As the world confronts the urgent need for climate action, the concept of carbon credits has emerged as a key component of global strategies to curb greenhouse gas emissions. In India, while the term “carbon credit” is widely acknowledged, the underlying framework and its legal implications remain a fascinating subject, not fully explored. This blog takes a deep dive into India’s carbon credit system, shedding light on unique aspects often overlooked in mainstream discussions.

India’s Carbon Credit Landscape: Beyond Kyoto and Paris

Though carbon credits gained prominence under international frameworks like the Kyoto Protocol and the Paris Agreement, India’s approach offers a layered complexity that is worth exploring. While the international agreements provide a structural basis for carbon credit trading, India has evolved its mechanisms by integrating them into national policies like the National Action Plan on Climate Change (NAPCC).

A critical aspect of India’s carbon credit strategy involves not just compliance with international standards but a keen emphasis on sustainable development. Unlike some Western countries where carbon credits often serve as mere compliance tools, in India, they function as both economic drivers and instruments for social welfare. For instance, the afforestation carbon projects in India are increasingly seen as tools to not only reduce carbon emissions but also to enhance rural livelihoods through community forestry and land restoration efforts.

The Grid Controller of India Limited (GCIL) is the registry for carbon credits in India. The GCIL’s responsibilities include:

• Keeping a database of organizations related to carbon credit certificates (CCCs)
• Tracking CCC transactions
• Helping develop an IT platform for maintaining a database of CCCs 

The Central Electricity Regulatory Commission (CERC) is the regulator for trading activities in the Indian carbon market. The CERC’s responsibilities include: Registering power exchanges, Approving carbon credit certificate trading, and Performing functions related to the trading of carbon credit certificates. 

The Bureau of Energy Efficiency (BEE) issues carbon credit certificates to entities that meet or exceed their assigned emission reduction targets. 

Carbon Registry India
Administrative Office. ATS Bouquet, Tower B, B-801(A), 8th Floor, Sector 132, Noida, U.P 201304. Email: info@nccf.in. Phone: +91-9289209111. Registered Office.

Legal Gaps: Is Carbon Credit Really Defined in India?

One of the most intriguing legal gaps in India’s environmental framework is the lack of a direct statutory definition for carbon credits. While statutes such as the Energy Conservation Act, of 2001 regulate aspects of emissions, they do not expressly codify what a “carbon credit” is. This omission raises several legal questions when carbon credits are traded internationally or on voluntary platforms.

Carbon Credits as Quasi-Currencies?

India’s carbon credits have been debated as potential quasi-currencies in some policy circles. With the increasing intersection of carbon markets and blockchain technology, a new class of carbon assets is emerging. These assets, while not legal tender, are starting to play a pivotal role in economic transactions related to climate change mitigation. The Ministry of Finance has even debated the taxability of carbon credits under the goods and services tax (GST), signaling the country’s growing recognition of their economic significance.

Regulatory Bodies and Key Ministries Involved

Several regulatory bodies and ministries play crucial roles in shaping India’s carbon credit market:

• Ministry of Environment, Forest and Climate Change (MoEFCC): As the primary ministry responsible for climate initiatives, the MoEFCC spearheads policies for carbon credits, managing India’s participation in international agreements and overseeing the National Action Plan on Climate Change (NAPCC).
• Bureau of Energy Efficiency (BEE): Under the Ministry of Power, BEE implements the PAT Scheme, which fosters energy efficiency and emissions reduction, contributing directly to carbon trading.
• National Clean Development Mechanism Authority (NCDMA): A supervisory body under MoEFCC, the NCDMA approves CDM projects, ensuring they align with India’s sustainable development goals.
• Securities and Exchange Board of India (SEBI): While not directly involved yet, SEBI may play a role in overseeing carbon credits once they become part of India’s financial markets.

Types of Carbon Credits: A Shift Towards VCUs

India traditionally issued Certified Emission Reductions (CERs) under the Clean Development Mechanism (CDM), but there is a growing shift towards Verified Carbon Units (VCUs). Unlike CERs, which are tightly regulated under the Kyoto Protocol, VCUs are more flexible and can be generated under voluntary standards like the Verified Carbon Standard (VCS) or the Gold Standard.

The flexibility of VCUs is attracting a new breed of industries, particularly those in the tech and financial sectors, who wish to voluntarily offset their carbon footprints without the stringent requirements of CDM. This shift reflects a broader global trend where voluntary carbon markets are projected to outpace compliance markets in terms of both growth and innovation.

What sets India apart in this context is the integration of VCUs into corporate social responsibility (CSR) initiatives. Indian companies, especially those in the energy and IT sectors, are using VCUs not just to offset emissions but also to fulfill their CSR obligations, creating a win-win scenario that blends environmental responsibility with brand building.

