GOVERNMENT OF INDIA

MINISTRY OF POWER

NATIONAL
CARBON
MARKET

RELEASE
Draft Blue Print for
Stakeholder Consultation
 Preface

Climate Change, an unwarranted consequence of carbon intensive activities has

posed some of the severe and irreversible impacts on the ecosystem. It has also
become an unmatched challenge to the sustainability of the entire human civilization.
Recognizing the need to mitigate the effects of climate change, India has made an
impressive progress by strengthening the existing initiatives and bringing in new
energy reforms.

Hon’ble Prime Minister of India has described climate change as the biggest challenge
facing humankind and it is only natural to draw a corollary that India is ready to step
up its efforts under climate discussions, reflecting a long-term strategy for
development that is low on greenhouse gas emissions.

Carbon markets have been successful in reducing green-house gas emissions by

setting a limit on emissions and enabling their trading. Trading enables entities that
can reduce emissions at lower cost to be paid to do so by higher-cost emitters, thus
lowering the economic cost of reducing emissions.

Given the desirability to pursue low carbon scenario option with enhanced energy
efficiency from both the energy security perspective and the sustainability perspective,
it is imperative that India takes up on priority strong energy efficiency strategies across
multiple sectors. In this context, Government of India is developing carbon market to
reduce emissions and to pursue a low carbon path more vigorously, as most of the
economic sectors are still developing (or yet to develop) providing an opportunity to
re-imagine and refresh the development paradigm.

The development of a thriving national carbon market must ensure that necessary
support mechanism is available along with a push to drive simultaneous demand,
while being feasible and cost effective. In this regard, Ministry of Environment, Forest
and Climate Change (MoEFCC) entrusted this important task to Bureau of Energy
Efficiency (BEE) for implementation. BEE prepared this draft blueprint on National
Carbon Market, this document is to understand the present infrastructure and how
carbon markets have been operating, as well as examine the projected view of an
independent National Carbon Market.
A phased approach is expected to overcome the barriers and encourage voluntary
entities to participate in meeting India’s NDC commitments, which would primarily
involve increasing demand first, increasing supply in the market in the second phase
and then progress towards a Cap & Trade system in its final phase. Also, fungibility
between ESCerts and Emission Reduction Units could ensure compatibility for
voluntary buyers and sellers and changing the cycle period from three years to one
year could enhance participation and steer yearly compliance and regularity in trading.

This blueprint document deliberates ways overcome barriers in the process of

issuance and trading of Energy Saving Certificates, examines challenges faced during
trading, proposes approaches for creating voluntary carbon market in India and gives
suggestions to resolve the market barriers. It is pertinent to develop such a blueprint
and to circulate it amongst stakeholders for their valuable inputs. This dialogue would
help create an effective and meaningful marketplace for emissions trading, thereby
creating synergies across different policy measures for climate change mitigation.

Abhay Bakre
Director General
Bureau of Energy Efficiency
 Discussion Paper on schemes for Voluntary Carbon Market in India

Table of Content

1. Introduction ................................................................................................................................... 5
1.1 Background................................................................................................................................. 5
1.2 Carbon markets .......................................................................................................................... 6
1.3 PAT Background ........................................................................................................................ 7
1.4 ESCerts – Issuance, stakeholders, and Trading ........................................................................ 9
1.5 Challenges seen in ESCerts trading ........................................................................................ 10
1.6 Major barriers in ESCerts trading ............................................................................................. 12
2. Proposed phase wise approach for creation of VCM in India .................................................... 16
2.1 Phase-1: Increasing demand in the VCM ................................................................................. 16
2.2 Phase-2: Increasing supply in the VCM ................................................................................... 18
2.3 Phase-3: Moving to a Cap-and-Trade System ......................................................................... 20
3. Suggestions for how to resolve select ESCerts market barriers ............................................... 21
3.1 Fungibility between ESCerts and emission reduction units (ERUs) (Short term: 1 to 3 years) 21
3.2 Yearly compliance, issuance, and trading (Short term: 1 to 3 years)....................................... 22
3.3 Participation of voluntary buyers and sellers (Short term: 1 to 3 years)................................... 23
3.4 Target and compliance in emission intensity (medium term: 3 to 5 years) .............................. 23
Annexure - 1 ................................................................................................................................... 25
Overview of select compliance markets ......................................................................................... 25
Voluntary markets - Overview ........................................................................................................ 30

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 Discussion Paper on schemes for Voluntary Carbon Market in India

List of figures
Figure 1 Target definition under PAT scheme ........................................................................................ 7
Figure 2 List of 13 sectors covered in PAT scheme ............................................................................... 8
Figure 3: Key Stakeholders in PAT scheme ........................................................................................... 9
Figure 4 Governance process of PAT in India ...................................................................................... 10
Figure 5: PAT Trading overview ........................................................................................................... 10
Figure 6 ESCerts trading of PAT cycle 1 .............................................................................................. 11
Figure 7: ESCerts status: Current and projected .................................................................................. 12
Figure 8: Voluntary carbon credit prices and demand 2019 by project type (average of wholesale and
retail prices) ........................................................................................................................................... 14
Figure 9: Proposed phase wise approach for India VCM ..................................................................... 16
Figure 10: Phase-1 overview ................................................................................................................ 17
Figure 11:Phase-2 overview ................................................................................................................. 18
Figure 12: Life cycle of a Carbon Credit ............................................................................................... 19
Figure 13: Phase-3 Overview................................................................................................................ 20
Figure 14: EU-ETS scope and phases ................................................................................................. 25
Figure 15: Emissions trading in the EU-ETS ........................................................................................ 25
Figure 16: EU-ETS compliance cycle ................................................................................................... 26
Figure 17: Price range under EU-ETS (Phase-1,2,3) ........................................................................... 27
Figure 18: Demand for voluntarily carbon credits (MtCO2e) ................................................................ 30
Figure 19: Demand for voluntarily carbon credits by sector 2019 (MtcO2e) (total volume .................. 31
Figure 20: Voluntary carbon credit prices and demand 2019 by project type (average of wholesale
and retail prices) .................................................................................................................................... 31
Figure 21 Voluntary carbon market value chain ................................................................................... 32

List of tables
Table 1: Key highlights of the PAT-I cycle .............................................................................................. 8
Table 2: Key highlights of the PAT-2 cycle ............................................................................................. 8
Table 3: China national ETS parameters .............................................................................................. 28
Table 4: Korea ETS snapshot ............................................................................................................... 29

