To create a uniform framework for the issuance and trading of carbon credits, the Government of India (“GoI”) notified the Carbon Credit Trading Scheme, 2023 (“CCTS”) on June 28, 2023. The CCTS sets out the framework for the establishment of an Indian carbon market (“ICM”) and a framework for reducing, sequestering or avoiding greenhouse gas (“GHG”) emission across sectors of the Indian economy. In order to achieve this objective, the CCTS envisages pricing GHG emission reduction through trading of carbon credit certificates (“CCCs”). In accordance with the CCTS, the Bureau of Energy Efficiency (“BEE”) has in July, 2024 issued the ‘Detailed Procedure for Compliance Mechanism under the CCTS’ (“Compliance Mechanism”) and the ‘Accreditation Procedure and Eligibility Criteria for Accredited Carbon Verification Agency’ (“Accreditation Procedure”).

The Compliance Mechanism mandates the obligated entities to comply with the GHG emission intensity targets and envisages establishment of the National Steering Committee for Indian Carbon Market (“NSC-ICM”) which will be responsible for the governance, oversight and functioning of the ICM. The Accreditation Procedure, on the other hand, lays down the eligibility criteria for the qualification of an Accredited Carbon Verification Agency (“ACV Agency”).

Compliance Mechanism – Key Highlights

1. Entities under the Compliance Mechanism: The Compliance Mechanism provides a procedure for obligated entities to register their projects in the ICM registry, and thereafter, obtain CCCs. The obligated entities will be the energy-intensive industries to be notified by the Ministry of Power (“MoP”) and upon considering the recommendations issued by the NSC-ICM. Thereafter, the MoP will recommend GHG emission intensity targets for each of the obligated entities which will be notified by the Ministry of Environment, Forest and Climate Change (“MoEFCC”) under the Environment Protection Act, 1986.

The Compliance Mechanism also allows non-obligated entities to register their projects in order to trade CCCs. However, notably the Compliance Mechanism does not deal with issuance of CCCs to non-obligated entities but goes on to state that the trading of CCCs (by both obligated and non-obligated entities) will be carried out in accordance with the procedure to be issued by Central Electricity Regulatory Commission (“CERC”).

2. Compliance Mechanism: The obligated entities are required to comply with the annual GHG emission intensity targets within the compliance cycle (i.e. a period of 3 (three) consecutive years). An obligated entity exceeding the targeted GHG emission intensity in a compliance year is eligible for issuance of CCCs which will be calculated based on the difference between achieved and targeted GHG emission intensity for the relevant production quantity in that year. The obligated entities failing to achieve the targeted GHG emission intensity in any compliance year will have the option to purchase CCCs which will be calculated based on the difference between achieved and targeted GHG emission intensity for the relevant compliance cycle.
3. Verification and Assessment of Performance: An obligated entity is required to appoint an ACV Agency which will conduct the verification process for entitlement or surrender of CCCs in accordance with the Compliance Mechanism. The obligated entity is required to submit a performance assessment document to BEE and the state designated agency within 4 (four) months after the end of the compliance year, along with a verification report provided by an ACV Agency. Prior to the submission of the verification report, obligated entities are required to address any material issues or non-compliance as pointed out by the ACV Agency.

BEE, upon receipt of a complaint regarding any non-compliance or by its own motion, may initiate an action to check the verification of an obligated entity within 1 (one) year from the date of submission of the verification report, or within 6 (six) months from the date of issuance of CCCs to the entity. Upon the issuance of a notice to the obligated entity, BEE may decide to conduct an independent review of the GHG emissions of the entity through a different ACV Agency.

4. Issuance and Surrender of CCCs: After verifying the accuracy of the verification report issued by the ACV Agency, BEE will submit a report to the NSC-ICM with the number of CCCs which are required to be issued to the obligated entity. The quantum of CCCs will be calculated based on the difference between the achieved and targeted GHG emission intensity for the relevant compliance year.

5. Trading and Banking of CCCs: The obligated entities and non-obligated entities may trade the CCCs on the power exchanges registered with the CERC in accordance with the procedure to be prescribed by the CERC. The Compliance Mechanism also provides the facility to bank the surplus CCCs at the end of a compliance year in order to meet compliance requirements in subsequent years.
6. Compliance with GHG emission norms: The obligated entities are required to prepare a long-term action plan spanning at least 5 (five) years for reduction of the GHG emissions. The action plan is to be submitted within 1 (one) year from the commencement of the 1^st (first) compliance year. The action plan prepared by the obligated entity should provide details of measures identified for reduction of GHG emission for the next 5 (five) years, estimated cost and resultant saving for each measure, implementation plan to achieve GHG emission intensity reduction targets.
7. Monitoring and Reporting Process: The obligated entity, in consultation with the ACV Agency, is required to establish transparent, independent, and credible monitoring and reporting procedures to meet the prescribed GHG emission intensity targets. The obligated entity is required to submit the monitoring plan to BEE within 3 (three) months from the commencement of a compliance cycle and is required to include comprehensive documentation of the monitoring methodologies for each emission source and details regarding conversion of all direct and indirect GHG emission sources into CO2 equivalent tonnes.

The obligated entity is entitled to make adjustments for emissions from electricity exported from captive power plants, cogeneration plants, or waste heat based on the weighted average net heat rate of power generation and fuel consumption. The obligated entity is also entitled to demonstrate zero GHG emissions in case of consumption of renewable energy. In case the obligated entity is purchasing heat in the form of steam, hot water, chilled water, or in any other form, such indirect emissions will be included in GHG emission monitoring of the obligated entity.

Accreditation Procedure

The Accreditation Procedure sets out the minimum eligibility requirements that an agency is required to fulfil to qualify and function as an ACV Agency. The accreditation granted to an ACV Agency will be valid for a period of 5 (five) years or until it is withdrawn by the BEE, with the option to renew its accreditation 6 (six) months prior to the expiry of the term. The verification of the ACV Agencies and their monitoring is required to be carried out by BEE. The key role of an ACV Agency is to verify whether the obligated entities are in compliance with their GHG emission targets as notified under the Compliance Mechanism.

The Accreditation Procedure further provides that the ACV Agencies will also be empowered to carry out the verification under the ‘Detailed Procedure for Offset Mechanism’^[1] (“Offset Mechanism”) for non-obligated entities. Please note that this detailed procedure is yet to be issued by BEE. Given that the Compliance Mechanism is silent on issuance of CCCs to non-obligated entities, the Offset Mechanism should provide the mechanism for issuance of CCCs to non-obligated entities.

Footnote:

^[1] As per the notification issued by the MoP on December 19, 2023 amending the CCTS, “offset mechanism” has been defined to mean “a mechanism where the non-obligated entities can register their projects for accounting greenhouse emission reduction or removal or avoidance for issuance of Carbon Credit Certificates.”