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Introduction

The urgent need to mitigate climate change has led to a global push towards implementing carbon pricing mechanisms as a vital tool for reducing greenhouse gas (GHG) emissions. As one of the world’s largest economies and a major emitter of carbon dioxide, India’s role in addressing climate change is pivotal. This article aims to provide a comprehensive overview of the status of carbon pricing implementation in India, highlighting both the challenges and opportunities that lie ahead.

Implicit Pricing Mechanisms and Their Impact

While India does not currently have a nationwide, explicit carbon pricing mechanism, several implicit pricing mechanisms are already at play in the country. These mechanisms, though not specifically designed for carbon pricing, indirectly affect different sectors. The key implicit pricing mechanisms in India are:

1. Fuel Excise Taxes: Fuel excise taxes, covering 54.7% of emissions, have seen recent increases. This approach effectively internalizes the carbon cost of fossil fuels and incentivizes the adoption of cleaner alternatives.

2. Coal Cess: The coal cess levies a charge on domestic coal production, with the revenue generated contributing to clean energy initiatives. By making coal production more expensive, this mechanism encourages the use of renewable energy sources and reduces GHG emissions.

3. Perform Achieve Trade (PAT) scheme: The PAT scheme mandates energy efficiency improvements in specific industries. It rewards industries that exceed efficiency targets with tradeable credits on a platform, thereby creating an implicit price for carbon emissions.

4. Renewable Energy Certificates (RECs): Electricity distributors in India have a mandatory purchase obligation for RECs, incentivizing renewable energy generation. This mechanism promotes a market for renewable energy and indirectly prices carbon emissions.

Net Effective Carbon Rate (ECR) and National Carbon Market

According to estimates by the Organisation for Economic Co-operation and Development (OECD), 54.7% of Indian GHG emissions have a positive ECR, albeit below €60/tonne CO2e. While this ECR falls within a mid-range carbon cost estimate, it highlights the potential for further pricing measures.

To harness the benefits of a market-based approach, India launched a pilot phase of a national carbon market in 2020. Covering eight industrial sectors, this initial phase aims to transition to full compliance by 2026. Developing a robust and effective national carbon market can provide cost-effective solutions for emission reductions and attract green investments, thus aiding India’s ambitious climate goals.

Internal Carbon Pricing and Corporate Leadership

The adoption of internal carbon pricing by companies in India is steadily increasing. By setting shadow prices, companies can account for the potential carbon costs in their decision-making processes. This trend showcases corporate leadership in addressing climate change and highlights the role of the private sector in driving carbon pricing implementation.

Challenges in Implementation

Though India has made commendable progress, several challenges and considerations must be addressed to ensure the successful implementation of carbon pricing mechanisms:

1. Complexity and Fragmentation: The patchwork of implicit pricing mechanisms in India creates complexity in cost assessments and monitoring emissions reductions. Streamlining and harmonizing these mechanisms can enhance efficiency and transparency in the carbon pricing landscape.

2. Distributional Impacts: Carbon pricing has the potential to increase energy costs, which may disproportionately affect vulnerable populations. To ensure social equity, careful design and targeted support measures are necessary, such as income redistribution and subsidies for low-income households.

3. Competitiveness Concerns: Industries fear that carbon pricing could put them at a disadvantage when compared to international competitors who do not face similar carbon costs. Addressing these concerns requires well-designed policies that provide supportive measures such as border carbon adjustments and transition assistance for affected industries.

4. Political Feasibility: The successful implementation of carbon pricing relies on the collaboration and consensus of political stakeholders and effective engagement with various industry sectors. Building a broad-based coalition for climate action will be crucial to overcome political challenges.

Opportunities and Outlook

Despite the challenges, the implementation of carbon pricing in India presents significant opportunities for the country:

1. Market-Based Approach: A well-designed national carbon market can provide a cost-effective pathway for emissions reduction while facilitating the growth of green investments and innovative solutions.

2. Harmonization with Global Trends: Aligning India’s carbon pricing mechanisms with international frameworks can foster technology transfer and enable carbon market linkages, enhancing India’s role in global climate efforts.

3. Innovation and Technology: Technological advancements play a vital role in lowering emissions reduction costs. Investing in research and development can help develop cleaner technologies and support adaptation efforts in diverse sectors.

4. Inclusive Growth: Carbon pricing can be designed to promote the adoption of cleaner technologies and renewable energy sources, creating a greener and more sustainable economy. Additionally, the transition to a low-carbon economy can generate green jobs and contribute to inclusive growth.

India’s journey towards implementing carbon pricing is well underway, with growing recognition of its significance in tackling climate change. The existence of implicit pricing mechanisms, the development of a national carbon market, and increasing corporate adoption of internal carbon pricing all signal India’s commitment to addressing environmental challenges.

To uphold ambitious climate goals, India must address the challenges of complexity, distributional impacts, competitiveness, and political feasibility. By doing so, India can tap into the opportunities presented by a market-based approach, global harmonization, technological innovation, and inclusive growth.

The ongoing debate on carbon pricing in India serves as a testament to the nation’s determination to find sustainable solutions. Continued research, stakeholder engagement, and collaboration are essential for designing and implementing effective mechanisms that will create a cleaner, more resilient, and sustainable future for India and the world at large.