The implications of rising greenhouse gas (GHG) emissions on social and economic dimensions of daily life are yet to be fully understood. Climate change is driving humanity into uncharted territory, with extreme weather events becoming increasingly prevalent. These changes impact communities differently and have cascading effects on various sustainable development goals (SDGs).

The social and economic costs of climate change, compounded by GHG emissions, are immense. Governments face increased expenditures due to damage from extreme weather, alongside revenue losses. Carbon pricing emerges as a pivotal mechanism to address climate change, creating financial incentives to adopt low-carbon solutions. A well-crafted carbon pricing policy not only drives decarbonization in a cost-effective way but also generates significant government revenue. This revenue can be allocated to support stakeholders transitioning to a sustainable, low-carbon economy and fund climate-resilient and sustainable development.

India's Carbon Credit Trading Scheme

India's Energy Conservation Amendment Act, 2022 set the stage for a Carbon Credit Trading Scheme (CCTS). This initiative includes a mandatory compliance mechanism (a credit-based emissions trading system) for energy-intensive industry and power sectors and a voluntary offset mechanism. These instruments aim to help India meet its nationally determined contributions (NDCs) targets under the Paris Agreement by facilitating decarbonization, attracting clean technology investments, and mitigating risks from international measures such as carbon border adjustment mechanisms (CBAMs).

Globally, auctioning emissions allowances in emissions trading systems (ETS) for sectors that can bear to pay carbon costs has proven effective. It aligns with the 'polluter pays principle,' creating a robust price signal to reduce emissions. Auctioning also generates revenue for governments, which can be channelled into clean energy investments, just transition for communities reliant on fossil fuels, and support for vulnerable households. The CCTS's compliance mechanism presents an opportunity to generate significant revenue, supporting a cost-effective and equitable low-carbon transition for India while setting an example for other economies.

Revenue Generation Potential of India's CCTS

India's CCTS could yield substantial revenue if it incorporates the auctioning of allowances, a practice seen in leading ETS globally. In the power sector alone, auctioning allowances could generate an estimated $700 billion to $1.4 trillion by 2050 . Additionally, with CBAMs being implemented and considered by multiple jurisdictions, introducing auctioning for a certain proportion of allowances in energy-intensive industrial sectors may also be beneficial, by reducing CBAM charges and increasing government revenue that could be recycled to facilitate industrial decarbonization.

The pace of decarbonization could be further accelerated by providing early finance for companies, in advance of auctioning, as demonstrated by Japan's Climate Transition Bond.

Learning from international ETS frameworks, India can design its system to balance industrial competitiveness with emission reduction. The revenue generated through CCTS can support a just transition and bolster India's position as a leader in climate action.

Key Pillars for Effective Auctioning in CCTS

Ensuring a Conducive Power Market Ecosystem

The ability of a sector to pass carbon costs through to product prices is crucial for auctioning allowances. Globally, the power sector is the primary sector where this cost pass-through is most feasible. It is also one of the most important sectors to include in an ETS due to the scale of available cost-effective GHG emission reductions. As such, ensuring that the power market integrates seamlessly with the CCTS is essential for an optimized system.

For effective integration, carbon costs should influence power station dispatch decisions encouraging a shift to lower-carbon fuels and renewables, and such costs should be reflected in retail electricity prices to promote emission reductions from demand-side management. Some of the auction revenue could be used to mitigate potentially higher electricity costs for vulnerable consumer groups. Furthermore, in India, where the power sector faces challenges such as subsidies, inefficiencies in distribution companies (DISCOMS), and limited investment in infrastructure, a cost pass-through mechanism can alleviate financial strain, which could reduce subsidies, enhance efficiency, and improve electricity access.

Designing a CCTS Optimized for Auctioning

India's CCTS, as proposed, is a credit-based ETS, similar to Australia's Safeguard Mechanism and the first phase of Japan's GX-ETS. While credit-based systems can generate revenue, there is much greater scope for this with an allocation-based system, as seen globally. As such, GX-ETS is expected to transition from a credit-based to an allocation-based system in the next phase to enable auctioning for the power sector. 