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1. Introduction
1.1 Background
India has witnessed a significant impact to its economic growth during the past 18 months. The country
is bouncing back from the impact of COVID 19, yet this impact requires a careful examination and
recalibration of its investments towards climate resilience.
The Indian government has responded to the economic crisis by unveiling one of the largest stimulus
packages in the world, equating to a share of around 11% of the country’s GDP in 2019. India’s overall
COVID recovery stimulus package mainly supports activities related to industries likely to have a large
negative impact on the environment by, for example, increasing the use of fossil fuels, and
unsustainable land use.
After the initial stimulus package to support the industry and businesses, additional announcements
have been made towards deeper targets for contribution of renewables into the Indian power sector,
yet the dependence on fossil fuel will be integral to the economic growth of the country. Power sector
alone is expected to have nearly 60 GW of coal-based capacity addition by end of this decade.
Significant investments have been carried out towards demand side energy efficiency programs and
mass rapid transport infrastructure, which may pave the way towards long term reduction in GHG
emissions, yet a larger participation of businesses and industry is required to ensure continuous
investments in both mitigation and adaptation related opportunities.
A new report from the Deloitte Economics Institute shows India must act now to prevent the country
losing US$35 trillion in economic potential over the next 50 years due to unmitigated climate change.
The report, titled, “India’s turning point: How climate action can drive our economic future”, also reveals
how the country could gain US$11 trillion in economic value instead over the same period, by limiting
rising global temperatures and realising its potential to ‘export decarbonisation’ to the world.
The report further says that India has a window of opportunity to lead the way and show how climate
action is not a narrative of cost but one of sustainable economic growth. As India aspires to be a US$5
Trillion economy, it is not just foreign and domestic investments that will be key in driving growth, we
must also take this opportunity to align our ambitions with climate choices.”
Accelerated decarbonisation could bring significant benefits to India and the world. India could use the
transition to a low-emission footing to restructure its economy towards growth in advanced industrial
sectors, leveraging lower cost clean energy export markets, as the region experiences a rapid increase
in energy demand over the coming years.
As a developing nation, India’s transformation to a low-emission footing is likely to be more complex
and challenging than much of the rest of Asia Pacific. It will have to strike a delicate balance between
the need for sustained economic development—and the corresponding rise in energy demand—and
investing in and transitioning to emerging, low-emission technologies. The structural adjustment costs
associated with reducing India’s emissions profile are expected to be significant, but the cost of inaction
will be greater.
India has yet to submit updated 2030 targets (in its Nationally Determined Contribution - NDC) to the
UNFCCC. Its current NDC target would be well overachieved with current policies. It has already missed
the UN deadline of Oct 12, 2021. The updated NDC may further target deeper reduction in the emissions
intensity through a formal announcement at Glasgow COP 26.
To facilitate achieving these targets, it is important that India considers development of domestic carbon
market with and agenda to provide necessary market support mechanism to new mitigation
opportunities and simultaneously establish enough momentum to drive demand. In addition to this a
careful management of supply and demand, the remain relevant, the operationalisation should be cost
effective, politically feasible and should be based on the existing body of knowledge of managing
ESCerts and RECs transactions.

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Such a carbon market would help create synergies across different policy measures for climate change
mitigation, by creating a common marketplace for emissions trading through development of a meta-
registry. The World Bank’s Partnership for Market Readiness (PMR) has announced a US$ 8 million
grant for India to prepare for and pilot the use of carbon pricing instruments to help reduce to
greenhouse gas (GHG) emissions.
Part of the funding will help India to broaden and deepen the scope of its existing market-based
approaches to increase energy efficiency and renewable energy, including through the Perform Achieve
and Trade (PAT) Mechanism and the Renewable Energy Certificate (REC) scheme.
Funding will also go to develop and pilot a new market-based instrument that could improve either solid
waste management or energy efficiency in medium and small industries. Part of the funding will be used
to create systems to strengthen India’s existing registry systems for the PAT and REC schemes and to
facilitate tracking greenhouse gas (GHG) emission reductions. The upgraded system will promote
transparency, environmental integrity and will reduce the risk of double counting as well as help prepare
India to engage in the international transfer of mitigation outcomes.
The US presence into the Paris Agreement under its new president is expected to bring in its own
psychological heft into global climate action. Indian companies have been missing the compliance
market action since end of the first commitment period (December 2012). The market has been thus
surviving on offset transactions through voluntary market operators resulting in significantly lower
recovery without any transparent price discovery mechanism.
A domestic carbon market with proper support and administration will provide necessary support to a
larger future expectation of not just meeting / exceeding the NDC aspirations of the country, it may also
pave way for a meaningful implementation of Article 6 of the Paris Agreement with possible
opportunities for ITMOs across sectors for their robust environmental benefits and acceptance across
geographies.
The domestic carbon market should thus begin with review of following target areas:
- Examination of present trade of various environmental instruments (ESCerts, REC, CERs and
VERs)
- Fungibility across instruments and their role in a domestic voluntary carbon market
- Calibration and effective management of demand and supply of instruments
- Permission and play for intermediaries (traders and BFSIs)
- Participation of non-energy sectors with potential environmental footprint and reduction
opportunities and types of instruments that can be transacted
- Entry and exit barriers for international trade of emission reduction units
- Fair and transparent price discovery
- Registry management and operation (short, medium- and long-term view)
- Participation protocol and methodology (registration and operationalisation of candidate
projects)
- Monitoring and reporting of carbon market performance
This brief discussion paper is an attempt to identify plausible options leveraging the present
infrastructure and learning from the transaction of ESCerts and RECs; the role played by voluntary
carbon markets in last decade or so and the future outlook of an independent yet flexible domestic
carbon market that can serve the present as well future requirements to position India as a meaningful
contributor to the global decarbonisation journey.

1.2 Carbon markets

The end of the year 2020 marks a fundamental change in the global governance of greenhouse gas
(GHG) emissions. Looking forward, the Paris Agreement now provides the new framework for the global
effort to combat temperature rise. This significantly differs from the approach of its predecessor, the
Kyoto Protocol. The new context of the Paris Agreement has important implications for the voluntary
carbon market, i.e. the voluntary purchasing and retiring of carbon credits.

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Understanding future models for the voluntary carbon market – and the potential for it to support efforts
to address climate change – is particularly relevant as an increasing number of organisations and
individuals are concerned about climate change and are taking voluntary action to both reduce their
emissions and to offset those that remain via the use of carbon credits.
Historically, carbon credits have mostly been generated from projects implemented in countries that did
not have GHG emissions targets under the Kyoto Protocol. In this context, the carbon credit's emission
reductions were only used by the buyer to achieve a climate change mitigation target or goal, and not
by the country hosting the mitigation project. Under the Paris Agreement, however, all countries must
formulate climate targets or actions in the form of nationally determined contributions (NDCs). This new
context poses important challenges for the role that voluntary offsetting can play in the future, in
particular whether and how voluntary purchasing and retirement of carbon credits fits into this new
global framework.
Currently the voluntary carbon market (VCM) is small with demand around 95 million tonne of CO2
equivalent per year, representing 0.2% of global greenhouse gas emissions. However, analysis 1 shows
that demand is likely to increase significantly, driven by a growing number of corporate Net Zero
commitments. This in turn will increase scrutiny that real emissions reductions are being achieved. As
demand for carbon credits increases, the costs of undertaking real emission reduction projects will need
to rise as lower cost projects are used up. If the financing of voluntary projects is to genuinely reduce
emissions beyond those that would otherwise have occurred, today’s average prices of $3-5/tCO2e will
need to increase to $20-50 per tonne of CO2 equivalent by 2030 and potentially $100 per tonne of CO2
equivalent if governments undertake lower cost projects first. Prices are then expected to keep rising
to 2050. Brief about select global mandatory and voluntary carbon markets design, structure,
price and volume trends are provided in Annexure 1.

1.3 PAT Background

Perform Achieve and Trade (PAT) scheme is a flagship programme of Bureau of Energy Efficiency
under the National Mission for Enhanced Energy Efficiency (NMEEE). NMEEE is one of the eight
national missions under the National Action Plan on Climate Change (NAPCC) launched by the
Government of India in the year 2008
The PAT Scheme is a regulatory instrument to reduce the specific energy consumption in energy
intensive industries. Target definition under the PAT scheme is provided in figure below.

Figure 1 Target definition under PAT scheme

PAT is a completely market-based mechanism, focussed primarily on enhancing the energy efficiency
of large energy intensive sectors through accelerated adoption of efficient and low-carbon technologies.
A total of six cycles of the PAT scheme have been launched till April 2020, covering 1073 industries
from 13 industrial and service sectors, which represents about 50% of the primary energy consumption
of India. List of 13 sectors included in PAT are provided in figure below.

