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Viability of Carbon Markets in India’s Sustainable Future

Publications, Research paper

Abstract

The Indian economy remains heavily reliant on fossil fuels, making it complex to grow the economy quickly and equitably while also reducing GHG emissions. Such problems are compounded by high economic inequality, in which the bottom half of the population owns only 2% of national wealth, as well as developmental challenges such as poverty, lack of access to electricity and clean water, and homelessness. Despite these challenges, India has committed to reducing its GHG emissions by 33-35% below 2005 levels by 2030, including the substitution of 40% of its power generation capacity by non-fossil fuels. This paper considers the role of carbon markets in addressing this challenge by assessing their potential for providing cost-effective emission reductions that foster sustainable development.

It examines India’s climate commitments; scrutinizes the possibility of reaching carbon markets to fulfil these; provides an evaluation of this issue within the following possible elements: improvement in the trade balance with enhanced domestic carbon market and more industrial structural shift towards high value added as carbon-minimum as services and carbon trading with some emphasis on green bonds. This article explores the feasibility of using carbon markets in the policy approach of India. It finds that carbon markets have enormous potential in helping India meet its climate goal, but success is based on overcoming institutional, financial, and social constraints. Carbon markets, with the right legal framework and stakeholder involvement, potentially become a game changer for the transition to a low-carbon, resilient, and inclusive economy.

Keywords

Carbon Market, Sustainable development, Economic growth, Climate change. Climate goals, carbon trading, socioeconomic challenges.

Introduction

India is at a crossroads to confront twin concerns of economic development and climate change. India being a developing country is ranked the world’s third-largest emitter of greenhouse gases with over 269 million of its citizens live in poverty. Climate change is a significant global issue requiring immediate policy adjustments to transition economies away from carbon-intensive sectors. The Kyoto Protocol and Paris Agreement have highlighted the effective strategies for reducing CO₂ emission and averting climate change. A growing economy of India has to balance reduction with emission and long-term growth. A carbon market can be a viable answer in reducing emissions to the affordability of businesses and industries while promoting enterprises and industries into making clean technologies investments and staying away from high carbon infrastructure. Well-designed carbon markets may also help India achieve its climate targets without compromising economic progress or industrial competitiveness, which means that carbon markets are sure to make a significant contribution to sustainable development. Carbon markets have the potential to help in achieving sustainable development as being essential to global climate action. High integrity carbon markets can triple global climate goals by 2035 while keeping total costs intact.

These markets can direct resources toward local-level activities that have social, economic, and environmental benefits, such as infrastructure development, economic resilience, job creation, and improved health outcomes in underserved communities. This would require India to make all of the low-carbon growth paths because the problems in terms of poverty, nonaccess to clean cooking fuel and electricity, unavailability of safe water, lack of house accommodation, and insufficient availability of social services are holding India away from becoming completely successful in the execution of Sustainable Development Goals. It would further add strength to the manufacturing sector with programmes like Make in India, Smart Cities Mission, and Housing for All. Programs like Digital India and Start-up India facilitate growth in the service sector. New initiatives, like NAPCC, would be required to achieve climate goals like bringing down GHG emissions intensity and bringing up non-fossil sources to 40% of total installed capacity of power generation by 2030. Carbon markets will hold revolutionary potential to meet the climate goals of India simultaneously as it progresses toward sustainable development. The paper intends to analyze the possibility of carbon markets in India and review its ability to create affordable abatement of emissions through increased economic growth and also help redress the country’s imbalances in its social and economic dimensions.

