Enhancing Environmental Sustainability: A Comprehensive Review of Carbon Credit Mechanisms and Global Efforts

Introduction

Global warming has intensified in recent times due to human activities, leading to a rise in average global temperatures. A major contributor to this phenomenon is carbon dioxide, which has compelled governments worldwide to develop strategies aimed at curtailing emissions within specified limits. The rising demand for environmental sustainability emphasizes the need for urgent global action. To tackle environmental challenges, organizations focus on the three R's (reduce, reuse, recycle), adopt low-pollution green technologies, and promote community engagement through environmental awareness programs.

The pursuit of a "net zero" target, aiming to minimize atmospheric carbon emissions, is a central objective. This target can be achieved through implementing carbon credit mechanisms. A carbon credit represents ownership of one metric ton of CO₂ tradable in the market, while carbon offsetting generates credits by reducing atmospheric CO₂ levels. Companies earn credits through environmental projects like reforestation or renewable energy, trading them in the carbon market to offset carbon dioxide emissions. The adoption of carbon credit initiatives holds promise for mitigating the threat of global warming (Rahul Pandey, 2019).

The Intergovernmental Panel on Climate Change (IPCC) report underlines the necessity of addressing climate change and minimizing global warming. In this light, it becomes apparent that the carbon credit market is a vital tool for reducing emissions and promoting environmental sustainability. As companies around the globe embrace carbon credit programs as part of their efforts to reduce carbon emissions, it is crucial to understand the intricacies, importance, and hurdles of this evolving market. India, a major participant and ranked second in the global carbon credit trade, necessitates a thorough investigation of the dynamics within its carbon credit market. This paper highlights the importance of the carbon credit market for environmental sustainability by investigating India's Carbon Credit Trading Scheme of 2023. It examines its dynamics, challenges, and future implications, structured with an introduction, literature review, methodology, key findings, and a conclusive summary.

Literature Review

In the pursuit of curbing the collective carbon footprint, carbon credits and markets emerge as key players. These mechanisms grant companies the authority to emit a specified amount of greenhouse gases into the atmosphere, which can then be traded as valuable financial assets, yielding annual revenue (Rana et al., 2024). Concurrently, the Clean Development Mechanism (CDM) endeavours to foster sustainable development by encouraging investments from developed nations into emission reduction projects in developing countries, allowing for credits toward emission reduction targets (Chanda et al., 2021). However, a recent study examining carbon credit revenue within the Indian corporate sector unveils a concerning trend: despite diverse efforts, there's a notable decline in carbon credit revenue, suggesting challenges in generating substantial income (Bhanawat et al., 2015).

As global greenhouse gas emissions continue to rise, nations under the Paris Agreement pledge to move towards a sustainable future India, a prominent player in this arena, leverages carbon trading to generate revenue (Nandi & Banerjee, 2023). Additionally, carbon pricing mechanisms like carbon taxes ensure emissions accountability by imposing fees for carbon release, driving environmental responsibility in developed nations. The imposition of such taxes significantly impacts profit margins for greenhouse gas-emitting companies, urging active efforts to reduce emissions in production processes (Bhardwaj et al., 2021).

In tandem, carbon credits are instrumental in facilitating carbon offsetting, allowing polluters to acquire credits that authorize a predetermined carbon emission level, already offset. Many organizations prioritize carbon offsetting to reduce their carbon footprints within sustainability initiatives (Jones et al., 2024). Various regions have implemented carbon pricing mechanisms to address the negative impacts of greenhouse gas emissions, with emissions trading systems (ETS), or cap-and-trade systems, being a common strategy. ETS regulate GHG emissions by allocating specific carbon credits (CCs), enabling holders to emit an equivalent volume of GHGs in their economic activities (Anjos et al., 2022).

Climate finance is gaining popularity in India. The Reserve Bank of India (RBI) has approved green deposits in all banks starting June 2023. India has allocated approximately USD 2.40 billion for low-carbon transformation in the Union Budget 2023-24 with green carbon pricing (Sen et al., 2024). Furthermore, the carbon tax offers a more streamlined and transparent approach to carbon pricing, making it easier to administer and monitor compliance across India's diverse economic landscape. Unlike an ETS, a carbon tax does not require the complex infrastructure of cap-setting, allowance allocation, and trading mechanisms, simplifying the implementation process and reducing associated costs. Moreover, a carbon tax can be applied broadly across sectors, capturing a wider range of emissions sources and driving economy-wide decarbonization efforts more effectively than targeted feebate schemes (Dabla-Norris et al., 2021).