1
Source: Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance, Trove Research, 2021

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Thermal Power
Aluminium Cement Fertilizer Pulp & Paper Chlor-Alkali Iron & Steel
Plant

Hotels (under
Petroleum
Textile Railways Petrochemicals DISCOMs commercial
Refinery
buildings)

Figure 2 List of 13 sectors covered in PAT scheme

PAT Cycle-1
PAT Cycle-I, which concluded in 2015, had 478 units, known as “Designated Consumers” (DCs), from
eight energy-intensive sectors, viz. Aluminium, Cement, Chlor-Alkali, Fertilizer, Iron & Steel, Pulp &
Paper, Thermal Power Plant, and Textile. The baseline annual energy consumption of these DCs was
around 164 million toe. Some key highlights from PAT Cycle-I are mentioned below2:
Table 1: Key highlights of the PAT-I cycle

Particulars Unit Value

Total Number of DCs No’s 478
Baseline Energy Consumption in PAT-Cycle-I Million TOE 164.97
Energy reduction target Million TOE 6.685
Energy savings achieved in PAT-Cycle-I Million TOE 8.67
Energy Savings achieved in excess of target Million TOE 1.985
Reductions in GHG emissions in PAT Cycle-I Million Tons of CO2 eq. 31
ESCerts issued to over achievers Million EScerts 3.825
Purchase compliance of ESCerts for shortfall Million EScerts 1.42
Volume traded in 17 trading session Million EScerts 1.299
Balance ESCerts of PAT Cycle 1 Million EScerts 2.53

PAT Cycle-2
In PAT Cycle–II (2016-19), three more sectors, viz., DISCOMS, Railways, and Refineries were added
to the existing 8 sectors. The total number of DCs notified in this cycle was 621. PAT Cycle-II targeted
to achieve an overall energy consumption reduction of 12.13 million toe. The estimated emission
reduction from this was around 66.1 million tonnes of CO2. The expected investment on energy efficient
project and technologies under PAT cycle-II was around INR 43,721 Cr2.
Table 2: Key highlights of the PAT-2 cycle

Particulars Unit Value

Total Number of DCs No’s 621
Energy reduction target Million TOE 12.13
Energy savings achieved in PAT-Cycle-I Million TOE 14.08
Energy Savings achieved in excess of target Million TOE 4.57
Reductions in GHG emissions in PAT Cycle-I Million Tons of CO2 eq. 66.1
ESCerts issued to over achievers Million EScerts 5.7
Purchase compliance of ESCerts for shortfall Million EScerts 3.66

PAT Cycle-3
Since a decision was taken to put PAT scheme under the rolling cycle from PAT-II onwards, the third
cycle was notified on 31st March 2017. The baseline year for Cycle-III was taken as 2015-16, and the
target year is 2019-20. The total number of DCs notified were 116 from six sectors, namely, Thermal

2
Source: Pathways for accelerated transformation in Industry sector: A report on Outcome of PAT cycle 2, June 2020

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Power Plants, Iron & Steel, Cement, Aluminium, Pulp & Paper, and Textile. No new sectors were added
in this cycle. The total savings target was given as 1.06 million tonnes of oil equivalent, which
corresponds to a reduction of around 3 million tonnes of CO22.
PAT Cycle-4
For PAT Cyce-4, the baseline year is taken as 2016-17 and the target year is 2020-21. A total of 109
DCs are likely to achieve a total reduction target of 0.6998 million tonnes of oil equivalent. These DCs
are from eight sectors, consisting of six existing sectors and two new sectors. The new sectors are
Petrochemicals and Commercial Buildings. Under Commercial Building sector, hotels have been
identified as the potential designated consumer sub-sector for this cycle. The total expected CO2
emission reduction from PAT-IV is around 2 million tonnes2.
PAT Cycle-5
PAT Cycle-V has commenced with effect from 1st April 2019. Under PAT Cycle-V, 110 DCs from the
existing sectors of PAT i.e. Aluminium, Cement, Chlor-Alkali, Commercial Buildings (Hotels), Iron &
Steel, Pulp & Paper, Textile and Thermal Power Plant have been notified. The total energy consumption
of these DCs is about 15.244 million TOE and they are expected to achieve a total energy savings of
0.5130 million TOE2.
PAT Cycle-6
PAT Cycle-VI has commenced with effect from 1st April 2020. Under PAT Cycle-VI, 135 DCs from six
sectors, i.e. Cement, Commercial buildings (hotels), Iron and Steel, Petroleum Refinery, Pulp and Paper
and Textiles, have been notified. Cement grinding units has been notified separately as a sub sector of
cement with threshold of 10,000 toe. The total energy consumption of these DCs is about 23.298 million
TOE and they are expected to achieve a total energy savings of 1.277 million TOE.

1.4 ESCerts – Issuance, stakeholders, and Trading

As per PAT rules, when a designated consumer overachieves the notified SEC targets in compliance
year, the EScerts are to be issued by Central Government for the difference of quantity between notified
target and achieved SEC. The DCs with SEC higher in compliance year than the notified target is
directed to purchase ESCerts equivalent to quantum of shortfall. The various entities involved with PAT
scheme are mentioned below:

Note: Designated Consumer = industrial company covered by the PAT scheme, CERC = Central Electricity Regulatory Commission

Figure 3: Key Stakeholders in PAT scheme

Apart from the above-mentioned entities, the two exchanges: Indian Energy Exchange (IEX) and Power
Exchange India Limited (PXIL) play a crucial role in Escerts trading as well by providing platforms for
trading. Governance process of PAT and trading mechanism is illustrated in figure 4 and 5.

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Figure 4 Governance process of PAT in India

The trading process overview is shown below

Figure 5: PAT Trading overview

1.5 Challenges seen in ESCerts trading

The success of PAT cycle-I resulted in 8.67 million toe of energy savings. In lieu of these savings, over
and above the target, the DCs were awarded with tradable Energy Saving Certificates (ESCerts). From
the assessment of PAT-I, around 309 DCs achieved in excess to their targets, thereby, adding to a total
of 38.25 Lakh positive ESCerts. On the other hand, 110 DC could not achieve their target and were
entitled to purchase a total of 14.25 lakh ESCerts. For PAT-I, out of 110 DCs who failed to achieve their
target, 96 complied by purchasing ESCerts. A trading worth 100 Cr INR took place in 17 sessions with
12.9 lakh ESCerts being traded at a weighted average price of INR 768.5 per ESCerts. Details such as
market clearing volume (MCV) and market clearing price (MCP) are provided in figure below:

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ESCerts trading of PAT cycle 1 (Sep 2017 to Jan 2018)

12,00,000 1,400

10,00,000 1,200

MCP of ESCert (INR)

1,000
No. of ESCerts

8,00,000
800
6,00,000
600
4,00,000
400
2,00,000 200
- -

Date of trading

MCV (No. of ESCerts) Sell Bid (No. of ESCerts) Purchase Bid (No. of ESCerts) MCP (INR per ESCert)

Figure 6 ESCerts trading of PAT cycle 1

Inference
 Basis the market trend of cycle 1 trading, the ESCerts is a buyers’ market. The demand of
ESCerts remained muted in during first two months of trading and picked up only during last
month of compliance
 In 17 trading sessions, happened on every Tuesday, the MCP varied from INR 200 to INR
1200, with weighted average MCP of INR 768.50, which is about 7.3% of the price of one metric
tonne of oil equivalent (or the penalty for non-compliance)
 At the end of the PAT cycle 1, there was surplus of 2.53 million ESCerts, which are banked for
next PAT cycle.
 Banked ESCerts of PAT cycle 1 are expected to expire after completion of compliance of PAT
cycle 2.
Future ESCerts market scenario
To understand future scenario of PAT trading, expected surplus ESCerts volume was estimated
upto PAT cycle 6, with following assumptions:
 Actual trading numbers of PAT cycle 1
 Actual ESCert issuance and purchase compliance of PAT cycle 2, with assumption of
100% purchase compliance
 For PAT cycle 3 to 6, percentage over achievement of energy saving target is assumed at
20%
Based on above assumption, the surplus of ESCerts after each PAT cycle were estimated with
following two approaches:
 Approach 1: Based on assumption that the EScerts do not expire after successive
compliance cycle and continue to remain valid till PAT cycle 6. The surplus after completion
of compliance period for this approach is termed as “Cumulative surplus” in following graph.
 Approach 2: Based on assumption that the ESCerts expire after next compliance cycle from
issuance cycle. The surplus after completion of compliance period for this approach is
termed as “Cumulative considering retirement” in following graph.

