Decoding Caveats In Carbon Trading Policy : Daily Current Affairs

Date: 01/09/2022

Relevance: GS-3: Conservation, environmental pollution and degradation, environmental impact assessment

Key Phrases: Perform, Achieve and Trade (PAT) scheme, Energy Conservation (Amendment) Bill 2022, ‘hard to abate sectors’ (HtAS).

Energy Conservation (Amendment) Bill 2022 was recently passed in the Lok Sabha and the much-awaited carbon trading market is expected to take shape.
In this context, let us decode caveats in the carbon trading policy and future prospects of India in this field.

There is a caveat that this law will be initially limited to ‘hard to abate sectors’ (HtAS). The term HtA raises several questions on the scope and efficacy of the policy.

Carbon Emission is expressed in terms of CO2 equivalent.
For India, annual emissions is 2,838 billion tonnes, of which abatable emission is about 1,561 billion tonnes including:
1. 1,122 billion tonnes or 40 per cent through substitution of thermal power by renewable solar and wind energy;
2. 439 billion tonnes or 15 per cent by switching over to electric road vehicles; and electric appliances in residential and commercial establishments.
3. The balance 1,277 billion tonnes or 45 per cent from process industries, animal husbandry and agriculture are ‘hard to abate’.

HtAS pertains to a sector where the transition to net zero emission status is difficult because of lack of technology and/or prohibitive cost.
Carbon Emission occurs during the burning of carbonaceous fossil fired fuels, or in industrial manufacturing processes of cement, steel, chemicals etc.
It can be eliminated by -
- Substituting energy source- renewable solar or wind energy for thermal power;
- Electric vehicles for petrol/diesel vehicles; and
- Domestic electric appliances instead of kerosene/gas.
Industrial processes where the nature of chemical reaction is such that carbon dioxide is an inescapable output, Carbon Emission can at best be reduced with better process efficiency
- Examples: in the production of cement clinker or iron in blast furnaces or chemicals and petrochemicals.

India’s cement industry is perhaps the most efficient in the world.
It has the emission intensity reduced to 576 kg of CO2 per tonne of cement against the global average of 634 kg.
But, it has limited potential for further process efficiency and continues to be an HtAS.

The Perform, Achieve and Trade (PAT) Scheme is a regulatory instrument to reduce specific energy consumption in energy-intensive industries, with an associated market-based mechanism to enhance the cost effectiveness through certification of excess energy saving which can be traded
The underlying logic of the PAT scheme was to curb energy demand in 13 energy intensive areas by improving their energy efficiencies —
1. Thermal power plants (TPP),
2. Cement,
3. Aluminum,
4. Iron and steel,
5. Pulp and paper,
6. Fertilizer,
7. Chlor-alkali,
8. Petroleum refineries,
9. Petrochemicals,
10. Distribution companies,
11. Railways,
12. Textile and
13. Commercial buildings.
By reducing energy consumption below a threshold limit that begets tradeable energy certificates, an entity indirectly reduces CE and concurrently earns revenue. Each certificate is for reduction of 1 MWH over a set target.
However, the PAT scheme does not incentivize efforts for the major direct CE reduction in HtAS emanating from industrial chemical processes.
Over and above improvement of energy efficiency, HtAS would entail R&D-led alternative technologies/processes, or substitution of raw materials, the technical feasibility and commercial viability of which are yet to be established.
Hence, as such, there is no potential for additional benefit from the PAT scheme for most cement plants in India.

It is often portrayed as a path breaking solution for decarburization. However, it does not curb the CE in HtAS but merely captures the unavoidable CE and transports over long distances to store underground at depths of +2 km.
It is an extremely expensive proposition. The operating cost is placed by the International Energy Agency typically at $50/tonne and calls for investment subsidy for most entities barring very large companies.
If HtAS does invest in CCS the carbon trading market becomes an incentive.

In the future, the carbon emissions of the energy sector will reduce substantially with gradual phase down/phase out of thermal power plants (by 2045).
However, the needs of India’s rapidly growing economy will lead to a quantum increase in demand for cement and steel-by 2050, the cement capacity is expected to increase from 330 million tonnes to 1,000 million tonnes and steel from 125 million tonnes to 440 million tonnes.
In this business-as-usual scenario, the aggregate carbon emissions are expected to increase to 6,033 billion tonnes and the HtA emissions could increase from 45 per cent to 76 per cent.
This threatens to derail the achievement of Net Zero Emissions by 2070 and hence, the introduction of the carbon trading market for HtAS is a step in the right direction.

The carbon trading market revolves around the presence of:
- Permissible threshold limits of CE for each industry,
- Market players’ success at decarburization, reducing CE to below threshold levels, and/or attained lower net CE by investing in carbon sequestration or afforestation,
- Polluting/inefficient market players whose CE exceeds the permissible threshold levels, and
- Pricing mechanism that acts as an incentive for sale of credits by efficient market players and purchase of credits by inefficient market players.
Europe has the largest carbon market operating for over 16 years. Industry has been lukewarm there, barring the power sector wherein carbon credits have helped expedite a switch from coal to gas-fired electricity.
Steel companies offset their carbon emissions by buying cheap credits from China, East Europe and other emerging economies and continue to pollute the environment.
It is generally accepted that carbon prices should be double of current levels to trigger a behavioral change and be attractive for renewable technologies like ‘green hydrogen’.

The UN Panel on Climate change has indicated a price range of $40-80 per tonne of carbon dioxide if global warming is to be pegged within 2 degrees by 2050.
However, the prices till the last quarter of 2021 were way below, in the range of $2 to $12 per tonne CO2.
In December 2021, the price crossed €50 per tonne and touched €56.35 ($68/tonne) which is encouraging.
While many analysts believe that the carbon credit price would touch $80/tonne level only by 2030, some are predicting a price of €110 ($136/tonne) in the near future.

The idea of a carbon market presupposes that market dynamics will enable optimum price discovery that is a deterrent for polluters and incentive for entities who invest in protecting the environment. This objective does not appear to have been realized so far.
Although these are early days, if the proposed carbon market in India does not become vibrant and robust quickly, there is a danger that HtAS will buy carbon credits at low prices and continue to increase their CE defeating the very purpose of a market-linked mechanism that determines a deterrent cost for pollution.
Hence, it is to be hoped that the carbon trading policy including the permissible threshold limits in each industry is carefully crafted to meet the twin objectives of growth and quality of life.

Mains Question:

Q. Carbon trading policy has potential to meet the twin objectives of growth and quality of life. Discuss in the Indian context. [150 Words].