they important?
United Nations Development Programme, Global. Available at https://
climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-
why-are-they-important, as accessed on 17 July 2024

8 Carbon pricing dashboard. Available at https://carbonpricingdashboard.

worldbank.org/what-carbon-pricing, as accessed on 17 July 2024

9 Carbon pricing dashboard. Available at https://carbonpricingdashboard.

worldbank.org/what-carbon-pricing, as accessed on 17 July 2024

10 Anon 2021. Role of Derivatives in Carbon Markets, International Swaps and

Derivatives Association, New York City

11 Carbon pricing dashboard. Available at https://carbonpricingdashboard.

worldbank.org/what-carbon-pricing, as accessed on 17 July 2024

12 Emission trading systems. Available at https://www.oecd.org/environment/

tools-evaluation/emissiontradingsystems, as accessed on 15 January 2024

102
13 Center for Climate and Energy Solutions 2011. Cap and Trade, Climate Change
101: Understanding and Responding to Global Climate Change, Pew Center
on Global Climate Change, Arlington

14 Carbon pricing dashboard. Available at https://carbonpricingdashboard.

worldbank.org/what-carbon-pricing, as accessed on 17 July 2024

15 Ivy Yin 2024. Commodities 2024: China's domestic carbon market set
for revamp; Article 6 in limbo, S&P Global. Available at https://www.
spglobal.com/commodityinsights/en/market-insights/latest- news/energy-
transition/011724-chinas-domestic-carbon-market-set-for-revamp-in-
2024-article-6-in-limbo, as accessed on 18 July 2024

16 Sadia Sohail 2012. Emissions trading in particulate matter takes off. Down To
Earth. Available on https://www.downtoearth.org.in/environment/emissions-
trading-in-particulate-matter-takes-off---38793, as accessed on 18 July 2024

17 International Carbon Market. Available at https://climate.ec.europa.eu/eu-

action/eu-emissions-trading-system-eu-ets/international-carbon-market_en,
as accessed on 18 July 2024

18 Carbon pricing instruments around the world, 2024. Available at https://

carbonpricingdashboard.worldbank.org/, as accessed on 18 July 2024

19 ICAP 2024. Emissions Trading Worldwide: Status Report 2024, International

Carbon Action Partnership, Berlin

20 Anon 2022. The Untapped Power of Carbon Markets in Five Charts,

BloombergNEF. Available at https://about.bnef.com/blog/the-untapped-
power-of-carbon-markets- in-five-charts/, as accessed on 18 July 2024

21 A Guide to Compliance Carbon Credit Markets. Available at https://

carboncredits.com/a-guide-to-compliance-carbon-credit-markets/, as
accessed on 15 June 2024

22 Nivit Kumar Yadav, Sowmiya Kannappan, et al 2021. Perform, Achieve and

Trade (PAT) Scheme in Thermal Power Plants: A Critical Analysis. Centre for
Science and Environment, New Delhi

23 Jørgen Wettestad and Lars Gulbrandsen 2018. The Evolution of Carbon

Markets Design and Diffusion, Routledge, New York

103
 REFERENCES

24 Jihyung Joo, Jouni Paavola, et al 2023. The divergence of South Korea's

Emissions Trading Scheme (ETS) from the EU ETS: An institutional
complementarity view. Politics & Policy, 51(6), 1155-1173

25 Use of international credits. Available at https://climate.ec.europa.eu/eu-

action/eu-emissions-trading-system-eu-ets/use-international-credits_en, as
accessed on 12 May 2024

26 EU Emissions Trading System (EU ETS). Available at https://icapcarbonaction.

com/en/ets/eu-emissions-trading-system-eu-ets, as accessed on 1 March 2024

27 Ibid

28 European Commission 2024. Commission presents recommendation for

2040 emissions reduction target to set the path to climate neutrality in 2050,
European Commission, Strasbourg

29 EU Emissions Trading System (EU ETS). Available at https://climate.

ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en, as accessed
on 8 February 2024

30 Urjit R. Patel 2007. The Challenges of Emissions Trading, The Brookings

Institution. Available at https://www.brookings.edu/articles/the-challenges-
of-emissions-trading/, as accessed on 9 February 2024

31 EU Emissions Trading System (EU ETS). Available at https://icapcarbonaction.

com/en/ets/eu-emissions-trading-system-eu-ets, as accessed on 1 March 2024

32 Ibid

33 Directorate-General for Climate Action 2024. Record reduction of 2023

ETS emissions due largely to boost in renewable energy, European
Commission. Available at https://climate.ec.europa.eu/news-your-voice/
news/record-reduction-2023-ets- emissions-due-largely-boost-renewable-
energy-2024-04-03_en, as accessed on 6 May 2024

