The carbon regime has yet to come into effect, but the voluntary market is already buzzing

At the heart of this market are International Renewable Energy Certificates (I-REC), which have been collected by the country’s fast-growing clean energy sector. About 20 renewable energy producers sell these certificates, while buyers include multinational corporations including Big 4 consultants and major technology companies, industry participants said.

“When I look at the domestic carbon credit market today, it is mainly companies buying I-RECs. This is because everyone wants to first achieve their energy transition goals and reduce their scope 2 emissions,” said Siddhanth Jayaram, co-founder of Climes, a company that helps companies track and reduce their emissions.

Scope 2 emissions are a company’s indirect greenhouse gas emissions caused by the production of electricity that it consumes. Scope 1 emissions are the direct emissions caused during business operations.

One I-REC corresponds to one megawatt hour (MWh) of renewable energy. Buyers can redeem these certificates to add the carbon emissions reduced by this clean energy to their emissions count to reach their net-zero goals.

Issuance growth flat

According to Evident I-REC registration data published by S&P Global in a recent report, around 7.8 million I-RECs were issued in India in 2023. Year-on-year issuance growth remained flat in 2023, after growing 119% in 2022.

Besides I-RECs, virtual energy purchase agreements (VPPA) and carbon avoidance credits have also taken off, Jayaram said. VPPAs are contracts in which the energy producer supplies an agreed amount of renewable energy to the electricity grid and the buyer receives green credits for this. Carbon avoidance credits are certificates awarded for choosing business practices that reduce carbon emissions that would otherwise have occurred.

“The trading of I-RECs is largely done in the voluntary market. In the last three to four years, we have seen a huge demand for these certificates due to the Scope-1 and 2 requirements,” said Aditya Malpani, senior director for Open Access and Regional Business Head – West at Ampin Energy Transition, a renewable energy company.

India has emerged as one of the largest sellers of I-RECs thanks to increasing renewable energy generation in the country. However, only 4.5 million of the I-RECs issued in India in 2023 were redeemed, resulting in an issuance to redemption ratio of 2.4 to 1, according to Evident data. Hydropower I-REC prices in India fell then month on month by 7.9% to about 70 cents ( ₹58, approximately) at the end of January, according to S&P Global Commodity Insights.

“Currently, the market size is small and only about 50 lakh certificates are traded annually, which accounts for about 400-500 MW of renewable energy. These are largely in the short-term market. As I-RECs gain momentum in the long term, we expect the market size of I-RECs to grow to 3-5 GW in the coming years,” said Ampin Energy’s Malpani.

Other forms of carbon offsets

Carbon offsets other than I-RECs are yet to take off in India, although there are some green shoots. Climes is planning agroforestry projects on 2,000 hectares of degraded land in Andhra Pradesh, Telangana and Maharashtra to earn carbon credits. The company will provide local farmers with saplings and facilitate irrigation. Farmers will keep the proceeds from the products and receive a portion of the revenue from the sale of carbon credits generated from the project, Climes co-founder Jayaram said.

The company expects to generate 500,000 to 600,000 credits from such projects over the next three to four years, he said. One credit corresponds to one million tons of carbon captured. These credits can then be sold for an over-the-counter price of $10-20 per credit ( ₹835-1,670), he said. The company expects to generate 10 to 12 million carbon credits from these projects over the next twenty years.

Regulation

India still does not have a compliance-based carbon credit regime, requiring polluting industries to meet emissions reduction targets. India’s Perform, Achieve and Trade (PAT) program sets energy consumption reduction targets for certain energy-intensive industries compared to a base year. Excess energy savings that exceed targets earn energy saving certificates (ESCerts), which can then be traded with companies that do not meet their targets.

The government introduced the Carbon Credit Trading Scheme (CCTS) last year, which will follow PAT and set carbon emission reduction targets instead of lower energy consumption targets.

Currently, all transactions, including those of I-RECS, take place on the voluntary carbon trading market.

“The voluntary carbon trading market has seen sharp growth, with many foreign players looking for high-value carbon offsets to achieve their sustainability goals,” said Deepto Roy, partner at law firm Shardul Amarchand Mangaldas & Co.

“Once regulations for domestic carbon credit trading are finalized, this market will become even larger, more lucrative and more competitive,” Roy said.