India's Tryst With Green Markets: Challenges And Reforms In Renewable Energy Certificates

The need to have a sustainable growth story is necessitated by the fact that India is the fastest-growing major economy, and it is unlikely to give up that title anytime soon.

By Anuj Agarwal

The world is going green, and India is at the forefront. The need to have a sustainable growth story is necessitated by the fact that India is the fastest-growing major economy, and it is unlikely to give up that title anytime soon. However, being an emerging market with growing energy demands, the country has witnessed a considerable surge in CO2 emissions, quadrupling between 1990 and 2015. This period also marked India's transition from legacy economic policies to open economic policies, resulting in an impressive 6.5 per cent annual economic growth over the past 25 years, compared to sub-4 per cent growth in the preceding two and a half decades. India contributes seven to eight per cent of global greenhouse gas emissions, with per capita emissions remaining only one-fourth of the G20 average. At COP26, India pledged to achieve net-zero by 2027.

The need to adopt green and sustainable practices becomes even more critical for India to stay integrated into the global value chain. Both businesses and consumers are increasingly favouring responsible suppliers. Regulations just solidify this further. The EU has introduced the Carbon Border Adjustment Mechanism (CBAM), with the transition phase starting from October 2023 and coming into full force from 2026. The idea behind CBAM is to act as a carbon tax for goods entering the EU and prevent carbon leakage. Most companies bypass the EU emission regulations by shifting their production base outside of the EU. The EU is the second-largest destination for Indian exports after the US. The US has put in place the Inflation Reduction Act. Similar regulatory regimes will become the norm across key export markets. Compliance with emissions regulations will be vital if India is to rival the manufacturing and export success of countries like China and the Southeast Asian Tigers.

Recent times have seen India taking concrete measures towards sustainability. The Business Responsibility and Sustainability Reporting (BRSR) framework introduced by SEBI in 2021 necessitates ESG (Environmental, Social, and Governance) disclosures for the top 1,000 listed companies. Earlier voluntary, BRSR is now mandatory starting fiscal 2023. In 2023, SEBI introduced BRSR Core - a narrow and focused set of 49 ESG parameters. Starting with the top 150 companies, this will be increased to top 1,000 by fiscal 2027. SEBI has also decided to put in place a regulatory framework on ESG disclosures by listed entities, ESG ratings in the securities market, and ESG investing by mutual funds. Additionally, the regulator has decided to come up with norms for ESG Rating Providers. Last month, the Ministry of Power notified the Carbon Credit Trading Scheme 2023 to develop and govern the carbon market in India. The Ministry of Power notified the Carbon Credit Trading Scheme 2023 to develop and govern the carbon market in India. All this is good news.

India’s tryst with green markets is not new. Renewable Energy Certificates were introduced in 2011 to help resource-deficit states to meet their Renewable Purchase Obligations (RPOs). Under the Perform, Achieve and Trade (PAT) scheme, the Bureau of Energy Efficiency introduced energy-saving certificates (ESCerts). The scheme seeks to reduce the specific energy consumption (SEC), i.e., energy used per unit of production in energy-intensive large industries. However, these schemes faced challenges due to inadequate incentives and low targets. The price of the certificates was never able to truly incentivize them to become green or efficient. Targets PAT were too low and units overachieved targets, leading to a glut of ESCerts. In 2022, a floor price for ESCerts was introduced. The RPO targets have increased by 114 per cent, from 11.5 per cent in FY17 to 24.6 per cent in FY23. This is targeted to go up to 43.3 per cent by fiscal 2030. However, in fiscal 2022, only three states (Uttarakhand, Rajasthan, and Himachal Pradesh) managed to achieve the RPO target of 21 per cent. The cost of non-compliance is too low to incentivize compliance.

The success of green markets and regulations depends on their proper implementation, as greenwashing practices can undermine their effectiveness.

India aims to be a $5 trillion economy and has a target of 500 GW of installed renewable capacity by 2030. To maximise the potential for sustainable growth, India's carbon markets and standards must align with those of developed countries. A level playing field will enable India to fully embrace its sustainable growth journey and demonstrate its commitment to a greener future.

(The author is the Chief Economist and Head of Research at TruBoard Partners)

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