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ESCerts surplus, present and projected (MToE, Million ESCerts)

16.00
14.00
12.00
Million EScerts

10.00
8.00
6.00 4.57 4.78 4.92 5.02 5.28
4.57
2.53
4.00 2.53 2.25
2.00 0.35 0.24 0.36

-
Cycle 1 Cycle 2 Cycle 3 Cycle 4 Cycle 5 Cycle 6

Energy saving targets Energy saving achieved Cumulative surplus Cumulative considering retrirement

Figure 7: EScerts status: Current and projected

Inference
 With present rules, ESCerts of PAT cycle 1, if not traded during upcoming PAT cycle 2 trading
will expire after PAT cycle 2 compliance period. The expected desperation to sell a
commodity, which is set to expire may result in lower MCP for ESCerts in terminal
trading sessions
 At the end of compliance period of PAT Cycle 2, surplus ESCerts is expected to be 4.57
million ESCerts, which is 80% of the total ESCerts issued during PAT cycle 2.
 With present rules, at end of PAT cycle 3 compliance period, approx. 4 million ESCerts
may retire without being traded. This volume may go up if compliance is low in DISCOM
sector, similar to the case observed in REC market for RPO compliance
While the PAT scheme has been able to significantly reduce emissions in the Indian economy, there
has been a surplus in the EScerts supply in the market. While this was evident in PAT Cycle-1 and is
expected to continue into PAT-Cycle-II, a continued surplus supply and muted demand will lead to
sustained lower prices in EScerts trading and eventually deter DC’s to make investments in EE
technologies.
The PAT scheme is based on the premise that price of ESCerts shall act as an incentive for entities to
invest towards energy efficiency profitably or where unable to buy ESCerts cost effectively. To send a
stable price signal, it may be useful to address the supply-demand gap.

1.6 Major barriers in ESCerts trading

Major barriers identified basis the experience of two PAT cycles is provided in figure below:

Compatibility challenge Compatibility challenge

Limited participation -
Limited trading period for voluntary demand from global demand
only DCs
due to unit of trading prespective

Each of above-mentioned barriers are discussed in detail in subsequent sections.

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1. Limited Participation – only DCs

In EScerts trading, as per existing PAT rules, only designated consumers, having targets under PAT
cycle can participate. Due to limited life of ESCerts, only DCs who have obligation of purchase in current
cycle or expected shortfall in immediate next cycle, go for purchase of EScerts.
A study on the participation of Indian companies
Science-Based Targets initiative's (SBTi) 'Business What is the Science-Based Targets initiative
Ambition for 1.5 C' campaign reveals that more than 60 (SBTi)?
private enterprises in India have either committed or set The Science Based Targets initiative (SBTi)
a target under the same. Currently of the 60 Indian drives ambitious climate action in the private
companies that are a part of SBTi, 27 have already set sector by enabling companies to set science-
a target for reductions in their scope 1,2 and 3 based emissions reduction targets. The SBTi
emissions by a specific target year. defines and promotes best practice in emissions
To understand the potential demand of emission offset reductions and net-zero targets in line with
instrument, project team estimated annual offset climate science. It is also the lead partner of the
requirement of 5 group companies, those are part of Business Ambition for 1.5°C campaign - an
PAT as well as SBTi (with committed targets upto urgent call to action from a global coalition of UN
2030). agencies, business and industry leaders,
Demand from such companies estimated with mobilizing companies to set net-zero science-
assumption that around 50% of the targeted emission based targets in line with a 1.5°C future
reduction would be met through in-house energy For more details refer https://sciencebasedtargets.org/
efficiency improvement and renewable energy and
balance 50% would be met through purchase of offsets.
Basis this estimation, expected annual requirement of mentioned 5 group of companies was
found to be 2.1 million tonne of CO2 equivalent on yearly basis to offset emissions (which is
approx. annual demand of 1 million EScerts). Thus, bringing the voluntary players in the market,
which some GHG emission reduction commitments, by giving them an opportunity to trade in the
instrument could unlock pent-up demand in the private sector side.
As of today, globally 5600 corporates have committed emission reduction on SBTi or CDP and expected
offset requirement from such companies is estimated3 to be 270 to 950 million tonnes of CO2 by 2030.
2. Limited Trading period
The ESCerts are traded at the power exchanges at the end of each PAT cycle of three years. During
PAT cycle one, the trading lasted for around 4 months. Such a short window for trading makes it difficult
to attract significant number of buyers as well as sellers on exchanges to increase traded volume and
for better price discovery.
For example, in the REC market in India, the trading happens every month on the last Wednesday. A
few international experiences are cited below that demonstrate that carbon markets have aimed for
regular trading4:
 The China ETS, which is the largest Carbon market, was launched recently in 2021 and is
currently being traded on the Shanghai Environment and Energy Exchange (SEEE) on a
regular basis. In the initial phase, while only carbon-emitting utilities can participate, over time,
financial institutions as well as individual investors would be included
 The Korea ETS (K-ETS) also is traded daily on the KRX since its inception in 2015.

3
Source: Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance, Trove Research, 2021
4
“Trading begins under China’s National ETS”, IISD-SDG Knowledge Hub, Link: https://sdg.iisd.org/news/trading-begins-under-
chinas-national-ets/, accessed: 15th October, 2021

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 In the EU-ETS system, auctioning of allowances happens monthly on the European Energy
Exchange (EEX)
 Under the Western Climate Initiative (WCI), of which the California, Quebec and Noa Scotia
Emissions market are a part, the trading of allowances happens once in a quarter.
 REC market in India, when operational, the trading happened every month on the last
Wednesday.
3. Compatibility challenge for voluntary demand due to unit of trading
The EScerts are not denominated in terms of GHG reductions, which is the de-facto trading unit of most
compliance based as well as Voluntary carbon markets around the world. Also, the voluntary emission
reduction commitments taken by corporates in India and around the globe on SBTi/CDP are in terms
of CO2 emission reduction.
Developing a provision for fungibility of the unit trading from energy saving to emission reduction may
attract voluntary buyers (and in future sellers, if required) to participate in ESCerts market, as it would
make the trading instrument more fungible (in the short and medium term) and in the long term this may
lead to international participation in the market as the adoption of the instrument increases. The figure
below presents the demand for EE certificates in International VCMs 5:

Figure 8: Voluntary carbon credit prices and demand 2019 by project type (average of wholesale and retail prices)

4. Compatibility with standards of issuance and verification in the International VCM

Currently, there are 4 major groups that take part in standards and process guidance: ART, Verra, Gold
Standard and American Carbon registry, (apart from some smaller less prominent ones) are followed
for issuance of carbon instruments traded across various voluntary and compliance markets. The
validation, verification, and issuance processes for each of the standards are quite expensive, and in
the Indian context, where the M & V process of PAT is unique in terms of local requirement, may pose
challenge of compatibility, in case fungible ESCerts is used as offset instrument at global scale.
Additionally, each of the standards has shown difficulty in capturing additionality, permanence, and
prevention of leakage in each of the standards mentioned above.

