These corporate commitments, cumulatively, represent several billions of tons in Scope 1, 2, and 3 emissions. Science Based Targets, by definition, require the emission reductions to be achieved through action; no offsetting is allowed. However, both Net Zero and Carbon Neutral are built on the concept of ‘reduce emissions to the extent possible, and then offset the remaining’. Therefore, these commitments inherently require carbon offsets or carbon removals to cover the last mile. This explains the recent surge in global voluntary carbon market. The demand is driven by companies wanting to fulfil their ongoing carbon neutral commitments and companies locking-in offset supply lines for the future to meet their Net Zero commitments.
India is one of the key beneficiaries of this rapidly growing voluntary carbon market. Excluding Africa, India holds the biggest potential to generate high quality, truly additional, carbon credits through projects that have significant socio-economic co-benefits. Demand for Indian offset credits, as expected, is coming from outside India. With the price of offset credits from community-based projects moving up manyfold, from sub-dollar level to above $5 level, Indian offset generators are beginning to smell the glory days under the Kyoto regime. Offset project developers in India are quietly scaling up projects. Carbon contracts are executed with aggregators and directly with project developers. Deals are taking place in the form of outright credit purchase contracts as well as funding the projects or project developers through front-loaded forward contracts. Although developers with scale can explore green bonds and/or social bonds, Indian developers are yet to wake up to it.
While the euphoria among Indian project developers is justified, there are potential threats and risks that must be considered. Unlike the Kyoto Protocol regime, where India had no emission reduction commitment at all, the Paris Agreement regime has brought on significant emission reduction commitments on India. Our 2070 Net Zero pledge and the Nationally Determined Contributions (NDCs) towards the Paris Agreement are ambitious by any measure. With these, there is a strong emerging point of view that India needs all the emission reduction achieved within and, therefore, carbon credits generated in India should not be sold outside. In this context, the idea of creating a National Carbon Market has been mooted by many ministries and government agencies. This could impact the demand for carbon credits and price discovery. This also represents a risk to existing forward delivery contracts with overseas buyers.
Another potential risk in the Indian voluntary carbon market is the lurking shadow of GST. There has been at least one instance of an Indian state declaring carbon credits as ’goods’ and, therefore, taxable. There’s also a Madras HC ruling saying carbon credits are capita assets and not taxable. Nonetheless, as trading volumes and transaction values increase, it’s foreseeable that such transactions could attract GST. Carbon credit contracts must make provisions for resolving this eventuality.
The global voluntary carbon market is expected to grow to $50-$190 billion by 2030. It is expected that, as we get closer to 2030 and within visible range of many Net Zero commitments, the demand for carbon offsets and carbon removals will skyrocket. It is also expected that the unit (per ton) price of offset as well as removal credit will move significantly upward from today’s levels. However, with low-carbon transition well underway and many transitional technologies getting established as business-as-usual, generating truly additional offset credits may become increasingly more difficult. Therefore, at some point in future, the carbon market itself is likely to transition from a carbon offset market to a carbon removal market. In the meanwhile, Indian offset generators, especially those operating in the community space, are well-placed to draw rich dividends from the ballooning voluntary carbon market.
(Author, Bose K. Varghese, is Senior Director – ESG Practice, Cyril Amarchand Mangaldas)
