Carbon market has once again become a global buzzword with increased focus on net zero goals by corporations, and with countries firming up their climate commitments under the Paris Agreement. It is seen as one of the most effective market-based mechanisms to price greenhouse gas (GHG) emissions and achieve climate goals. Carbon market had been operational since the launch of the Clean Development Mechanism by the United Nations in 2006, has evolved in its new version.

There are two types of carbon markets, the compliance market (emission trading resulting from legal and regulatory requirements); and the voluntary market (resulting from voluntary climate commitments by corporations). While the compliance market mainly driven by emission trading systems (ETSs) have been operational since the mid-2000s, the voluntary carbon market (VCM) has gained traction in the past few years. The VCM is led by corporations and industries in the hard-to-abate sectors which rely on carbon credits to achieve their ambitious ‘voluntary’ climate goals. This market grew by more than 60% from 2020 to reach $1 billion in November 2021 and is expected to reach at least $50 billion by 2030. One of the differentiating factors of VCM is premium pricing attributed to projects that generate co-benefits such as biodiversity conservation, gender and community economic development. Prices of carbon credits for these projects can vary widely from $5/tCO2e (e.g., agriculture, forestry etc.) to $25/tCO2e (e.g., clean cooking for low-income households) depending on the types of co-benefits (1 tCO2e is equal to 1 carbon credit).

These additional revenue streams from carbon credits have the potential to fundamentally alter the economics of key activities such as agriculture, forestry, cooking and waste management – possessing high social, economic and environmental impact potential. These activities are either capable of removing carbon from the air or avoiding emissions by adopting better practices and technologies. They play a key role in empowering local communities by:

For example, a low-income household using traditional cooking stoves can derive carbon benefits by switching to cleaner cooking solutions; and smallholder farmers can get benefit from planting trees and changing agriculture practices to reduce GHG emissions without harming productivity. The carbon credits from these activities can give almost $20 to $40 per year to a household switching to clean cooking and $7 to $20 per year per acre additional income to smallholder farmers.

Carbon markets can play a very critical role in India’s journey to achieve its net zero and decarbonization goals as well as in catalyzing certain key sectors such as transportation, agriculture, forestry, waste management etc. While India is aggressively reducing emission intensity of many sectors, it would still rely heavily on the carbon market for offsetting residual emissions to achieve net zero. This resulting carbon market is estimated to be at least worth $50 billion.This estimate only factors seven hard-to-abate sectors comprising cement, steel, aluminum, electricity utilities, aviation, automobile (passenger cars), oil and gas (refining and extraction). Additionally, India can achieve a carbon market potential of $30 to $50 billion by 2050 (at a conservative price of $15 per carbon credit) from agriculture, land restoration activities, and reducing emissions from deforestation and forest degradation (REDD+).

Rapidly growing carbon markets coupled with a dynamic international policy environment, are driving countries to develop action plans to leverage carbon markets to meet their climate commitments. India is already proactively working on shaping the domestic carbon market with the Ministry of Environment, Forest and Climate Change (MoEFCC) and Ministry of Power (MoP) developing the requisite legal, institutional and technical infrastructures.Once developed, these would be able to address aspects related to double counting, corresponding adjustments and issues of quality and integrity of carbon credits, especially in the compliance market.

While the domestic compliance carbon market is critical for India’s net zero ambitions, there is a significant opportunity to leverage the voluntary carbon market. We can be one of the major destinations for attracting global capital pools chasing voluntary carbon projects in the Global South. For this, there is a need for a more structured mechanism for private sector participation in the voluntary carbon credit projects.A proactive approach from India on developing a framework to promote public-private partnerships, and to attract private investment in carbon projects through inclusive business models can unlock significant social, economical and environmental benefits.