5
Future demand, supply and prices for voluntary carbon credits – Keeping the balance, UCL, Trove Research, 2021

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International Standards, Issuance and Verification Bodies

Post Project design phase, where the developer provides information about the project’s anticipated emissions
reductions, plans for quantifying and monitoring the delivery of climate and other social and environmental benefits, these
bodies validate the plans and assumption for emission reductions in the projects and after the project has been
implemented and monitored over a period of time, another audit process called “verification” assesses the delivery of
greenhouse gas mitigation. Post this, tradeable offsets are handed out to the developers to be traded. Some international
bodies that deal with issuance, verification and validation of such projects are:
VERRA | American standard registry | Gold Standard | ART

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2. Proposed phase wise approach for creation of VCM in

India
To overcome barriers of ESCerts market and to encourage voluntary entities to participate in meeting
NDC commitments of India, it is proposed to initiate development of voluntary carbon market (VCM) in
India. The key policy objective for introducing a VCM in India is to support achievement of the Indian
Nationally Determined Contribution (NDC) under the Paris Agreement. Additional objective includes
generation of demand for surplus ESCerts issued under the PAT program.
PAT program, which covers around 1073 designated consumers (consuming around 50% of primary
energy) in 13 sectors, is proposed to be considered as the base over which voluntary carbon market
can be developed. PAT is proposed since, the extensive policy development and implementation
learnings of BEE has developed a fully functional mechanism acceptable to various stakeholders, with
detailed rules for estimating DC specific targets, normalisation factor, issuance, trading, and other
relevant regulations. Hence, it is suggested to keep the basic structure and underlying mechanism
same, while updating policy and market rules to develop VCM in India.
Approach for development of VCM in India from existing PAT scheme is provided in figure below. The
proposed implementation for the planned Voluntary Carbon Market (VCM) in India is spread over three
phases, as mentioned below:

Figure 9: Proposed phase wise approach for India VCM

The details to be covered under each of the phases is mentioned in the following sections:

2.1 Phase-1: Increasing demand in the VCM

This phase focusses on increasing the demand in the existing EScerts market, by focusing on making
the instrument more fungible, adding more participant into the pool, and linking other markets in India
with the proposed VCM. The overview of the phase-1 operations is shown below:

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Figure 10: Phase-1 overview

 The demand would stem from 5 principle sources – Voluntary buyers, existing DCs part of the
PAT Scheme, inclusion of State Designated Agencies (SDAs) to participate in the VCM,
DISCOMs – who have RPO obligations and inclusion of the airlines sector as a whole.
 As mentioned previously, the voluntary buyers, in the form of corporate agencies in India, could
be made a part of the VCM. With existing companies having ambitious targets under global
initiatives like SBTi and more companies expected to join in the future, this segment can be a
lucrative demand side pull in the envisaged market
 There has been an increasing concern across the globe regarding the growing emissions from
the airlines industry. The Carbon Offsetting and Reduction Scheme for Aviation (CORSIA) is
one such scheme developed by the International Civil Aviation Organization (ICAO) that
requires airlines and other aircraft operators to offset any growth in CO2 emissions above 2020
levels (while this is currently in the voluntary phase, it will become mandatory post 2026). In the
Indian context, domestic flights by the Indian airlines led to 11.8 Million tons of CO2 emissions,
while their international flights led to 7.05 Million tons of CO2 emissions in 2019 (~65% rise
from 2012 levels). Thus, bringing in Airlines and Airport operators into the VCM would provide
them with the avenue to comply with international regulations as well as act as a source of
demand for emission reduction units6 (ERU) in the market
 State ‘s / City‘s desirous of raising their ranking on the index (or to gain competitive advantage
vis-vis others) can chooses to encourage use measures for energy efficient procurement.
 With strict enforcement and increasing RPO compliance requirement, DISCOMs with RPO
obligations may become a potential demand in proposed VCM
 For inclusion of such demand side participant, it is envisaged that three critical policy and/or
market rule changes would be essential
o Change in trading unit fungibility for both EScerts and RECs

6
ERU or emission reduction unit terms is used to represent trading unit for emission reduction equivalent to 1 metric tonne of
CO2 equivalent. The policy makers and market developers may choose appropriate name for this instrument, which developing
fungibility rules.

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o Updating of PAT market rules to allow voluntary players to be part of the buyer/seller
pool
o Change in trading period

2.2 Phase-2: Increasing supply in the VCM

This phase focusses on increasing the supply in the VCM market post completion of phase-1 changes.
The crucial supply side push would come from project level registration and their proper validation,
verification and issuance of emission reduction units (ERU). The overview of the phase-2 operations is
shown below:

Figure 11:Phase-2 overview

Here, specific activities of participants are credited. I.e., a project-specific reference case is established
for each activity. For emission reduction activities, this will be done in a simple manner applying a
greenhouse gas intensity factor to the production in question. The intensity factor will be derived from
performance benchmarks. For CCS the reference case will be zero sequestration. Once implemented,

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the performance of the activity will be monitored, and respective amounts of credits issued by the
regulatory body.
In order to generate credit, a project developer must complete a rigorous process in order to ensure
that real, quantifiable emissions reductions have been achieved. Although the process can vary, most
follow a similar series of steps:

Project Idea Project Design

Validation Verification Issuance
Note Document
Producing a Carbon Credit
Once the project developer has decided on their project activities, they begin to work on a Project Idea
Note. This first step focuses on early-stage preparations, like generating a project plan, assessing the
project’s feasibility, impacts, and risks, and/or engaging with local stakeholders.
Next, the project developer makes more concrete
plans in a Project Design Document. The
developer provides information about the project’s
anticipated emissions reductions, plans for
quantifying and monitoring the delivery of climate
and other social and environmental benefits, and a
demonstration that the project’s activities exceed
“business-as-usual” reductions and avoids
emissions leakage.
These plans and assumptions are then “validated”
by a third-party auditor. After the project has been
implemented and monitored over a period, another
audit process called “verification” assesses the
delivery of greenhouse gas mitigation. Only after
the project has successfully passed each of these
steps can the project developer begin to issue
tradeable credits.

Figure 12: Life cycle of a Carbon Credit

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2.3 Phase-3: Moving to a Cap-and-Trade System

This phase focusses on moving to a cap and trade system wherein sectors and withing sectors specific
companies are earmarked for only a specific amount of emissions

Figure 13: Phase-3 Overview

In this approach, an entity-specific GHG-emissions intensity factor is determined (e.g. t CO2/MWh

electricity output, or t CO2/t aluminium) for the current situation. Then, the expected sectoral growth for
the next years will be used to determine “business as usual (BAU) emissions” for the first crediting
period of the scheme, as a preliminary reference. In order to achieve alignment with the Indian NDC,
an NDC-alignment coefficient (NAC) will be introduced. E.g. if the Indian NDC specifies a reduction of
30% compared to business as usual (BAU), then the NAC should be 0.3. Alternatively, the alignment
could be undertaken according to the competitiveness situation of each sector, or abatement
costs/potentials. Crediting will be based on actual production volumes (ex-post-determination) to which
the NAC will be applied.
In order to participate, each entity needs to set up a GHG emissions inventory and MRV scheme. This
approach is comparatively easy to implement and maintain because a high number of different
measures can be captured by only one parameter (t CO2/unit of output). It would allow large companies
to address their entire value chain with a comparatively simple, high-level approach. Such an approach
has not yet been applied in any credit and offset scheme worldwide, thus would make the Indian scheme
a first-of-its-kind. The proposed scheme in Phase 3 is similar in design as EU ETS, details about the
same is provided in annexure 1.