Procedure for Registering Carbon Credits in India

Registering carbon credits in India involves a multi-step process, ensuring projects meet both national and international criteria:

1. Project Identification: Projects should focus on reducing GHG emissions through activities such as renewable energy, afforestation, or energy efficiency.
2. Program Selection: Projects can be registered under either the Clean Development Mechanism (CDM) for global trading or the Voluntary Carbon Market for local offsets.
3. Validation and Verification: The project is first validated by a third-party agency (Designated Operational Entity), and after implementation, an independent auditor verifies the actual emission reductions.
4. Registration: Following validation, the project is submitted for approval by the NCDMA and international bodies such as the UNFCCC for final certification.
5. Issuance of Credits: Once verified, the project generates tradable carbon credits, such as CERs or VCUs.

India’s Emerging Carbon Market: A Focus on Grassroots Projects

One of the lesser-known facts about India’s carbon credit market is the prominence of small-scale community-based projects that generate carbon credits. These projects range from biogas plants in rural villages to solar-powered irrigation systems that not only reduce emissions but also create employment and infrastructure development.

These small-scale projects, unlike their larger industrial counterparts, are often overlooked in carbon market discussions. Yet, they represent a significant portion of India’s carbon credit potential. For example, a biogas project in a village may generate relatively small amounts of carbon credits, but when aggregated with thousands of similar projects across the country, the cumulative impact becomes substantial. These credits are often traded on the voluntary carbon market, with proceeds going back into community development, making these projects both economically and socially sustainable.

Indian Energy Exchange (IEX) 

The Indian Energy Exchange (IEX) operates a Voluntary Carbon Trading Platform. Here are the details:

• Address: Indian Energy Exchange Limited, Unit No. 3, 4, 5 & 6, Fourth Floor, TDI Centre, Plot No.7, Jasola District Centre, New Delhi, 110025.
• Website: www.iexindia.com
• Email: info@iexindia.com

The Indian Energy Exchange (IEX) is a private entity that facilitates voluntary carbon trading, although it operates under regulations provided by government bodies like the Ministry of Power and the Bureau of Energy Efficiency (BEE).

Carbon Trade eXchange (CTX)

The Carbon Trade eXchange (CTX) 

The Carbon Trade eXchange (CTX) operates in India through a partnership with SASA Enviro, providing a platform for trading voluntary carbon credits. Their office is located at:

1st Floor, Mamanjee Centre, S7-A, Thiru-Vi-Ka Industrial Estate, Guindy, Chennai, Tamil Nadu – 600032.

You can contact them at +91-7305444709 for further inquiries. For online access to their services, visit their website at ctxglobal.net​

How is Carbon Offset Done in Biogas Projects, and How Are Carbon Credits Counted? 

In biogas projects, carbon offsets are calculated based on the reduction of methane emissions and other greenhouse gases (GHGs) that occur when organic waste is converted into biogas rather than being left to decompose. The amount of carbon credit generated depends on the size and output of the biogas plant.

• For example, 1 metric ton of methane prevented from release is equivalent to about 21 metric tons of CO2 equivalent (CO2e). Each metric ton of CO2e reduced can be traded as 1 carbon credit.

How Much Carbon is Offset in Biogas?
On average, for a standard household biogas plant processing 50 kg of organic waste daily, approximately 3-5 tons of CO2e can be offset annually. Larger, community-scale biogas plants generate significantly more credits depending on their capacity.

Regulatory Innovation: A Step Toward Blockchain-Based Carbon Credits

India is experimenting with the tokenization of carbon credits using blockchain technology, a cutting-edge move not commonly associated with developing economies. The Bureau of Energy Efficiency (BEE), along with NITI Aayog, is exploring blockchain to enhance transparency and traceability in carbon credit trading. By leveraging blockchain, India aims to create a decentralized carbon market where carbon credits can be traded more efficiently and securely.

This is particularly relevant in the context of smart contracts, where emission reduction agreements can be automatically enforced without human intervention. Smart contracts can ensure that carbon credits are only released once specific emission reductions are achieved and verified, adding an extra layer of accountability to the system.

Is any Initiative Mentioned in the Blog with Blockchain Involvement? 

One initiative exploring blockchain for carbon credits is led by NITI Aayog and the Bureau of Energy Efficiency (BEE). This project, initiated around 2021, focuses on enhancing transparency in carbon trading. Though the specific blockchain technology isn’t widely publicized, they are experimenting with decentralized solutions for carbon credits.

In the context of carbon credits and blockchain technology, Proof of Work (PoW) and Proof of Stake (PoS) are two commonly used consensus mechanisms that ensure the integrity of transactions and data within a blockchain network.

1. Proof of Work (PoW)

How it works: In a PoW system, miners compete to solve complex cryptographic puzzles, and the first one to solve it gets to add the next block of transactions to the blockchain. This process is computationally intensive and requires significant energy, which has been a major criticism in environmental contexts.

