Implications of an Emissions trading scheme for India's Net-zero Strategy

A Modelling-Based Assessment

Aman Malik, Vaibhav Chaturvedi, Medhavi Sandhani, Pallavi Das, Chetna Arora, Nishtha Singh, Ryna Yiyun Cui, Gokul Iyer, and Alicia Zhao
July 2024 | Low-carbon Economy

Suggested Citation: Malik, Aman, Vaibhav Chaturvedi, Medhavi Sandhani, Pallavi Das, Chetna Arora, Nishtha Singh, Ryna Cui, Gokul C Iyer, and Alicia Zhao. 2024. Implications of Emissions Trading Scheme for India’s Net-Zero Strategy: A Modelling-Based Assessment. Environmental Research Letters. https://doi.org/10.1088/1748-9326/ad64ec.

Overview

India’s emission trading scheme (ETS), dubbed the Carbon Credit and Trading Scheme (CCTS), passed into legislation last year. CCTS will be an extremely important policy instrument in the path to reach net zero in 2070 because it essentially incentivises industrial entities to reduce emissions. However, experience from other nations, particularly the EU, has shown that designing an effective ETS is a tricky and continuous process. This first-of-a-kind study investigates several crucial questions regarding the role of the ETS in meeting long-term mitigation targets, sectoral interactions under an emissions cap, and the ETS's compatibility with existing energy and climate policies. Using an integrated modelling framework, we provide key insights that will be useful for policymakers designing India’s ETS.

Key Highlights

• The electricity sector emerges as the largest source of cost-effective greenhouse gas (GHG) reduction options and thus plays a critical role in an ETS.
• Reductions in the electricity sector are mainly from the switch from coal to new renewable energy (RE) installations; other industrial sectors would do fuel switching in the near term and increasingly opt for electrification and hydrogen use in the longer term.
• The carbon price in an ETS is affected by Renewable Purchase Obligation (RPO) policies through interaction with the electricity sector
• Financial transfers across sectors depends on emission allocation as well as the number and characteristics of sectors included in the ETS
• Auctioning of emission allowances could result in significant revenue for the government

Key Recommendations

• Use the ETS to reduce India’s emissions cost-effectively.
• Include the power sector in India's ETS because of its large potential to provide cheap emission credits.
• PReplace setting emission intensity targets for each sector with auctioning of emission allowances, in the long run. This would ensure that no particular sector receives windfall financial gains, ensure transparency and efficiency of the market, and provide revenue to the government.
• Account for the effect of existing energy and climate policies, particularly Renewable Purchase Obligations, while setting up sector targets in an ETS or while selecting which entities should be included in the ETS.