Carbon Credit
A carbon credit is a tradeable certificate representing the right to emit one tonne of carbon dioxide equivalent (CO2e), generated either through verified emission reductions or sequestration activities, with India developing a domestic carbon market framework through the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022.
India's journey toward a structured carbon credit market accelerated when the Energy Conservation (Amendment) Act, 2022 was passed by Parliament, amending the Energy Conservation Act, 2001 to explicitly enable the creation of a domestic carbon market. This legislative backing paved the way for the Bureau of Energy Efficiency (BEE) to develop the Carbon Credit Trading Scheme (CCTS), with BSE and NSE empanelled as exchanges to facilitate credit trading.
Before the CCTS, India had two primary instruments in the sustainability space. Renewable Energy Certificates (RECs) allowed obligated entities under the Renewable Purchase Obligation (RPO) to meet compliance requirements by purchasing certificates from renewable energy producers who sold their electricity at conventional tariffs. Energy Saving Certificates (ESCerts) were issued under the Perform, Achieve and Trade (PAT) scheme to industrial units that exceeded their energy efficiency targets, which could be traded with units falling short.
In the voluntary carbon market, Indian project developers have generated Certified Emission Reductions (CERs) under the United Nations Clean Development Mechanism (CDM) and Verified Carbon Units (VCUs) under Verra's Verified Carbon Standard. Indian forestry, cookstove, and solar projects contributed a meaningful share of global voluntary carbon supply, though CER prices collapsed after 2012 due to oversupply and weak European Union ETS demand.
The domestic CCTS is designed as a compliance market where designated consumers (large energy-intensive industries) are issued carbon credit certificates for verified emission reductions below their intensity targets. These credits can be bought and sold on designated exchanges. The scheme aims to gradually tighten intensity benchmarks to incentivise decarbonisation investment across cement, steel, aluminium, petrochemicals, and pulp-and-paper industries.
For equity investors, the development of a carbon market has direct implications for energy-intensive companies. Firms that over-perform on emission reductions can monetise excess credits, while those that underperform face compliance costs. Carbon credit revenues and liabilities are expected to appear as material line items on income statements and balance sheets of large industrials over the next decade, making carbon intensity a key analytical variable for fundamental investors.