In a bid to further promote carbon credit initiatives, the World Bank collaborates with the Infrastructure Development Financial Bank (IDFB), offering initial aid of $10 million through world-managed carbon finance to fund projects under the Clean Development Mechanism. Moreover, estimates from the UNFCCC underline the necessity for industrialized nations to purchase project-based emissions from developing countries like India to stimulate growth in the CDM market, potentially reaching significant scales annually.

Issued by governments, funds from carbon credit sales are often invested in green projects, particularly forest conservation. Governments set emission caps to regulate carbon output, penalizing excess emissions while allowing companies to trade unused credits through cap-and-trade systems. This mechanism not only incentivizes emission reduction but also creates a new economic avenue by enabling investors to profit from surplus credits. Overall, carbon credits contribute significantly to mitigating climate change while stimulating economic growth.

Objectives of the Study

• To understand the current scenario, significance, and challenges related to the carbon credit market in India.
• To study the future implications of the carbon market in India.

Research Methodology

This study delves into the current state and challenges of the carbon credit market in India through a comprehensive literature review, relying solely on secondary information. Emphasizing theoretical and descriptive analysis, it aims to uncover evolving trends, significance, and hurdles within the carbon credit market. Utilizing existing academic research, scholarly articles, and reports from reputable sources like Google Scholar, Scopus, and Web of Science, the study seeks to identify gaps and future directions. Focused on the period from 1990 to 2023, the paper is divided into three parts: an assessment of current practices, an exploration of the importance and challenges of the Indian Carbon Market, and a speculative glimpse into its future trajectory.

Carbon Credit Practices in India

i. Carbon Credit Definition and Significance

Human activities like industrial emissions and deforestation contribute to global warming. It's crucial to monitor and reduce carbon emissions.

"If we track something we can control it better." — Peter Drucker

Monitoring CO₂ emissions helps us understand energy use, save money, and make companies work more efficiently. Carbon credits have emerged as a vital tool for accurately measuring industrial carbon emissions. Functioning as permits allowing companies to emit specific amounts of CO₂, each credit represents one ton of CO₂ either removed from or prevented from entering the atmosphere. They play a pivotal role in national and international emission trading schemes, fostering environmental protection and revenue generation for developing nations.

ii. Evolution of the Carbon Credit Market in India

India's journey in the carbon credit market has progressed gradually. Initially, its participation was motivated by engagement in international initiatives like the Clean Development Mechanism (CDM) under the Kyoto Protocol. This international agreement aimed to reduce emissions, preserve the ozone layer, and promote environmental cleanliness. Through this program, developed nations incentivized developing countries to implement projects that reduce greenhouse gases, while earning Carbon Emission Reduction (CER) credits. India focused on sectors like renewable energy, energy efficiency, and afforestation to earn these credits.

Despite early involvement, the domestic carbon market remained relatively undeveloped. However, with increasing awareness of climate change and sustainable development, India began exploring domestic carbon pricing mechanisms. The introduction of the National Action Plan on Climate Change in 2008 and its commitment to Nationally Determined Contributions (NDCs) further catalyzed efforts to build a robust carbon market framework. Today, India is committed to enhancing transparency, incentivizing emission reductions, and promoting carbon neutrality through legislative and initiative-driven approaches to foster a dynamic carbon credit market.

iii. Current State of Carbon Credit Practices in India

The current state of carbon credit practices in India reflects a dynamic landscape influenced by evolving environmental policies, market dynamics, and corporate engagement. In 2023, India's carbon emissions surged by a notable 8.2%. Reports from the Joint Research Centre offer detailed insights into sector-wise greenhouse gas emissions from 1990 to 2022.

According to the EDGAR report, India's GHG emissions rose by 5% in 2022 compared to 2021, continuing a three-decade trend of continuous increase, now being approximately three times higher than in 1990 (Table 1). This increase is mainly due to rising CO₂ emissions from industrial combustion and power industries. India ranks as the third largest emitter globally, after China and the United States (World Resources Institute, 2023).