34 Ibid

35 Patrick Bayer and Michaël Aklin 2020. The European Union Emissions
Trading System reduced CO2 emissions despite low prices. Proceedings of

104
 the National Academy of Sciences, 117(16), 8804-8812, Proceedings of the
National Academy of Sciences

36 Antoine Dechezleprêtre, et al 2018. The joint impact of the European Union

emissions trading system on carbon emissions and economic performance.
Journal of Environmental Economics and Management, 118, 102758, Elsevier

37 Jonathan Colmer, et al 2023. Does Pricing Carbon Mitigate Climate Change?

Firm-Level Evidence from the European Union Emissions Trading Scheme.
CRC TR 224, Discussion Paper No. 232, Elsevier

38 Jeong Hyuk 2020. Challenges and Improvements based on the First Trading
Period of South Korea’s Emissions Trading Scheme (Focusing on Emission
Allowance Allocation). Journal of Climate Change Research 2020, Vol. 11, No.
3, pp. 133–144, Hankuk University of Foreign Studies Institute for EU Studies

39 Anon 2018. The Korea Emissions Trading Scheme: Challenges and Emerging
Opportunities. Asian Development Bank

40 Ibid

41 Korea Emissions Trading Scheme. Available at https://icapcarbonaction.com/

en/ets/korea-emissions-trading-scheme, as accessed on 5 January 2024

42 Ibid

43 Ibid

44 Ibid

45 Anon 2018. The Korea Emissions Trading Scheme: Challenges and

EmergingOpportunities, Asian Development Bank

46 Ibid

47 Heesu Lee 2024. Carbon Trading Is Meant to Make Polluters Pay. In South
Korea, It’s Had the Opposite Effect, Climate Advocacy Group Says. Bloomberg.
Available at https://time.com/6825324/south-korea-cap-and-trade-carbon-
emissions-polluters- profit-plan15/, as accessed on 21 March 2024

105
 REFERENCES

48 Anon 2023. How to Fix a Broken ETS: A Korean Case Study, Plan 1.5.

49 Korea Emissions Trading Scheme. Available at https://icapcarbonaction.com/

en/ets/korea-emissions-trading-scheme, as accessed on 5 January 2024

50 Anon 2022. South Korea approves initial wave of near-term ETS

reforms, International Carbon Action Partnership. Available at https://
icapcarbonaction.com/en/news/south-korea-approves-initial-wave-near-
term-ets-reforms, as accessed on 17 July 2024

51 Jihyung Joo, Jouni Paavola, et al 2023. The divergence of South Korea&#39;s

Emissions Trading Scheme (ETS) from the EU ETS: An institutional
complementarity view. Politics & Policy, 51(6), 1155-1173

52 Anon 2022. South Korea approves initial wave of near-term ETS

reforms, International Carbon Action Partnership. Available at https://
icapcarbonaction.com/en/news/south-korea-approves-initial-wave-near-
term-ets-reforms, as accessed on 17 July 2024

53 Primary energy consumption in China from 2018 to 2023, by fuel. Available

at https://www.statista.com/statistics/265612/primary-energy-consumption-
in-china- by-fuel-type-in-oil-equivalent/, as accessed on 17 July 2024

54 ICAP 2024. Emissions Trading Worldwide: Status Report 2024, International

Carbon Action Partnership, Berlin

55 Draft benchmark values for the 2021-22 compliance period. Available at

https://icapcarbonaction.com/system/files/document/221124%20China%20
allocation%20plan%20news_PDF_Vfin.pdf, as accessed on 17 July 2024

56 Tan Luyue 2022. The first year of China’s national carbon market, reviewed,
Dialogue Earth. Available at https://dialogue.earth/en/climate/the-first-year-
of-chinas- national-carbon-market-reviewed/, as accessed on 18 July 2024

57 You Xiaoying 2023. As China’s carbon market turns two, how has it performed?
Dialogue Earth. Available at https://dialogue.earth/en/climate/china-carbon-
market-turns-two-how-has-it-performed/, as accessed on 17 July 2024

58 Energy Innovation: Policy and Technology and Chris Busch 2022. China’s
Emissions Trading System Will Be The World’s Biggest Climate Policy.