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3. Suggestions for how to resolve select ESCerts market

barriers
In this section, suggestions on how to upgrade PAT to develop voluntary carbon market in India with
regards to trading instrument, cycle duration, target type and participation of voluntary buyers has been
discussed. Suggestions provided in subsequent paragraphs are indicative and non-exhaustive.

3.1 Fungibility between ESCerts and emission reduction units (ERUs) (Short
term: 1 to 3 years)
Existing:
At present in PAT rules, after satisfying the correctness of verification report and check verification
report (wherever applicable), Bureau of Energy Efficiency, recommends issuance of Energy Saving
Certificates to DCs based on claim raised by Form A, as per following formula:
For thermal power plants
No. of energy saving certificates = (Heat rate notified for target year – Heat rate as achieved in the target year) X Production
in baseline year
For other sectors
No. of energy saving certificates = (Specific energy consumption notified for target year – Specific energy consumption as
achieved in the target year) X Production in baseline year
The value of one energy savings certificate is equal to one metric tonne of oil equivalent of energy
consumed.
Proposed:
To make the unit of trading compatible for voluntary buyer/sellers, it is proposed to make ESCerts
fungible with ERUs. The value of one ERU is equal to one metric tonne of CO2 equivalent of emission.
Fungibility of ESCerts and ERUs may be developed by using appropriate conversion factors. Estimation
of conversion factor for a specific DCs may be done using following formula
Emission Reduction Units (ERU) (Nos) = Conversion factor of specific DC X ESCerts (Nos.)
Conversion factor of a specific DCs (tonne of Co2 equivalent emission per mtoe) =
Annual CO2 emissions by DCs in target year
[(SEC target – SEC actual in target year) X Production baseline year]
Annual CO2 emissions by DCs in target year=
[{Emission factor of fuel 1 (tonne of Co2 per tonne of fuel) X Quantity of fuel 1 consumed in target year (tonne)} + {Emission
factor of fuel 2 (tonne of Co2 per tonne of fuel) X Quantity of fuel 2 used in target year(tonne)} + {Emission factor of
electricity used (tonne of Co2 per million units) X Quantity of electricity used in target year(million units)} ……. + {Emission
factor of fuel N (tonne of Co2 per tonne of fuel) X Quantity consumed in target year (tonne)}
This approach estimates conversion factor at designed consumer level, so there will be sperate
conversion factor for each DCs.
To further clarify conversion factor during and after trading period, it would be pragmatic to convert
ESCerts to ERU well before the actual trading, so that, DCs have visibility on available tradable units
and may plan accordingly. This can be done through communication of appropriate DC specific
conversion factors to registry (POSOCO).

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Applicability and potential way forward

 For DCs, already holding ESCerts, may be issued with such instruments, calculated by
multiplying existing ESCerts with DC specific conversion factor. After issuance of equivalent
emission reduction units (ERU), ESCerts held earlier will expire.
 For DCs, already provided compliance requirement for ESCerts, will be communicated
compliance requirement in terms of emission reduction units (ERU). In case the DCs has
already met part compliance through purchase or banking of ESCerts, balance compliance
may be converted to emission reduction units (ERU).
 For future, the issuance to DCs may be done in form of such instruments only, by making
appropriate changes in sector proforma and PAT forms.
Verification of emission factor for various fuels, may done during monitoring and verification studies
using NABL reports (ultimate analysis for carbon content of fuel).

3.2 Yearly compliance, issuance, and trading (Short term: 1 to 3 years)

As per PAT rules, “cycle” is the period of three years available to a DC to achieve / exceed the energy
consumption norms and standards. At present, issuance, and trading EScerts happens only during
limited duration of each PAT cycle and it is one of the barriers for proposed voluntary carbon market
development. Some of the major limitations coupled with three-year cycle are listed below:
 Compliance occurs once in three year, therefore a number DCs, who are not part of a specific
compliance cycle, may remain non active in trading sessions
 With limited participation, the value of market clearing volume (MCV) and market clearing
price (MCP) may not reflect he actual market position
 Accounts of DCs registered with exchanges and registry, become dormant during non-trading
years.
To overcome this challenge, it is proposed to change the cycle period from three years to one year.
Almost all other carbon markets (example EU ETS) operates annually, which ensures regular trading
of carbon instruments.
For conversion of three-year compliance cycle to one-year compliance, there are two approaches:
 Approach 1: Conversion of three-year compliance targets into yearly target for compliance and
issuance, as per provisions provided in PAT rules 2012, clause 12, sub clause (2).
 Approach 2: Issuing of yearly compliance targets to DCs.
Formula of approach 1, as mentioned in PAT rules 2012 are provided below for reference:
i. Energy saving certificate to be issued after year 1 = {[Specific energy consumption of baseline year – (specific
energy consumption of baseline year – specific energy consumption of target year)  3] - specific energy
consumption achieved in year 1} X 80% X production in baseline year
ii. Adjusted specific energy consumption after year 1 = specific energy consumption notified for target year –
(energy saving certificate issued in year 1  production in the baseline year)
iii. Energy saving certificate to be issued after year 2 = {[Specific energy consumption of baseline year – (specific
energy consumption of baseline year – specific energy consumption adjusted after year 1) X 2  3] - specific energy
consumption achieved in year 2} X 80% X production in baseline year
iv. Adjusted specific energy consumption after year 2 = specific energy consumption adjusted after year 1 – (energy
saving certificate issued in year 2  production in the baseline year)
v. Energy saving certificate to be issued in the target year = {[Specific energy consumption of baseline year –
(specific energy consumption of baseline year – specific energy consumption adjusted after year 2)] - specific
energy consumption achieved in the target year} X production in baseline year

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vi. Total number of energy savings issued in the cycle = Energy saving certificate to be issued after year 1 + Energy
saving certificate to be issued after year 2 + Energy saving certificate to be issued in target year
Formula for approach 2:
i. Energy saving certificate to be issued = {Specific energy consumption target notified for the year - specific energy
consumption achieved} X production in baseline year
Important considerations for approach 1 and 2:
 Estimation of ESCerts to be issued is less complex in approach 2 compared with approach 1
 Understanding the energy saving potential in various PAT sectors through potential estimation
studies and consultation with technical committees requires a considerable time. In this regard,
approach 1 seems more pragmatic.
 Identification and implementation of energy conservations measures in DCs in some case may
require more than 1-year time, hence in such cases, the DCs may opt for purchase ESCerts to
comply with provided target. This may have impact on trading activity in ESCerts market
Present capacity for handling administration of yearly PAT compliance cycle
Capacity of undertaking PAT activities such as baseline, M & V, and target setting, on yearly basis, has
already been developed through execution of PAT four rolling cycles. To expedite the baseline and M
& V activities, following suggestions may be considered:
 Award of M & V contracts, which is presently being done by DCs, may be undertaken by BEE
or any other central agency to prevent delays and conflict of interest
 Reports related to baseline, M & V and other documentation required from DCs and AEE, may
be prepared in digital form directly over PAT NET portal using digital keys.

3.3 Participation of voluntary buyers and sellers (Short term: 1 to 3 years)

As per present PAT rules, only designated consumer with compliance targets can participate in ESCerts
trading over exchanges (IEX/PXIL). Once fungibility option of ESCerts to emission reduction units
(ERU) is available, entities meeting minimum eligibility criteria, defined by market regulator, may
participate in voluntary carbon market. The minimum eligibility criteria for voluntary buyer and seller
may involve:
 Financial capacity and background checks to prevent default, corruption, and money
laundering.
 Registration of entity with BEE
 Registration of emission reduction with project with designated authority (in case a new
domestic project is getting registered for issuance in proposed voluntary carbon market)
 Verification and validation of emission reduction by AEA (for project developer having valid
CERs issued under CDM regime or for issuance under voluntary carbon market regime)
 Registration with registry and exchanges

3.4 Target and compliance in emission intensity (medium term: 3 to 5 years)

With commitments under NDC targeting reduction of emission intensity7 of GDP by 33 – 35% upto 2030
from 2005 level and global community focus on emission reduction, it seems practical to move to
emission intensity-based targets for designated consumers, as it represents almost 50% of primary
energy consumption of India.