Research Methodology

The study uses both qualitative and quantitative methods to evaluate the viability of carbon markets in India and their contribution to sustainable development. A comprehensive literature review encompasses the main frameworks: Clean Development Mechanism, climate policy in India, and international treaties such as the Paris Agreement. Case studies in the form of Delhi Metro Rail Corporation and other CDM projects suggest that carbon markets are not only capable of reducing emissions but are also potentially beneficial for socioeconomic reasons. Using the hybrid method that combines AIM/Enduse with the IMACLIM models, trade-offs are analyzed in economic and environmental terms. For policy analysis, studies based on the National Action Plan on Climate Change (NAPCC) and sectoral programs like the PAT are taken into account. For business and politics, the stakeholder comment is quite helpful in offering insight into the implementation issues, wherein practical challenges and opportunities surface. This holistic approach will give the comprehensive assessment of carbon markets on matching up with India’s sustainable development goals.

Literature Review

India’s Climate Commitments

The paragraph of “Climate Policy Landscape in India in the book Leveraging carbon markets for cost-efficient emissions reductions in India” tries to depict how the Indian climate policy strives to pursue balance between economic growth and environmental accountability on the global climate policy context. The NDCs of the Paris Agreement of India, in the near future, aims to reduce the GDP emission intensity by 33-35% by 2030, achieve 40% non-fossil energy capacity, and create a carbon sink that can absorb 2.5-3 billion tonnes of CO₂ through afforestation activities. By 2022, these targets had been enhanced to a 45% reduction in emissions intensity and a 50% non-fossil capacity by 2030. India’s long-term goal of reaching net-zero emissions by 2070 proves that it is committed to aligning climate policy with global goals.

Climate policies in India include sector-specific programs aimed at reducing the emission of greenhouse gases and promoting sustainable activities. Ambitious renewable energy goals for the electrical sector, including 175 GW of capacity by 2022 in solar, wind, biomass, and hydropower, form the plan. PAT in the industrial sector-the Perform, Achieve, and Trade strategy-shows the market-based approach to improvement of energy efficiency, reductions in emissions, and competitiveness. Some examples of building and transport sector initiatives that encourage low-carbon growth include ECBC (Energy Conservation building Code) and UJALA LED replacement plan. There are the CAFE (Corporate Average Fuel Efficiency) rules and the FAME India initiative, which further supports transition to energy efficient vehicles and charging infrastructure.

Carbon markets in India help the country meet its climate objectives and reduce emissions, invest more in low-carbon technology, and encourage the conduct of sustainable industrial practice. These markets are compatible with global frameworks, including those set forth by the SDGs, which are oriented to environmental, social, and economic sustainability. By leveraging carbon markets, investments can be channeled toward social and economic benefits such as more health, infrastructure, and resilience. Alignment of carbon market legislation at the state level with international frameworks under Article 6 of the Paris Agreement promotes collaboration, innovation, and global investment into India’s low-carbon transition, which is in line with the country’s proactive strategies on climate change and sustainable development.

The literature centers on India’s current policies, which include the Perform, Achieve, and Trade plan and the REC market, which provide the basis for market-based processes. These instruments, however, usually work in isolation, hence inefficient. Research indicates that incorporating current initiatives into a national carbon market may provide cost-saving benefits to companies by providing them with more options for emission reduction. The challenge is designing a system that reduces redundant counting and aligns sectoral aims with broader national ones.

Feasibility of Carbon Market

The article “Carbon Trading: An Approach to Sustainable Future Development in India” reviews the possibility and effectiveness of carbon markets for promoting sustainable development. It addresses the utilization of tools such as the CDM and JI based on the Kyoto Protocol that enhances sustainable development through the tool of carbon trading. These instruments allow the developed countries to use credits to reduce emissions by investing in emission-reduction activities in developing countries, providing a two-fold benefit of reducing emissions and foreign aid. In order to decrease the greenhouse gases released, the article also talks highly about carbon trading as being the most critical market-based opportunity; it enables developing nations, such as India, to attract investments in clean technologies with its promise of economic growth amid combating climate change. With a huge contribution of International Carbon Market, the world leader has emerged that includes India. India is quite prominent in the carbon market, as it is the largest supplier of Certified Emission Reductions (CERs). The Delhi Metro Rail Corporation (DMRC) has been highlighted as a trailblazer on carbon credits produced with regenerative braking technology. Despite the potential benefits, the paper identifies several barriers to the widespread adoption and development of carbon markets in India, including a lack of stakeholder understanding, technological and financial constraints, and international pressure for emission reduction responsibilities. It highlights the need of capacity building, increased knowledge, and policy support in overcoming these barriers and ensuring that carbon trading systems are consistent with India’s sustainable development goals.