106
 Here’s What Comes Next. Forbes. Available at https://www.forbes.com/sites/
energyinnovation/2022/04/18/chinas-emissions-trading-system-will-be-the-
worlds-biggest-climate-policy-heres-what-comes-next/?sh=47a789e52d59,
as accessed on 15 July 2024

59. Anon 2024. China launches domestic offset market to align with national
ETS goals, International Carbon Action Partnership. Available at https://
icapcarbonaction.com/en/news/china-launches-domestic-offset-market-
align-national-ets-goals, as accessed on 18 July 2024

60. Hongqiao Liu 2021. In-depth Q&A: Will China’s emissions trading scheme help
tackle climate change? Carbon Brief. Available at https://www.carbonbrief.
org/in-depth-qa-will-chinas-emissions-trading-scheme-help-tackle-climate-
change/, as accessed on 18 July 2024

61. Ivy Yin 2023. China's compliance carbon price hits record high on stronger demand
S&P Global. Available at https://www.spglobal.com/commodityinsights/en/
market-insights/latest-news/energy-transition/081823-chinas-compliance-
carbon-price-hits-record-high-on-stronger-demand, as accessed on 18 July
2024

62. You Xiaoying 2023. As China’s carbon market turns two, how has it performed?
Dialogue Earth. Available at https://dialogue.earth/en/climate/china-carbon-
market-turns-two-how-has-it-performed/, as accessed on 17 July 2024

63. Ibid

64. Analytical report on the status of the China GHG voluntary emission reduction
program. Available at https://www.edf.org/sites/default/files/documents/
Analytical-Report_on_the_Status_of_the_China_GHG_Voluntary_
Emission_Reduction_Program-ENG.pdf, as accessed on 18 July 2024

65. Are we one step closer for China’s CCERs program relaunch? Available at
https://www.linkedin.com/pulse/we-one-step-closer-chinas-ccers-program-
relaunch-rqnvc/, as accessed on 17 July 2024

66. Xiaonan Feng 2023. China’s national ETS update: Free allowances tightened
but overall cost increase still limited, S&P Global. Available at https://www.
spglobal.com/commodityinsights/en/ci/research-analysis/chinas-national-
ets-update-free-allowances-tightened.html, as accessed on 18 July 2024

107
 REFERENCES

67. Frank Eich, et al 2023. Chinese government tightens ETS benchmarks for
power generators, but offers generous exemptions, CRU Group. Available at
https://sustainability.crugroup.com/article/chinese-government-tightens-
ets-benchmarks-for-power-generators-but-offers-generous-exemptions, as
accessed on 18 July 2024

68. Anon 2023. China releases allocation plan and compliance arrangements
for 2021 and 2022, International Carbon Action Partnership. Available at
https://icapcarbonaction.com/en/news/china-releases-allocation-plan-and-
compliance-arrangements-2021-and-2022, as accessed on 18 July 2024

69. You Xiaoying 2023. As China’s carbon market turns two, how has it performed?
Dialogue Earth. Available at https://dialogue.earth/en/climate/china-carbon-
market-turns-two-how-has-it-performed/, as accessed on 17 July 2024

70. Brief industrial profile of Surat District. Available at https://dcmsme.gov.in/

old/dips/BIP%20SURAT_guj.pdf, a accessed on 18 February 2024

71. Anon 2022. Booklet on Particulate Matter, ETS Gujarat, Gujarat Pollution
Control Board, Gujarat

72. Ibid

73. Micheal Greenstone, et al 2019. The Surat Emissions Trading Scheme, Energy
Policy Institute at the University of Chicago

74. Anon 2020. Continuous Emission Monitoring Systems (CEMS) Emission

Trading Scheme Technical Brief, Energy Policy Institute at the University of
Chicago, Surat

75. Ibid

76. Anon 2022. Booklet on Particulate Matter, ETS Gujarat, Gujarat Pollution
Control Board, Gujarat

77. Ibid

78. The Impact of an Emissions Trading Scheme on Economic Growth and Air
Quality in India. Available at https://www.povertyactionlab.org/evaluation/

108
 impact-emissions-trading-scheme-economic-growth-and-air-quality-india as
accessed on 18 July 2024

79. Directorate-General for Climate Action 2024. Record reduction of

2023 ETS emissions due largely to boost in renewable energy. European
Commission. Available at https://climate.ec.europa.eu/news-your-voice/
news/record-reduction-2023-ets-emissions-due-largely-boost-renewable-
energy-2024-04-03_en, as accessed on 6 May 2024