7
NDC targets are expected to be revised soon

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With present PAT regime, there is a fully functional mechanism available, with detailed rules for
estimating DC specific targets, normalisation factor, issuance, trading, and other relevant regulations.
Hence, it is suggested to keep the basic structure and underlying mechanism same, while updating
forms, proforma to derive targets in emission intensity. Formula for emission intensity reduction and
issuance of ERUs is provided below
Emission intensity in baseline year (tonne of CO2 equivalent per tonne of production) = Annual emission in baseline year
(Scope 1 and scope2)  production in baseline year
No. of emission reduction units issuance = {Emission intensity in notified for target year – Emission intensity achieved in target
year} X production in baseline year
Emission intensity reduction (Tonne of CO2 equivalent per tonne of product) = Emission intensity baseline year – Emission
intensity achieved in target year
Annual Emission reduction for specific DC (Tonne of CO2 equivalent) = Emission intensity reduction X production of baseline
year.
Applicability and potential way forward
For PAT cycle planned after 3 – 5 years, the targets may be provided in emission intensity reduction
instead of energy intensity. In new system, BEE may consider emission intensity of the production as
the target parameter. The emission intensity may be estimated by dividing total emission of the factory
(scope 1 and scope 2) by total production. GHG accounting sheets, for inclusion in sector proforma
may be prepared, as per the energy and non-energy use of fossil fuels, electricity and other GHG
emission sources.

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Annexure - 1
Overview of select compliance markets
1. European Union – Emissions Trading System (EU-ETS)
The EU Emissions Trading System (EU ETS) is a ‘cap and trade’ system. The system allows trading of
emission allowances so that the total emissions stays within the cap and the least-cost measures can
be taken up to reduce emissions. The EU ETS is a major tool of the European Union in its efforts to
meet emissions reductions targets now and into the future. The trading approach helps to combat
climate change in a cost-effective and economically efficient manner. The system was first introduced
in 2005 and has undergone several changes since then. The implementation of the system has been
divided up into distinct trading periods over time, known as phases:

Figure 14: EU-ETS scope and phases

How does the EU-ETS work?

Within the cap, installations buy or receive emissions allowances, which they can trade with one another
as needed. The limit on the total number of allowances available ensures that they have a value. After
each year, an installation must surrender enough allowances to cover fully its emissions, otherwise
heavy fines are imposed. If an installation reduces its emissions, it can keep the spare allowances to
cover its future needs or else sell them to another installation that is short of allowances. Allowance
were provided free in initial phase and gradually the installation must purchase portion of allowances .
The overall working of EU-ETS is shown below:

Figure 15: Emissions trading in the EU-ETS

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What is the EU-ETS compliance cycle?

Operators of industrial installations and aircraft operators are required to monitor and report their annual
emissions to their Competent Authority (CA). This procedure can be summarised in an annual
compliance cycle:

Figure 16: EU-ETS compliance cycle

What are the highlights of the previous phases?

 Phase-1 was a trial phase in which Individual countries defined cap and sum of it become the
EU CAP. This initial phase was able to establish a price for EUAs, free trade throughout the EU
and the infrastructure for monitoring, reporting and verifying (MRV) actual emissions from the
covered installations. Approximately 200 million tonnes of CO2 or 3% of total verified emissions
were reduced due to the ETS at nominal transaction costs8.
 Phase-2: Aviation was included as a sector in this phase. In this phase Iceland, Norway and
Liechtenstein joined the EU ETS and the scope was amended to include nitrous oxide from
nitric acid production from several Member States. Businesses were allowed to use credits from
the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation (JI)
leading to a total of 1.4 billion tons of CO2 equivalent credits on the market (with the exception
of those for nuclear facilities, agricultural and forestry activities).
 Phase-3: EU defined the overall cap, and it is then allocated to countries. Liner reduction at
1.74% annually on overall emission allowance at EU level as well as concept of auction and
free reserve included. Carbon leakage safeguard included to prevent production transfer to
countries with laxer climate policies

Benefits of auctioning?
It Improves prudence while estimating need of allowance for a specific year. Encourages
installations to invest in low carbon technologies to avoid purchase through auction

8 International Emissions Trading Association: The EU Emissions Trading System

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What has been the price range of allowances under EU-ETS?

 Phase-1: Initially the price was in range of 25 – 30 euro per allowance. Since, option of banking
was not available in phase 1, oversupply led to price fall.
 Phase-2: Banking allowed which stabilized price in 20 – 25-euro range. Economic recession
effected demand
 Phase-3: Over supply of allowances in the market led lower price. In last 3 years the price is
on the rise has reached 54 euro due to stringent allowance reduction planned for 2021 – 2030
period

Figure 17: Price range under EU-ETS (Phase-1,2,3)

What have been the learnings from EU-ETS?

 The first important lesson is that a cap-and trade system like EU ETS is very helpful in
guaranteeing a credible and binding reduction of emissions within the ETS sectors. The gradual
yearly reduction of allowances is a key element to deliver its promised contribution to a long-
run deep decarbonization within EU ETS, whereas no such guarantee would be provided by
using a carbon tax instead.
 As the economic and sovereign debt crisis hit European economies, emissions dropped as less
cement was produced, less ore smelted, less oil refined and less power produced throughout
Europe. This amounted to a drastic reduction in demand for emission allowances. On the other
hand, supply of allowances remained unchanged as auctioned volumes were set in advance
and companies received their predetermined free allocations in spite of lower production. To
deal with this, the following steps were taken: Backloading of auction, increase emission
reduction target, Retiring of allowance, Expansion of scope, Limiting international import and
Option of strategic reserve for price management
 EU ETS has been an important cross-cutting tool for pricing carbon from the use of fossil fuels
within the EU. Its carbon price “base” covers most emissions within the electricity sector and in
energy-intensive industry

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2. China National ETS

China’s national ETS started operating in 2021, bringing the world’s largest ETS online after three years
of preparation since the political launch. In early January 2021, the Chinese Ministry of Ecology and
Environment (MEE) published key ETS policy documents, along with an announcement that regulated
entities will need to surrender allowances pertaining to their 2019-2020 emissions in 2021. In mid-2021
the Chinese national ETS commenced trading on the trading platform operated by the Shanghai
Environment and Energy Exchange (SEEE)
China ETS Snapshot
Table 3: China national ETS parameters

ETS Parameters Status

Sectors and Threshold Power sector (including combined heat and power, as well as captive
power plants of other sectors). Compliance obligations are currently
limited

The scope is expected to be gradually expanded to cover seven other

sectors in addition to power: petrochemical, chemical, building materials,
steel, nonferrous metals, paper, and domestic aviation. There is no
specific timeline for this expansion
Number of entities The Chinese regional ETS pilots covered power sector entities, which
may also fall under the national ETS. These entities are transitioning into
the national market. It is estimated that 2225 power sector entities are
part of the ETS in 20219.
Compliance period One year (1 January to 31 December). Nevertheless, entities are
expected to surrender allowances in 2021 for the years 2019 and 2020.
GHGs covered CO2
Allocation Free allocation: Benchmarking is used as the main allocation method,
with four distinct benchmarks: conventional coal plants below 300 MW;
conventional coal plants above 300 MW; unconventional coal; and
natural gas