The paper calls for carbon trading as a need for sustainable development and argues that India is likely to represent 31% of global carbon trading. Carbon markets offer business a financial reason to move towards greener approaches, making huge investments in low-carbon activities. Carbon trading was linked to the United Nations Sustainable Development Goals by the report, emphasizing how carbon trading fosters environmental sustainability, economic growth, and social development. Carbon trading activities under the CDM reduce emissions while also improving local infrastructure, creating jobs, and raising community standards of living. The paper concludes by underlining India’s unique position to benefit from carbon pricing, especially its large portfolio of CDM projects and opportunities for international investment. However, realising this potential involves overcoming market barriers, raising awareness, and incorporating carbon trading schemes into national policy. 

Role of Green Finance

According to the article “Green bonds, sustainable development, and environmental policy in the European Union carbon market,” the EU ETS is one of the most well-established and studied carbon markets around the world.

It indicates how carbon markets can reduce emissions and stimulate green investments. However, EU ETS has faced various challenges, including price volatility, requiring very stringent structures of regulations for compliance and predictability. The lessons for India, therefore, considering carbon markets in the policy framework to achieve the goals of the Paris Agreement, are very pertinent. The article points out the role that green bonds play in boosting investments in sustainable infrastructure, which can serve as a complement to carbon markets. Green bonds make funds possible for renewable energy and energy efficiency projects, hence in synergy with carbon markets, and ensuring that the financial system is supportive of the transition toward a low-carbon economy. A strong green bond market, combined with carbon trading, could present India with the financial resources it requires to encourage investments in low-carbon technologies beyond what the NAPCC efforts are doing today. 

Comparative Insights from Global Carbon Markets

The EU Emissions Trading System (EU ETS), the world’s oldest carbon market, shows that emissions trading can achieve reductions at a low cost. Leitao et al. (2021) stress the importance of strong governance, price stability measures, and complementary green finance solutions like green bonds. While the EU ETS has successfully reduced emissions in energy-intensive industries, it has also faced challenges such as price volatility and industry resistance. These lessons are critical for India, which will need a robust regulatory framework to ensure predictability and compliance. As with the EU, India can also make use of carbon markets to attain least-cost reductions in emissions. India’s design for its carbon market must take into account its particular socioeconomic problems, including its high reliance on coal and massive informal sector. Comparative studies, such as China and the EU, show that carbon markets need to be flexible and supported by complementary policies to address these challenges, like financial aid for vulnerable sectors and small company capacity-building initiatives.

The paper presents a convincing argument that successful integration of green finance mechanisms, like green bonds and carbon markets, may increase the overall effectiveness of emissions trading systems. This integration would, therefore, reduce the carbon leakage risks and ensure that the efforts at emissions reductions do not impede the economic growth, compatible with India’s objective to balance climate action with long-term economic development. Summing up, the European Union’s experience with carbon markets and green finance acts as a road map for India, but changes are to be made to fit this particular developmental and economic environment of the country. This improvement in its approach towards carbon pricing and capacity to attain climate as well as sustainable development goals can be done through these global frameworks.

Method

This study employs a mixed-methods approach to assess the viability of carbon markets in India, including a literature review, quantitative modelling, and case studies. The literature review examines existing policies, research on carbon markets, and India’s climate duties. The AIM/Enduse and IMACLIM models are used in quantitative analysis to assess economic and environmental impacts. Case studies, such as CDM projects and the Delhi Metro, provide practical insights, whilst stakeholder interviews help uncover challenges and opportunities. This technique conducts a comprehensive assessment of carbon markets’ capacity to satisfy India’s climate and development objectives.

