By – Rohaan Thyagaraju
Introduction
The urgent need to address climate change has compelled governments worldwide to adopt new approaches that can help reduce greenhouse gas emissions. Among these approaches, carbon markets have emerged as critical tools that enable trading emission allowances, thus helping to decrease aggregate emissions while simultaneously fostering economic growth.
India and China are the fastest-growing economies in the world and are major contributors to global emissions. Thus, they have also tried to build carbon markets that are uniquely adapted to their particular problems and opportunities. This comparative study analyses the configuration, framework, and operational mechanisms of carbon markets in both countries concerning what can be learned from each country about building an effective carbon trading system. Besides country-specific findings, the study has significant implications for global efforts to address climate issues as India and China continue their path to low-carbon economies.
Both countries need to reconcile economic growth with environmental stewardship, but their carbon markets will determine the international standards and best practices in climate mitigation. Comprehending the essential characteristics of each country’s strategies will improve understanding of how India and China can more effectively synchronise with international climate objectives while considering their socio-economic circumstances.
Both are transitioning toward better development models with fewer emissions and more resilient economies. With aspirational carbon neutrality goals by 2070 and massive dependence on coal, India needs help incorporating renewable energy sources into its market structures. China is the largest emitter of carbon dioxide globally and is going through the efficiency of its developing carbon trading system, which still requires further reforms to achieve the desired outcome. This paper will examine their strategies, effectiveness, and lessons learned and offer insights that could inform future global carbon market development.
China’s Carbon Market: an Examination
China’s carbon market has increased following the creation of pilot practices in different regions since the product’s introduction. The formal launch of the national Emissions Trading System (ETS) in 2021 marked a critical milestone, making China the home of the world’s largest carbon market, covering over 4 billion tons of CO2 emissions from its power generation sector. The Chinese system mainly operates under an intensity-based cap-and-trade mechanism, where firms are measured according to the emissions generated per output unit. This framework allows credit exchange between performing firms and those under challenges, enhancing a market environment where emission reductions can be capitalised.
This move broadly fits China’s aggressive commitment to become carbon neutral by 2060 and to peak emissions by 2030. The country has a regulatory mechanism under the Ministry of Ecology and Environment (MEE), overseeing the emission targets to be achieved by industries and ensuring compliance in the industry. Despite the initial promise shown by the system, issues related to over-issuance of permits and, through that, carbon price depressions have emerged, having implications for the incentive environment critical to stimulating corporate investment in clean technologies.
India’s Carbon Market Framework
Unlike China, the carbon market in India is taking shape in a collaborative manner involving insights and inputs from diverse stakeholders in different industry sectors. Scheduled to be launched under the CCS, India’s carbon market aims to curb emissions related to crucial industries like steel and iron, cement, petrochemicals, and pulp and paper. The CCS is the successor initiative to the previously initiated performances, especially in the Perform, Achieve and Trade (PAT) scheme, focusing on improving energy efficiency and awarding energy-saving certificates to bolster emission cuts across sectors heavily reliant on energy consumption. India’s strategy incorporates a dual market structure in which there are both compliance and voluntary components. This allows non-obligated enterprises under the compliance structure to engage in carbon trading. Such flexibility seeks to include more participants, including smaller businesses and non-industrial units, creating an environment of greater inclusiveness for the market. Furthermore, India’s assertive approach concerning voluntary involvement is in harmony with its dedication to sustainable development, as delineated by efforts to promote environmental accountability within the private and public sectors.
Comparative Analysis of Regulatory Structures
The regulatory frameworks for the carbon markets in India and China reflect their different governance systems and policy priorities. The Chinese ETS is marked by strong central oversight, with the government playing a crucial role in monitoring and enforcing compliance. The MEE works closely with local authorities to ensure that the emission targets are strictly followed and reporting protocols are very stringent. This centralised control approach is often practical in producing rapid regulatory responses but sometimes at the cost of inflexibility to adapt to changing market circumstances.
India’s regulatory framework, on the other hand, invites more stakeholder engagement through the BEE, which oversees the CCTS. Involving different ministries and industry players in decision-making underscores India’s broader agenda of ensuring that other interests are represented in market outcomes. Nevertheless, this collaborative approach may pose bureaucratic challenges or delay decision-making, mainly in establishing definitive guidelines and robust institutional mechanisms that oversee trading activities. Through learning from China’s experiences in its ETS during its early years, India can emphasise transparency and monitoring to build trust and integrity within its carbon market.
Impacts of Carbon Markets on Emission Reductions
Both China and India’s carbon markets are set to enable cost-effective emission reductions, supporting economic growth and development. In China, massive investments in renewable energy and clean technologies have been partly driven by the ETS, which requires heavy-polluting industries to invest in sustainable practices. Despite issues with surpluses and price depressions, trading in emission allowances has spurred innovation among firms to improve energy efficiency, driving down emissions overall.
India CCTS, set against a backdrop of broader climate commitments, has the potential to provide substantial benefits across its industrial landscape. With the CCTS scheduled to commence its compliance segment in late 2025, the ability of companies to generate and trade carbon credits could incentivise investments in greener technologies and processes. The anticipated integration of international carbon credit registries will enhance India’s position as a competitive player within the global carbon market.
However, both countries must address significant challenges to fulfil the promise of their respective carbon markets. China’s need to stabilise its permit allocation and India’s imperative to ensure the credibility of carbon credits and robust monitoring systems are crucial for building resilient markets that respond effectively to climate change imperatives. Beyond the operational challenges, both nations must also navigate geopolitical dynamics and international expectations that increasingly shape the narratives around carbon market development.
Conclusion
In examining the carbon markets of India and China, it is evident that both countries are making strides toward establishing effective systems to manage emissions through market mechanisms. China’s well-established national ETS serves as a valuable model for structured regulatory oversight but is limited by its challenges related to market stability. India’s burgeoning CCTS, meanwhile, reflects a collaborative approach that capitalises on stakeholder input and aims to make carbon trading accessible to a broader array of participants. Ultimately, both markets illuminate the complexities of balancing economic growth with environmental sustainability. As India and China continue innovating and refining their carbon trading frameworks, they will contribute to their national emission reduction goals and broader global climate efforts. By confronting existing challenges and learning from each other’s experiences, these two nations could emerge as pivotal players in the quest for a sustainable future, influencing global standards and practices in carbon management and climate governance.
References
https://www.sciencedirect.com/science/article/abs/pii/S0959652620316164