Table 1: India's Yearly Greenhouse Gas Emissions

A study conducted by Down To Earth And the Center For Science And Environment (DTE-CSE) revealed that as of June 2023, India has enrolled 860 out of 1,451 projects in the world's leading carbon credit programs (Table 2). This demonstrates India's significant participation in global carbon credit initiatives, underscoring the country's dedication to tackling climate change and curbing greenhouse gas emissions.

Table 2: Number of Projects Eligible for Carbon Credits in India

Many projects across the country are running to limit carbon emissions. Some projects supported by the carbon credit fund include Greenway Grameen Infra Pvt Ltd, headquartered in Mumbai, which subsidizes the cost of efficient cookstoves in rural areas to reduce the consumption of fuelwood and consequently reduce carbon emissions. This project has issued 67,737 carbon credits till May 2023. The focus of this project is to distribute 15,100 cookstoves across India which will reduce approx. 86,825 tones of CO₂ annually. Another one is the Household Carbon Offset Project for clean, convenient & efficient cooking, which has set up 8,519 biogas plants across India that help to reduce 51,235 tons of CO₂ per year. Table 3, alongside these initiatives, provides a comprehensive compilation of renewable power developers, showcasing the diverse efforts aimed at promoting sustainable energy practices in the region.

Table 3: Renewable Power Developers

Process for Carbon Offset Projects

Earning carbon credits begins with conceiving a project idea aimed at reducing emissions and benefiting the climate. Developers then design the project, specifying anticipated emission reductions and climate benefits. An independent third party verifies the project's effectiveness in reducing carbon emissions. If the verification succeeds, the project receives carbon credits as recognition for achieving zero carbon emissions (Bureau of Energy Efficiency, 2023).

India's Green Credit Programmes 2023 incentivizes eco-friendly actions like tree planting and water management. Credits can be traded, and regulated by the Indian Council of Forest Research and Education. The program supports India's "Net Zero commitment" by boosting the carbon credit market, emphasizing water conservation and afforestation. The green credit program faces challenges due to its novelty and limited public awareness, alongside difficulty in pricing due to diverse environmental benefits. Advancing these programs is crucial for long-term sustainability.

Significance and Challenges in India's Carbon Credit Market

The carbon credit market plays a crucial role in achieving Sustainable Development Goals (SDGs) by promoting sustainable practices.

• The carbon credit market plays a vital role for businesses in developing nations, allowing them to generate income through the sale of carbon credits and investing in advanced technologies.
• In India, the carbon market is expanding rapidly and ranks second globally, trading around 30 million carbon credits (Bansal et al., 2023).
• Regulations within the carbon credit market ensure significant reductions in emissions, supporting environmental objectives.
• Rising demand for carbon credits among businesses strengthens the market, promoting sustainability and advancing towards a cleaner future (Principles of Climate Policy after 2012, 2006).
• Environmental concerns fuel efforts to mitigate carbon emissions, potentially averting the release of 60 million tons of CO₂ annually.
• India's strategy involves planting sufficient trees and greenery to absorb 2.5 million to 3 billion tons of CO₂ by 2023, combating carbon emissions.

The Government of India exercises its authority through various ministries to regulate the carbon credit market in India but there are certain challenges faced by the Indian Carbon credit market:

• Surplus of carbon credits (1 billion available in 2021) leads to an imbalance with more sellers than buyers.
• Fluctuations in carbon credit prices due to an imbalance in supply and demand destabilize the market.
• Varying company sizes, investments, and technologies pose challenges in establishing common emission baselines.
• Pricing instability is influenced by factors such as CO₂ emissions, crude oil prices, foreign exchange rates, demand and supply dynamics, and economic growth. Hence, it isn't easy to bring stability in pricing for carbon credit (Gupta & Pareek, n.d.).
• Greenwashing practices deceive consumers with false eco-friendly claims, affecting carbon credit purchases.

Future Inferences of the Carbon Market in India

Carbon credit is a mechanism aimed to reduce the level of carbon emissions in the environment. To impose limits on carbon emissions, specific mechanisms such as consumption-based mechanisms and carbon pricing mechanisms are utilized. The consumption mechanism also called bitCO₂, incentivizes emitters to opt for less carbon-intensive products, earning them bitCO₂ tokens. This is achieved through the creation of a carbon market where individuals can trade their bitCO₂. It serves as a method to internalize the social cost of carbon into carbon choices, thereby promoting sustainability.

