India’s carbon market will take time to emerge but its rewards could go beyond climate progress

This does little to counter nature’s response to the rise in heat-trapping carbon and methane emissions, seen in all kinds of environmental disasters like forest fires stoked by drought and increasingly heavy rainfall and floods.

Earlier this week, the EU’s Earth observation service Copernicus noted that for the first time, a three-year average from 2023 to 2025 is about to exceed the 1.5° Celsius cap on warming (above the pre-industrial level), after which the planet faces irreversible damage.

Hopes of slowing our descent into climate disaster are largely pinned on advances in clean technology. Displacing high-emission fossil fuels for energy has been made easier by solar panel costs dropping 90% over the past decade and battery storage costs softening more recently.

For industry, a key breakthrough includes a process that eliminates the release of carbon into the air while converting natural gas to hydrogen, which can be used as a fuel. India has been an early adopter of clean-tech, thanks to enabling policies designed to decarbonize electricity supply. As a result, renewables account for half our generation capacity.

But the challenge gets far steeper from here on.

For industries to emit less, they must invest in clean equipment in a manner that yields profits. Two months ago, the government set legally binding emission targets for a handful of energy-intensive sectors. These goals are premised on profits arising from efficiency gains and carbon prices in the domestic market.

While casting this net wider would call for large sums of capital, doing so will help develop a robust carbon market, which in turn would incentivize going green and the deployment of a wider range of clean technologies to that end.

Globally, fragmented markets mean prices vary widely across the world. In Africa, for instance, carbon credits sell for about €3 per tonne, while they cost 25-28 times more in Europe. In India, such credits earned via green electricity are priced at $2-5 per tonne. Carbon capture earns credits too; the use of a charcoal-like substance called biochar to do this can yield substantial earnings.

All of this offers India an opportunity. New Delhi could nudge the Global South to invest in carbon markets, deepen them and promote avenues for credit creation that could be turned into earnings. Solar panel expansion across Africa’s landmass, for example, could generate valuable credits in time to come. With some deft diplomacy, investment pacts with African countries may also help us secure access to rare earth minerals that are critical to clean-tech industries like electric vehicles and batteries.

A collective approach to green goals could enhance the Global South’s bargaining power, be it getting the rich world to provide climate finance or obtaining better exchange rates and terms as fractured carbon markets begin to converge. An equitable process of convergence could also ease the burden on companies that export goods to destinations like the EU, which plans to levy a border tax on carbon embedded in some products from next year.

Climate progress may remain a story of fits and starts, but its direction is clear and the mechanism of market pricing can help us along.