Currently, allocation is to take place mainly through free allocation, but

the National Measures clarify that auctioning may be introduced at a later
point in time
China's seven years of experience in emissions trading (The Beijing pilot started in late 2013) provide
an important case study for other emerging economies in Asia and the Americas of how a carbon price
with wide coverage can be introduced in a way that is sensitive to the local circumstances of a
developing economy while limiting carbon emissions.
What have been the learnings from China’s ETS journey, from pilot to national implementation?
 During the pilot ETS phase, and going into the national system, China has developed a
compromise solution in which large electricity consumers, such as industry as well as public
and private institutions, are provided with an emissions cap and allowance allocation in the
carbon market in relation to their indirect electricity consumption. While the lack of complete
cost pass-through means that efficiency incentives are downstream, it does help to protect
consumers from the cost impact.
 They have engaged industry representatives throughout in a number of ways. Companies and
sectoral associations sit on committees together with think tanks, government representatives
and policy design advisers.
 Every ETS needs to be designed with regard to other measures which may also lead to
emissions reduction. Energy efficiency standards, mandatory closure of facilities, pollution

9 International Carbon Action Partnership, China National ETS highlight, 2021

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mitigation policies and economic slow-down can all impact demand within the carbon market
by enabling companies to meet their cap more easily without buying ETS credits. In China, the
effects of a range of policies have informed the design of its ETS, in particular the reform of its
power sector. By planning to start operation of its national ETS exclusively in the power sector,
the Chinese government has opened the opportunity to carefully consider how to coordinate
between policies.
3. Korea Emissions Trading System (K-ETS)
The Korea Emissions Trading Scheme (KETS) caps greenhouse gas (GHG) emissions from
participants within the scheme and involves the issuance of a corresponding number of emission
allowances, where each allowance represents 1 ton of carbon dioxide equivalent (tCO2e) permitted to
be emitted. Participants must measure their annual emissions and surrender allowances to cover their
emission responsibility. Participants that emit less than their allocation can sell their excess allowances,
while those who do not have enough allowances to cover their annual emissions need to buy them.
This creates the direct economic incentive for emission reduction. At the same time, the cap limits the
GHG reductions to target levels.
Korea ETS snapshot
Table 4: Korea ETS snapshot

ETS Parameters Status

Sectors and The K-ETS covers the following six sectors: heat and power, industry, buildings,
Threshold transportation, waste sector, and the public sector. The transport sector (freight,
rail, passenger, and shipping) and construction industries have been brought
into the system’s scope, increasing the number of subsectors covered to 69
Number of 685
entities
Compliance One year. Entities need to surrender allowances for the previous emissions year
period by end of June
GHGs covered CO2, CH4, N2O, PFCs, HFCs, SF6
Allocation Free Allocation: Less than 90% of allocation to entities in sub-sectors subject to
auctioning; 100% for EITE sectors. The share of sector-specific benchmarking
is to reach 60% and has been expanded to a total of 12 sectors: grey clinker, oil
refinery, domestic aviation, waste, industrial parks, electricity generation, and
district heating/cooling, with the addition of steel, petrochemical, buildings,
paper, and wood processing.

Auctioning: At least 10% of allocation to entities in sub-sectors subject to

auctioning. Entities from 41 subsectors, which excludes EITE sectors, can
participate in auctions.
What have been the learnings from Korea Emissions Trading System (K-ETS)?
 The unrestricted banking of allowances in the Republic of Korea (ROK) resulted in most of its
participants banking excess allowances for future periods. For example, allowances unused in
Phase I were kept for Phase II compliance when targets are more stringent. When this is done
to a great extent across a system, it can lead to delayed abatement. A clear expectation of
future abatement needs can help address this 10.
 An extensive preparatory period may be required. With an ETS being a relatively complex policy
instrument that requires significant internal capacity from its participants, its introduction
requires an extensive preparatory period for the participants to familiarize themselves with the
rules and prepare for compliance actions. In ROK, the first master plan and allocation plan of
the ROK were published in the fourth quarter of 2014, with the system launch scheduled about
2 months later. With such a limited time for preparation, many participants were not fully
prepared to join the new system.

10 The Korea emissions trading scheme-Challenges and Emerging Opportunities, ADB, November 2018

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 Draft Blueprint on “National Carbon Market”

 Stakeholder engagement is crucial for successful ETS introduction. In a developing economy

that has significant reliance on energy-intensive industries, the introduction of a carbon pricing
instrument may appear to be a very sensitive issue that is likely to face strong opposition from
the national industries. It took the ROK over 2 years to gain agreement from the industry to
launch the KETS. Going forward, stakeholder engagement methods should be incorporated for
introduction of major changes of the system. Public hearings and industry consultations
continue to be frequently organized to provide support for KETS participants

Voluntary markets - Overview

The voluntary carbon market was created outside of governmental regulatory schemes by firms and
individuals voluntarily buying carbon offsets to reduce their greenhouse gas (GHG) emissions for
learning, image management, or regulation anticipation purposes 11. The emergence of the voluntary
market can also lay the basis for building national capacity in carbon markets in countries whose climate
policies may have yet to establish carbon market schemes. While from an environmental viewpoint
voluntary markets cannot be a replacement for compliance markets, they can be an important, if small,
complement to a compliance market. Voluntary markets can provide an early pre-compliance arena in
which to test and develop systems needed to transition to a compliance market.
Recent demand and prices for voluntary carbon credits
Demand for voluntary carbon credits has been increasing rapidly in recent years, doubling over the last
three to four years, reaching 95MtCO2e in 2020 12. Demand has increased for all credit types, but
especially Nature Based Solutions.

Figure 18: Demand for voluntarily carbon credits (MtCO2e)

Carbon credits are used by a wide variety of sectors. The figure below shows the number of carbon
credits retired by firms in different sectors in 2019. The source of data is different from the chart above,
and not as comprehensive, capturing 70MtCO2e out of a total of 90MtCO2e, but gives a good
representation by sector.
Firms in the financial services sector were the largest users of carbon credits in 2019 accounting for a
quarter of all credits retired in the year. This was followed by chemicals and petrochemicals (including
oil and gas) at 20%. All other sectors account for less than 10% of carbon credit retirements 13.

11
Bellassen et al., 2007
12
Trove Research, Link: http://www.trove-intelligence.com/, accessed: 18th October, 2021
13
Trove Intelligence analysis, 2021, CDP 2020. “Chemical and Petrochem” includes oil and gas companies

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 Draft Blueprint on “National Carbon Market”

Figure 19: Demand for voluntarily carbon credits by sector 2019 (MtcO2e) (total volume

Prices for voluntary carbon credits vary considerably according to the project type, its age (vintage), the
size of the transaction and the standard (e.g. Verra, Gold Standard, CAR or ACR) to which it is
accredited. Prices can range from under $1/tCO2e for older projects with fewer verifiable co-benefits,
to over $20/tCO2e for projects with unique features and specific co-benefits, such as biodiversity and
support for indigenous people. The figure below shows a summary of average prices in 2019 for credits
projects in renewable energy, REDD+/forestry & land use, non-CO2 gases/methane, energy efficiency
and other NBS/waste disposal.

Figure 20: Voluntary carbon credit prices and demand 2019 by project type (average of wholesale and retail prices)

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Voluntary Carbon Markets Functioning and Active Players
The VCM market worldwide currently involve the below-mentioned players over the entire value chain. Apart from the
above-mentioned entities, National Climate Solutions Alliance, World Economic Forum (WEF) and World Business
Council for Sustainable Development (WBCSD) act as guidance entities across the entire value chain

Figure 21 Voluntary carbon market value chain

BUREAU OF ENERGY EFFICIENCY (BEE)
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