Example in Carbon Credits:
While PoW blockchains like Bitcoin are not widely used in carbon credit trading due to their high energy consumption, some early carbon credit tokenization experiments were conducted on PoW-based platforms. However, due to the inherent energy inefficiency, PoW-based blockchain solutions are generally considered unsuitable for carbon credit initiatives, which aim to reduce overall emissions.

Paradox: Since PoW consumes large amounts of electricity, using it for carbon credit tokenization could be counterproductive, as the energy consumed might offset the carbon savings the credits are intended to represent.

2. Proof of Stake (PoS)

How it works: In PoS, validators are selected based on the number of tokens they hold and are willing to “stake” as collateral. Instead of competing to solve puzzles, validators are chosen in a way that requires less computational power, making it more energy-efficient.

Example in Carbon Credits:

• Ethereum 2.0: Ethereum transitioned from PoW to PoS with its Ethereum 2.0 upgrade in 2022, significantly reducing energy consumption. The platform has been explored for tokenizing carbon credits. 

For example, Toucan Protocol uses Ethereum’s PoS blockchain to create Base Carbon Tonne (BCT) tokens, which represent verified carbon credits. These tokens are used for carbon offsetting, with Ethereum’s energy-efficient PoS ensuring the carbon footprint of the trading system itself remains low.

• Flowcarbon: This platform uses a PoS-based blockchain to tokenize carbon credits, making carbon credits accessible to a wider market while ensuring transparency. Flowcarbon’s carbon tokens can be bought, sold, and retired on their blockchain, ensuring accountability with a minimal energy footprint.
• Polygon: Another PoS-based blockchain, Polygon, has emerged as a platform of choice for various carbon credit initiatives. For instance, KlimaDAO, an organization focused on driving climate action, operates on Polygon, allowing users to trade and retire carbon credits in a decentralized manner. Polygon’s low-energy PoS mechanism aligns with sustainability goals, offering a scalable solution for carbon markets.

Why PoS is Preferred in Carbon Credit Systems:

• Energy Efficiency: Since carbon credits are meant to reduce emissions, using energy-intensive PoW blockchains can be counterproductive. PoS blockchains, which consume far less energy, are better aligned with the goals of carbon offsetting.
• Scalability: PoS blockchains are generally more scalable, allowing more transactions per second. This is critical as the carbon credit market grows, requiring faster and more efficient platforms.

While Proof of Work (PoW) may have initially been explored for blockchain-based carbon credit trading, it is largely unsuitable due to its energy demands. Proof of Stake (PoS) platforms, such as Ethereum 2.0, Polygon, and Flowcarbon, are emerging as the preferred technology, allowing carbon credits to be traded, tracked, and verified in an energy-efficient and scalable manner. These PoS blockchains better align with the environmental goals that carbon credits aim to achieve.

Carbon Credits and India’s Tax Landscape: Untapped Potential

Another unique aspect is the tax treatment of carbon credits in India. While there is no explicit GST framework for carbon credits, some legal experts argue that carbon credits could be classified as “goods” under the Goods and Services Tax Act. This would make carbon credits subject to taxation, potentially adding to the government’s revenue stream while regulating the market more effectively.

Moreover, the income tax implications for carbon credit sellers in India remain largely undefined, leading to ambiguity for project developers. Some companies have taken a conservative approach, declaring the revenue from carbon credits as income and paying corporate tax, while others argue that carbon credits should be considered as exempt income due to their role in environmental conservation. A clearer regulatory framework on this issue could significantly influence the financial dynamics of the carbon market in India.

International Trading: Carbon Credits as Diplomatic Tools

India’s carbon credits are becoming a soft power tool in international diplomacy. Countries such as Japan, the EU, and Australia are increasingly purchasing Indian carbon credits to meet their international climate goals. This has created a new avenue for India to assert itself on the global climate stage, not just as a developing nation needing aid but as a leader in the carbon market.

More interestingly, India has been in negotiations with South Korea and Switzerland to create bilateral agreements for carbon trading, where Indian carbon credits could be exported to these countries as part of their national emissions reduction strategies. Such deals could lead to direct foreign investments in Indian carbon projects, potentially leading to further economic development and capacity building.

Conclusion: India’s Carbon Credit Journey Is Just Beginning

The story of carbon credits in India is not just about climate change mitigation; it’s about innovation, community development, and economic growth. As India continues to refine its carbon credit framework, we can expect more integration with advanced technologies like blockchain, greater international collaboration, and a clearer legal framework that addresses current ambiguities in taxation and regulation.

With small-scale projects and corporate giants alike driving the country’s carbon credit revolution, India is poised to become not just a participant but a leader in the global carbon market. The country’s unique blend of sustainable development goals, technological innovation, and market-based strategies ensures that carbon credits will play an increasingly pivotal role in shaping its future.