Overview

This issue brief discusses the role of financial players in the Indian Carbon Market (ICM) as it evolves into one of the largest carbon trading systems globally. The discussion is based on literature review and a stakeholder discussion organised by the Council on Energy, Environment, and Water (CEEW) in August 2023. Given that financial players are considered essential for efficient market functioning as they provide intermediation for capital allocation, price discovery, and offer financial instruments like derivatives. However, concerns about risks such as price volatility and market manipulation with introduction of these players in the market also needs to be addressed.

Key highlights

• Financial players such as hedgers, speculators, and arbitrageurs can help in price discovery and improving liquidity thereby significantly enhancing the ICM’s functionality.
• Key institutions like banks, asset managers, and commodity traders are integral to the market's success, providing information that is necessary for better decision-making by companies.
• Lessons from REC and PAT can offer insights into the timing and structure of financial players' inclusion in the ICM.
• While financial players could introduce risks like increased price volatility, a well-regulated system with proper safeguards can mitigate the potential of market manipulation
• Involving financial players early provides faster and deeper insights for companies and helps build capacity for both financial institutions and the government.