India should develop a long-term plan for evolving the design of the CCTS compliance mechanism, taking into account the potential transition to an allocation-based system, as well as other options related to target/cap-setting and allocation. Such a plan would provide greater long-term certainty and predictability to obligated entities to help make effective decarbonization investment decisions.

Crafting an Effective Revenue-Earmarking Strategy

To maximize the benefits of auctioning under India's CCTS, the country will need a robust strategy for earmarking revenue that aligns with its broader decarbonization and equity objectives. This will involve identifying sectoral decarbonization targets and allocating funds to overcome specific economic and technical barriers, ensuring progress toward climate goals. The need of vulnerable stakeholders should be assessed, including industries and communities dependent on fossil fuels, to mitigate the social and economic impacts of the transition. Revenue distribution must be equitable and transparent, supporting stakeholders in achieving emission reduction targets while addressing potential energy cost increases for vulnerable populations. Additionally, selecting suitable financial instruments tailored to India's context is critical, drawing on best practices such as direct cash transfers, transition funds, and investments in alternative livelihoods for coal-dependent communities. Such a strategy would ensure that the transition is both just and effective.

Establishing Robust Governance for Auction Revenue

India's past experiences with initiatives like District Mineral Foundation and the coal cess highlight the importance of a robust governance structure to ensure that auction revenues are utilized effectively. Drawing lessons from global ETS frameworks, such as the EU ETS with its centrally and regionally managed funds, can provide valuable guidance for India. In a federal system, governance mechanisms must balance both national and state-level priorities. An effective partnership between key stakeholders within the state and national government can ensure efficiency and effectiveness of the system. For instance, a central decarbonization fund could be established to support the industrial and power sectors, aligning with overarching national objectives. Simultaneously, state-managed just transition funds could focus on addressing local needs, particularly in coal-dependent regions, ensuring an equitable and region-specific approach to transitioning to a low-carbon economy.

Carbon Pricing and its Impact on SDGs

Carbon pricing's ability to internalize the social costs of GHG emissions positions it as a powerful tool for achieving multiple SDGs. Its influence spans economic, social, and environmental dimensions. Some of the more obvious direct and indirect impacts of carbon pricing are summarized below.

Direct Impacts

SDG 13 (Climate Action):  Carbon pricing incentivizes and ensures cost-effective GHG emission reductions, encouraging the adoption of cleaner technologies and achieving national and global climate targets.

SDG 9 (Industry, Innovation, and Infrastructure):  Carbon pricing drives innovation by incentivizing a wide range of low-cost emission reduction techniques and by providing financial support to promote the adoption of advanced and innovative technologies that are not yet commercially viable.

SDG 7 (Affordable and Clean Energy):  Carbon pricing enhances the economic viability of renewable energy, accelerating the transition away from fossil fuels towards clean energy systems.

Indirect Impacts

SDG 8 (Decent Work and Economic Growth):  The shift to a low-carbon economy creates new markets and job opportunities in green sectors, contributing to sustainable economic growth . Carbon pricing could generate the revenue required to accelerate the achievement of these opportunities equitably.

SDG 10 (Reduced Inequalities): Revenue distribution mechanisms can alleviate the financial burdens on marginalized groups, promoting social equity.

SDG 3 (Good Health and Well-Being):  GHG emission reductions are closely associated with improvements in air quality, leading to better public health outcomes and lower healthcare costs.

Conclusion

India's upcoming CCTS represents a transformative opportunity to address climate change while advancing achievement of SDGs. Through strategic design and governance, the system can generate substantial revenue, drive decarbonization, and support a just transition. Leveraging global best practices and tailoring them to India's unique context will be critical for the success of this ambitious initiative. By prioritizing inclusivity, equity, and sustainability, India can position itself as a global leader in climate action. #