Thinking Point
VN Garg
The writer is former chairperson, UP Forest Corporation; former principal secretary, forest & environment; former chairman, UP Pollution Control Board, and former Honorary Secretary, Indian Institute of Public Administration (IIPA), UP Regional Branch Burning Agricultural Residues and Environment
The traditional approach to reducing pollution is a system of Command and Control regulations that prescribe emission limits and compliance methods for each facility or source. But this approach is based on a politically flawed foundation. It makes businesses and industries defensive. If we want business and industry to fight pollution rather than fight pollution control agencies, we should make it more attractive for business and industry. To do this, we should give incentives to develop new pollution control technologies. This can be done by using markets. The underlying idea is to consider the cost of pollution control while formulating public policy.
Emissions trading is a market-based approach to controlling pollution. Under the emissions trading system, the government sets an overall limit on emissions. Then it issues permits according to that limit. It may sell these permits or may allot permits to regulated polluters equal to the polluter’s baseline emissions. The baseline is determined by an agency of the government by reference to the polluter’s historical emissions. A polluter must hold permits at least equal to the pollution actually emitted during the defined time period. A participant can choose to emit more than its permits by buying from other participants, thereby paying a charge for polluting. On the other hand, a participant may choose to emit less than its permits by polluting less. In that case, such a participant can sell the extra permits held by it, thereby getting a monetary reward for reducing emissions and pollution. This is called Cap and Trade (Or CAT). Cap and trade provide the private sector with flexibility to reduce emissions. They can stimulate technological innovations while striving for economic growth. Emissions Trading has been adopted by a number of developed countries. It has also been criticised on many grounds including ineffectiveness.
India is currently the third-largest polluting country in the world. It is likely to contribute 6 percent of global greenhouse gas emissions by 2030. But Government of India has historically opposed taking on mandatory emissions reduction targets on the ground that climate change is a problem caused by developed countries. As a result, it has not been possible to achieve a consensus to have an Emissions Trading (cap- –and- trade) system or policy in that regard. However, a pilot project, Emissions Trading System, with an aim to reduce emissions of particulate, not carbon dioxide, in the three states of Tamil Nadu, Maharashtra, and Gujarat has been implemented.
Instead of an Emissions Trading System, India has taken two initiatives:
1. PAT System, or Perform, Achieve, and Trade system;
2. REC Trading System, which is a Renewable Energy Certificate Trading system;
In addition to the above two, India participates in the international Clean Defence Mechanism, as will be explained shortly.
PAT is somewhat different from the Emissions Trading System (ETS). Under ETS, absolute emissions reductions are achieved through trade in emissions reduction certificates or permits. The structure of PAT flows from the Energy Conservation Act of India of 2001, which requires 15 energy-intensive sectors to implement energy efficiency measures. Energy Conservation Act, 2001 was amended to enable trading of Energy Savings Certificates (ES Certs) within the PAT system in order to avoid default in obligations. PAT sets mandatory energy efficiency targets on 478 facilities that are either part of energy-intensive industries or members of the electricity sector. These 478 facilities comprise about 60 percent of India’s 2007 GHG emissions. PAT Energy aims to reduce emissions by 20 million tons of Carbon dioxide (e) as well as save 6.6 million tons of oil equivalent over the 2012-2025 period. All covered facilities are obligated to improve energy efficiency by 1-2 percent per year. Installations must achieve their plant-specific targets within a three-year compliance period. An installation that exceeds its SEC (Specific Energy Consumption) target will be able to sell its ES Certs for the amount of its surplus energy improvements to those installations that are unable to meet mandatory targets. Trading occurs via regulated exchanges. Platforms for trading ES Certs have been designated in the two power exchanges IEX and PXIL.
Renewable Energy Credit Trading System
India’s REC trading system was launched in November 2010. Its purpose is to promote renewable energy even in regions that have low potential for renewable energy generation. The Ministry of Power regulates the REC mechanism under Energy Act, 2003. The country’s State Electricity Regulatory Commissions (SERCs) sets targets for power companies to purchase a certain percentage of their total power from renewable energy sources. These targets are called Renewable Purchase Obligations (RPOs). The covered entities may trade RECs either within or across states. The Eligible Entities are the generators of renewable energy and the Obligated entities are the purchasers of this power (Utilities). Purchasing RECs is treated as the consumption of a certain quantity of renewable power and thus, can be used towards fulfilling the RPO of the Obligated Entities. Each REC represents one MWh of a covered type of renewable energy –solar, wind, small-scale hydro, biomass-based power, biofuels, and municipal waste–based power. As a result, facilities can meet their renewable energy targets even if the local climate is not well-suited for renewable energy generation. The REC system enables obligated entities to weigh the costs and benefits of achieving their renewable energy commitments by selling electricity from renewable sources or by purchasing RECs. The Central Electricity Regulatory Commission (CERC) is the Central authority responsible for co-ordinating REC processes and providing the central regulations for the REC scheme. The implementation of the RECs itself is done by SERCs (State Electricity Regulatory Commissions); they are responsible for setting or changing state RPOs, providing a regulatory framework for the state REC processes, and monitoring the REC scheme.
International Markets Clean Defence Mechanism
India is the world’s second-largest supplier of CERs (Certified Emissions Reductions) under the Clean Defence Mechanism after China. As of March 2015, India has cumulatively issued 13 percent of CERs out of the total of 1540.8 million CERS issued around the globe since 2001. Moreover, India has the second largest number of CDM projects in 2048 out of 8640 – registered with the CDM Executive Board. Energy projects, deriving from wind, biomass, hydro, and energy efficiency projects, comprise the majority of CDM projects originating in India. In March 2017, the World Bank granted India 8 million US dollars to design a pilot carbon market. Under the Paris Climate Agreement, India plans to reduce its emissions intensity by 33 percent below 2005 levels by 2030. A nationwide carbon market would help to achieve this. However, India has yet to establish its emissions trading scheme. It is hoped that in due course, India will move from the PAT system to a complete Emissions Trading System (ETS) which requires better data collection, better-trained manpower, and stronger non-compliance penalties.
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