Carbon pricing is another mechanism that captures the cost of greenhouse gas emissions i.e. the cost that the public pays for damages to crops, loss of property from flooding & sea level rise. This pricing binds the cost of emissions to their source, providing an economic signal to emitters to either transform their activities or pay for their emissions, thus promoting overall environmental sustainability. It is observed from the studies that through the carbon market, it is possible to achieve the Paris Agreement goal of limiting warming up to 1.5 degrees Celsius. To confront climate change and its pessimistic impact on the environment, a global initiative was taken on 12 December 2015: the Paris Agreement At COP 21 in Paris, members of the UNFCCC United Nations Framework Convention on Climate Change to combat climate change to expedite & boost the investment required for a sustainable carbon future. Nowadays India's share in the carbon market is proliferating. It has generated approximately 30 million carbon credits globally, which is considered the second largest producer of carbon credit across the world. The carbon credit market offers developmental businesses investment opportunities through the purchase and sale of carbon credits (Bansal et al., 2023).

The Indian government aims to increase the share of green energy to 50% by the end of the decade, potentially making India a net energy exporter. The carbon market not only reduces emissions but also offers cost-effective solutions, potentially saving $35 trillion over 50 years. Drivers for the rapid growth of the Indian carbon market include corporate social responsibility, government regulations, and environmental compliance. As per the report published by 6Wresearch (Figure 5), supply of carbon credit from the Indian market has drastically risen; it is expected to rise into the upcoming year by up to 16.62% (till 2027).

In India, companies like Infosys, Ambuja Cement, and ACC Cement are actively engaged in the carbon credit market. Ambuja Cement and ACC Cement contribute to sustainability through projects like the Mumbai Coastal Road Project, utilizing high-performance concrete to reduce CO₂ emissions. Infosys collaborates with ATP to launch a carbon tracker for tracking players' travel data, promoting conscious travel decisions.

Key sectors contributing to the carbon credit market include agriculture, renewable energy, industrial manufacturing, and forestry land use, with agriculture playing a significant role (Figure 6). Carbon credit market will open new opportunities in developing countries like India. It is considered highly beneficial as it ensures that economic activities are carried out while considering the Sustainable Development Goals (SDGs).

Financial incentives from the carbon credit market support investments in renewable energy, promoting affordable clean energy solutions. These projects not only create job opportunities but also support the Sustainable Development Goal of decent work and economic growth. The obligation to cut emissions drives innovation, fostering advancements in industry and infrastructure. However, challenges persist, notably with the cap-and-trade system's varying regulations across countries, leading to policy risks and market price fluctuations. Additionally, concerns arise around market manipulation, where participants may engage in misleading transactions, potentially favoring dominant players and impeding fair competition.

Implication of the Carbon Credit Market in India

The carbon credit market has significant implications for India's effort to attain environmental sustainability and economic growth. This study analyzed the market's potential to drive investment in renewable energy projects and innovation across industries and infrastructure that promotes sustainable development. India's enlarging prominence as the second largest producer of carbon credit globally provides entrepreneurs with opportunities to generate income and advance sustainable development. However, challenges like regulatory disparity, price instability, and surplus credit in the carbon market must be addressed through improved governance and global cooperation. By conquering these obstacles, the carbon credit market may reach its full potential and facilitate India's transition to a low-carbon economy, promoting affordable clean energy solutions and combating climate change while fostering economic growth.

Conclusion

The carbon credit market plays a crucial role in combating climate change and fostering sustainability. Initiatives like India's Carbon Credit Trading Scheme 2023 and the Green Credit Programmes have significantly contributed to reducing carbon emissions and promoting environmental responsibility. However, the market faces challenges such as excess credits, price volatility, and regulatory disparity. Despite these hurdles, the carbon credit market holds immense potential for driving investments in the renewable energy sector, creating new job opportunities, and fostering economic growth while supporting Sustainable Development Goals. To fully realize this potential, it is crucial to tackle these challenges and strengthen international cooperation in carbon credit initiatives, both within India and on a global scale.