80. Susanna Twidale 2024, Global carbon markets value hit record $949 bln
last year - LSEG, Thomson Reuters. Available at https://www.reuters.com/
markets/commodities/global-carbon-markets-value-hit-record-949-bln-last-
year-lseg-2024-02-12/, as accessed on 18 July 2024

81. Ibid

82. Korea Emissions Trading Scheme. Available at https://icapcarbonaction.com/

en/ets/korea-emissions-trading-scheme, as accessed on 5 January 2024

83. Perform, Achieve and Trade. Available at https://beeindia.gov.in/en/

programmes/perform-achieve-and-trade-pat, as accessed on 18 July 2024

84. Anon 2022. Indian Steel Industry Reduces its Energy Consumption and
Carbon Emissions Substantially with Adoption of Best Available Technologies
in Modernisation & Expansions Projects, Press Information Bureau, Delhi.
Available at https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1794782,
as accessed on 18 July 2024

85. Nivit Kumar Yadav, Sowmiya Kannappan, et al 2021. Perform, Achieve and
Trade (PAT) Scheme in Thermal Power Plants: A Critical Analysis, Centre for
Science and Environment, New Delhi

86. Ibid

87. Hena Oak and Sangeeta Bansal 2022. “Enhancing energy efficiency of Indian
industries: Effectiveness of PAT scheme”, Energy Economics Volume 113,
Elsevier

88. Nivit Kumar Yadav, Sowmiya Kannappan, et al 2021. Perform, Achieve and

109
 REFERENCES

Trade (PAT) Scheme in Thermal Power Plants: A Critical Analysis, Centre for
Science and Environment, New Delhi

89. Aditya Chunekar and Apoorva Apte 2023. Not a PAT on the back, yet,
Prayas (Energy Group). Available at https://energy.prayaspune.org/power-
perspectives/not-a-pat-on-the-back-yet, as accessed on 18 July 2024

90. Anon 2021. Impact of Energy Efficiency measures for the year 2019-20, Bureau
of Energy Efficiency, New Delhi

91. Ibid

92. Anubha Aggarwal 2023. Status of biomass co-firing in coal thermal power
plants in Delhi NCR region, Centre for Science and Environment, New Delhi

93. National Steel Policy 2017. Available at https://steel.gov.in/sites/default/files/

draft-national-steel-policy-2017.pdf, as accessed on 18 July 2024

94. Simone Tagliapietra and Maria Demertzis, 2021. Carbon price floors: an
addition to the European Green Deal arsenal, Bruegel. Available at https://
www.bruegel.org/blog-post/carbon-price-floors-addition-european-green-
deal-arsenal, as accessed on 18 July 2024

95. Nivit Kumar Yadav, Sowmiya Kannappan, et al 2021. Perform, Achieve and
Trade (PAT) Scheme in Thermal Power Plants: A Critical Analysis, Centre for
Science and Environment, New Delhi

96. You Xiaoying 2023. As China’s carbon market turns two, how has it performed?
Dialogue Earth. Available at https://dialogue.earth/en/climate/china-carbon-
market-turns-two-how-has-it-performed/, as accessed on 17 July 2024

97. Anon 2022. China slams firms for falsifying carbon data, Thomson Reuters.
Available at https://www.reuters.com/world/china/china-slams-firms-
falsifying-carbon-data-2022-03-14/, as accessed on 18 July 2024

98. List of Accredited Energy Auditors. Available at https://beeindia.gov.in/en/

programmesnational-certification-examination/accredited-energy-auditors,
as accessed on 18 July 2024

110
111
India has pledged to meet its Nationally Determined
Contribution (NDC) targets by 2030. Additionally,
it aims to attain net-zero emissions by 2070,
following the guidelines set forth by the United
Nations Framework Convention on Climate Change
(UNFCCC). In order to achieve these goals, India
is actively exploring decarbonization strategies and
employing emission reduction tools and mechanisms
for greenhouse gas (GHG) emitting sectors in the
country. Carbon markets represent one such tool
or mechanism implemented globally, as well as
at national and sub-national levels by numerous
countries. India, too, is in the process of developing
and launching its own national compliance-based
carbon market. This report aims to collate a clear set
of learnings from the past and ongoing compliance-
based emission trading schemes worldwide, including
those operating in India. The aim is to facilitate the
effective operationalization of carbon markets in
India and ensure they serve their intended purpose
of reducing emissions

Centre for Science and Environment

41, Tughlakabad Institutional Area, New Delhi 110 062
Phones: 91-11-40616000 Fax: 91-11-29955879
E-mail: [email protected] Website: www.cseindia.org