Voluntary carbon market: Indian project developers in an ideal position

Global climate commitments have revived the voluntary global carbon market and it is blooming one spring in India. From an almost inactive market in 2020, with oversupply and rock bottom prices for carbon credits, the market has nearly quadrupled in 2021 and is well over the $1 billion mark. This trend in the global carbon market follows a clearly perceptible acceleration in climate commitment following the Paris Agreement, reaching a frenzy level ahead of COP26 in Glasgow in 2021. Today, more than a third of 2,000 of the world’s largest publicly traded companies are committed to net zero emissions by 2050 or earlier. There are over 4,000 companies committed to science-based goals (SBTs), more concrete mid-term goals compared to Net Zero goals. Then there are dozens of global companies that were already carbon neutral or committed to being carbon neutral.

These corporate commitments, combined, represent several billion tonnes of Scope 1, 2 and 3 emissions. Science-based targets, by definition, require that emission reductions be achieved through action; no compensation is allowed. However, both Net Zero and Carbon Neutral are based on the concept of “reducing emissions where possible, then offsetting the rest”. Therefore, these commitments inherently require carbon offsets or carbon removals to cover the last mile. This explains the recent rise of the voluntary global carbon market. The demand is driven by companies wanting to meet their ongoing carbon neutral commitments and companies locking in offset supply lines for the future to meet their Net Zero commitments.

India is one of the major beneficiaries of this rapidly growing voluntary carbon market. Outside of Africa, India holds the greatest potential to generate high-quality, genuinely additional carbon credits through projects that have significant socio-economic co-benefits. Demand for Indian offsets, as expected, comes from outside India. As the price of community project offset credits increases several fold from sub-$5 to above $5, Indian offset generators are beginning to feel the glory days under the Kyoto regime. . Offset project developers in India are quietly stepping up their projects. Carbon contracts are executed with aggregators and directly with project developers. The transactions take place in the form of outright credit purchase contracts as well as the financing of projects or project developers through advance forward contracts. Although large-scale developers may explore green bonds and/or social bonds, Indian developers have yet to realize this.

Although the euphoria of Indian project developers is justified, there are potential threats and risks that need to be considered. Unlike the Kyoto Protocol regime, where India had no emission reduction commitments, the Paris Agreement regime resulted in significant emission reduction commitments for India. Our Net Zero 2070 commitment and Nationally Determined Contributions (NDCs) to the Paris Agreement are ambitious by any measure. Along with these, there is a strong emerging view that India needs all emission reductions achieved domestically and therefore carbon credits generated in India should not be sold to the outside. In this context, the idea of ​​creating a national carbon market has been raised by many ministries and government agencies. This could impact demand for carbon credits and price discovery. It also poses a risk to existing forward delivery contracts with overseas buyers.

Another potential risk in India’s voluntary carbon market is the looming shadow of the GST. There has been at least one case where an Indian state has declared carbon credits as “property” and therefore taxable. There is also a ruling from Madras HC saying that carbon credits are per capita assets and not taxable. However, as trading volumes and the value of transactions increase, it is foreseeable that these transactions could incur GST. Carbon credit contracts should include provisions to deal with this eventuality.

The global voluntary carbon market is expected to reach $50-190 billion by 2030. It is expected that as we move closer to 2030 and within the visible range of many Net Zero commitments, the demand for offsets and carbon removals skyrocket. It is also expected that the unit price (per tonne) of offset as well as removal credit will increase significantly from current levels. However, with a low-carbon transition well underway and many transition technologies settling as if nothing had happened, generating truly additional offset credits may become increasingly difficult. Therefore, at some point in the future, the carbon market itself is likely to change from a carbon offset market to a carbon removal market. Meanwhile, Indian offset producers, especially those operating in the community space, are well positioned to reap rich dividends from the burgeoning voluntary carbon market.

(Author, Bose K. Varghese, is Senior Director – ESG Practice, Cyril Amarchand Mangaldas)

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