India’s carbon credit scheme receives U.K. official recognition

Why in the News

The United Kingdom has recognised India’s Carbon Credit Trading Scheme (CCTS) as a qualifying overseas carbon pricing scheme for the purpose of carbon price relief. The recognition was conveyed by His Majesty’s Treasury to the Bureau of Energy Efficiency (BEE) under the Ministry of Power. The scheme has been placed on the United Kingdom’s published indicative list of overseas carbon pricing schemes assessed as meeting the qualifying criteria under the Carbon Border Adjustment Mechanism (Calculation of CBAM Rate and Determination of Carbon Price Relief) Regulations 2026. A carbon border adjustment mechanism (CBAM) charges an imported good the gap between the carbon price paid where it was made and the price the importing country’s own producers pay. The recognition therefore lets a carbon price already paid in India be set off, lowering the effective CBAM liability on Indian goods. The relief is calculated on the price a tonne of carbon actually fetches in India, so a domestic market still in its early compliance cycles decides how much of the British levy an exporter escapes.

What is the Carbon Credit Trading Scheme?

1. Statutory basis: The scheme rests on the Energy Conservation Act, 2001, as amended by the Energy Conservation (Amendment) Act, 2022. It is administered by the Bureau of Energy Efficiency under the Ministry of Power.
2. Compliance mechanism: Obligated entities in notified industrial sectors receive greenhouse gas emission intensity targets, stated as emissions per unit of output. An entity that beats its target earns carbon credit certificates, and one that misses it must buy them.
3. Offset mechanism: An entity outside the compliance list can register an emission reduction project voluntarily. It earns certificates once the reduction is verified.
4. Trading venue: Certificates are traded on the power exchanges. That trade is what produces a domestic price for a tonne of carbon dioxide equivalent.

How does the recognition change the cost of exporting to the United Kingdom?

1. Carbon price relief: The British levy is charged on the embedded emissions of an imported good at a British carbon rate. A carbon price already paid in the country of production is deducted from that rate where the paying scheme qualifies.
2. The indicative list is the administrative gate: Placement on the list is what makes the deduction available to goods produced under the scheme. The list is indicative, so it fixes eligibility rather than the final rate an exporter pays.
3. Exposed sectors: The United Kingdom’s mechanism applies from 1 January 2027 to imports of aluminium, cement, fertiliser, hydrogen, iron and steel. Indian steel and aluminium shipments are the largest exposures within that set.
4. The obligation on the exporter survives: Recognition attaches to the scheme, not to any single firm. Each consignment must still be accompanied by emissions data for the goods concerned.

Challenges to the Carbon Credit Trading Scheme

1. A weak price yields a weak set off: The deduction is worth only what a carbon credit certificate sells for in India, so a low clearing price transfers most of the levy to the British exchequer anyway. Eg. Energy saving certificates under the Perform, Achieve and Trade scheme, the country’s earlier market based instrument, cleared at prices too low to change investment behaviour.
   The Fix: Set a floor price for compliance certificates, so the market cannot clear below the level at which abatement becomes worth financing.
2. Target setting is based on intensity, not absolute emissions: An obligated entity meets its target by cutting emissions per tonne of output while expanding total output, so national emissions can rise inside a compliant market. Eg. Cement plants raise clinker substitution to cut intensity while adding fresh capacity.
   The Fix: Convert the compliance mechanism to a declining absolute cap once the first two cycles have established a reliable emissions baseline.
3. Narrow coverage of the emitting base: The compliance mechanism reaches only large notified industrial sectors, leaving out transport, buildings and the bulk of smaller industrial units. Eg. Foundries and re-rolling mills in industrial clusters sit outside the obligated list despite being coal fired.
   The Fix: Extend the offset mechanism with sector specific methodologies for small units, so a cluster level project can be registered rather than a single plant.
4. Measurement and verification capacity is thin: Credits are only as sound as the emissions data behind them, and accredited carbon verifiers in India are few relative to the number of obligated entities. Eg. Voluntary carbon markets globally have been discredited by projects whose claimed reductions could not be reproduced on audit.
   The Fix: Accredit and licence verification agencies ahead of the compliance deadline, with random re-audit of a fixed share of issued certificates.
5. Overlap with earlier instruments confuses the signal: Renewable energy certificates and energy saving certificates already price parts of the same abatement, so a firm can face several partially overlapping obligations. Eg. A cement plant may hold energy saving certificates for efficiency gains that also lower its greenhouse gas emission intensity.
   The Fix: Publish a single conversion and transition schedule that folds legacy certificates into the carbon credit market on a stated date.

Conclusion

Recognition removes a trade barrier only to the extent that the domestic carbon market becomes real. The set off is a pass through of a price India charges itself, so the instrument that protects exporters is the same one that has to discipline them. What to watch is the clearing price at the first compliance cycle auctions and whether the European Union grants an equivalent recognition, since the European market absorbs a far larger share of Indian steel and aluminium than the British one.

Back2Basics: Bureau of Energy Efficiency

1. Statutory body: The Bureau was set up in 2002 under the Energy Conservation Act, 2001, and functions under the Ministry of Power.
2. Mandate: It is charged with reducing the energy intensity of the Indian economy, meaning energy consumed per unit of gross domestic product.
3. Standards and labelling: It runs the star rating programme for appliances and the Energy Conservation Building Code for commercial buildings.
4. Market instruments: It designed and administers the Perform, Achieve and Trade scheme and now the carbon credit market, making it the nodal agency for India’s carbon pricing architecture.

“[2023] Consider the following statements :

Statement-I: Carbon markets are likely to be one of the most widespread tools in the fight against climate change.

Statement-II : Carbon markets transfer resources from the private sector to the State.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

(c) Statement-I is correct but Statement-II is incorrect

(d) Statement-I is incorrect but Statement-II is correct