Suggestions

Addressing Socioeconomic Barries – India’s potential to establish a viable carbon market is limited by significant socioeconomic, institutional, and technological challenges. Vulnerable sectors, particularly MSMEs, lack the financial and technological resources to participate successfully owing to outdated technology and poor profit margins. Carbon pricing systems may disproportionately affect low-income households, raising costs and reducing affordability. To address these disparities, auction revenues need to be channeled into poor regions as transfer payments, skill creation programs, and infrastructure upgrades. Institutional capacity in India needs to be further fortified, as the PAT and REC schemes remain disjointed and inefficient in nature. An effective governance structure built around an independent regulatory agency and state-of-the-art MRV employing AI and IoT is sure to improve accountability and transparency.

Carbon leakage and competitiveness is a serious challenge, particularly in trade-exposed and coal-based industries, such as steel and cement, which have a high cost under a carbon price regime. Border carbon adjustments and free allowances can make an inducement from moving away into lenient jurisdictions a more complicated proposition for businesses.

Technical and Financial Barriers – A major issue is to set up a robust technical infrastructure for the carbon market. Although green bonds and foreign climate investment have the potential to support renewable energy and energy efficiency projects, their limited popularity in India highlights the need for bigger scale and alignment with carbon market objectives.

Public Awareness – This aspect is very important as people may not be aware of the carbon markets and strong interests by fossil fuel, which could help to stifle any reforms. Open communication with all stakeholders, interacting much more with companies, governments, and civil society to understand and overcome opposition, will also prove helpful. Complementary initiatives like sovereign green bonds and simple regulatory frameworks can speed up this transition to low-carbon technologies.

Sustainable Carbon Markets – Finally, the country will be able to establish an emission-reduction-linked carbon market that aligns its emission reductions with long-term development, ensuring competitiveness and inclusivity, by means of a combination of equitable redistributive policies, strong institutional mechanisms, technological innovation, and stakeholder engagement.

Conclusion

Indian carbon markets have great potential in facilitating sustainable development in tandem with ambitious climate goals. India may achieve a balance between emissions reductions and economic growth by aligning its carbon market design with global best practices and tailoring it to its own socioeconomic challenges. This study stresses the role of carbon markets in reducing GHG emissions at a reasonable cost, encouraging investment in low-carbon technologies, and alleviating socioeconomic disparities. However, certain challenges must be solved to ensure long-term viability. These include reducing carbon leakage risks, maintaining the competitiveness of vulnerable sectors such as MSMEs, and addressing carbon pricing’s disproportionate impact on low-income communities. Redistributing auction proceeds, providing targeted financial assistance, and building skill-training programs for workers in transitional industries are all important ways for achieving equity in climate action. A robust digital MRV system based on AI and IoT technologies can be expected to improve transparency, reduce transaction costs, and increase compliance.

This can only be done with a stable and predictable policy framework by India, through long-term carbon reduction goals, involving widespread stakeholder engagement, and striking the right balance between regulatory control and market flexibility. According to global norms, India might adjust its plan to realize its development goals, in the process making room for fair and equitable transitions to a low-carbon economy.

As India pursues the ambition of being a global leader in sustainable development, carbon markets are going to be a game-changing policy tool. Resolution of these issues and taking full advantage of new opportunities will enable India to not only meet its climate goals but also to support economic resilience, social equity, and environmental sustainability, presenting an example for other developing nations that can be scaled up. The time to act is now, since further delay would aggravate the socioeconomic costs of inaction in the face of a looming climate crisis.

References

SUBMISSION DETAILS –

NAME: BHOOMI RANJAN

COLLEGE: SYMBIOSIS LAW SCHOOL, PUNE