On 27th March 2023, less 2 months into India’s Budget which prioritized green growth, the government released the first draft of the Carbon Credit trading scheme to seek inputs. This was against the backdrop of the Energy Conservation (Amendment) Act 2022, which came into force at the beginning of 2023. The Act empowered the government to formulate and regulate India’s carbon trading scheme and issue Carbon Credit Certificates, which will allow for carbon offsets by entities working towards reducing their emissions.
While such news of the ever-growing carbon market being regulated by the Indian government is progressive, it is important to demystify what this burgeoning phenomenon in the climate domain entails. For starters, one carbon credit, or one carbon offset, is a representation of one metric ton of carbon dioxide which has either been removed from the atmosphere or recycled.
To use a crude example, an emission-intensive factory in Mumbai can technically reduce or ‘offset’ its carbon emissions by 5 metric tons of CO2 in a year by purchasing 5 carbon credits from either a carbon offset project (like an afforestation project elsewhere, say in Tamil Nadu, which sequesters 5 tons of CO2 annually) or by purchasing it from a factory, say in Punjab, which is not using the 5 carbon credits it has been allocated.
Tighter regulations around carbon markets can lead to lower carbon emissions, and allow for greater investments in carbon offset projects like renewable energy, afforestation, and sustainable agriculture. In theory, regulating carbon markets, and subsequently, carbon offsets, are an effective tool when it comes to decarbonization and meeting climate targets such as India’s net-zero target by 2070.
However, when we look at implementing such regulation, certain drawbacks of carbon offsets end up doing a disservice to the intent of reducing emissions overall and creating a climate-positive, net-zero future. In some cases, carbon offset activities and related entities have been plagued by accusations of corruption and ineffectiveness. As India explores the future of carbon markets, the benevolence of carbon offsets must be weighed against the emerging downsides they pose. Integrating innovative technology such as AI & blockchain in carbon markets is a way to bring about more transparency, accountability, sustainability, and dare I say, more ethical execution of offsets.
By definition, carbon offsets help environmental projects secure funding, creating a virtuous loop that helps them sustain and sequestrate more carbon along the way. For businesses, carbon offsets present the benefit of reducing their carbon footprint in a less capital-intensive manner. By issuing around 17% of carbon credits issued globally from 2010 to 2022, India has been able to support economic activity locally while also reducing its carbon emissions. With further regulation and a national carbon credit scheme, India can reap socio-economic and environmental benefits through carbon offsets and is poised to be a significant stakeholder in this multi-billion-dollar global market. Beyond that, given the large agricultural sector and the potential of agricultural soil to absorb carbon, if India’s farmers can be educated and trained on leveraging sustainable agriculture practices and agroforestry for gaining carbon offsets, there can be significant progress in delivering positive value to a majority of the rural population. An example of such a farmer is Kuldeep Singh Cheema, whose farming practices have generated carbon credits that are up for sale in global voluntary markets.
With the establishment of the Indian Carbon Markets Governing Board and the Bureau of Energy Efficiency being the administrator of India’s Carbon Credits Scheme, stringent rules about the issuance and regulation of carbon credits will hopefully see a revitalized growth in domestic carbon markets. Eventually, this will feed into the intent of carbon offsets towards climate action, and socio-economic benefits, if implemented effectively.
The picture isn’t sunshine and roses when it comes to carbon offsets. In fact, as things stand, there are various ways in which carbon offsets may not only fail to meet their objectives but may even be counterproductive in our collective pursuit for a sustainable future.
What stands out as the biggest theoretical limitation for carbon offsets is that it essentially becomes a license for polluting organizations to continue polluting, and not make actual efforts towards decarbonization or reducing emissions, which is the primary need of the hour. In India, there exists the risk of carbon offsets being used to continue to invest in emission-intensive coal-based power plants; instead of being divested and phased out, such environmentally hazardous projects can continue polluting (not to mention other social and environmental negative externalities) while simply ‘offsetting’ their emissions elsewhere. “Theoretically, carbon offsets fail the central principle of additionality. It is difficult to determine the counterfactual of whether emissions reductions would have occurred in the absence of an offset project,” says Venugopal Rajamani, an ESG and Sustainable Finance Advisor at GIZ. “Studies have shown that substantial portions of the offset market actually do not serve their intent. Funding the protection of a seemingly threatened forest (which is actually not under any threat) is one such example… more than half the quality of offsets fail this central principle of additionality.”
Second, there are various dimensions to sustainability. So, a carbon offset project in a geographical area that is not near the source of the polluting organization buying carbon credits from the carbon offset project, may be, in the crudest sense, meaningless. By buying carbon credits from an afforestation-based offset project in South India, a Delhi-based factory with large carbon emissions that affects the region’s deteriorating air quality helps nobody but the factory itself in justifying its continued emissions. An emission reduction in one place is not climatically equivalent to an emission reduction elsewhere.
In addition, there is the case that the carbon sequestration capacity of an offset such as a forestry project in an area prone to droughts, pests or wildfires may reduce over time. Such a project may not actually be serving the intent of being a lever for reducing the amount of carbon emission equivalent to the price of the credits when the purchase initially happened. However, as we explore later, the integration of digital technology in carbon markets and offset activities like AI, blockchain, machine learning, big data analytics, Internet of Things, may negate this current limitation.
Finally, there is simply not enough time to allow organizations to leverage carbon offsets as a way of seemingly reducing their emissions. The latest IPCC report paints a gloomy picture which calls for an immediate overhaul of current industrial practices towards complete decarbonization. The pursuit towards a net-zero future cannot wait for innovative accounting practices to show emission reduction from industries through carbon offsets, but rather an actual effort towards reducing emissions from polluting entities.
In the context of India, developed countries can easily continue polluting and buying carbon offsets from the global South to seemingly be emitting less, thus becoming a bigger contributor to climate change than they already are. After all, historical emissions by developed countries have a cumulative effect on contributing towards global warming to a major degree. Recently, India took the welcome step of announcing a ban on the export of domestically-produced carbon credits, which would restrict developed countries from leveraging offsets and carbon credits from India as a license to continue polluting. However, the ban was never operationalized officially or issued formally as a government notification.
Benefits and drawbacks as there may be, there is a darker underbelly of carbon offsets, plagued with issues of corruption, fraud, and illegalities. Fraudulent carbon offset projects, wherein offsets are sold for emission reductions that have already taken place, or wherein these reductions are not verified, are commonplace. South Pole, a renowned climate consultancy, faced criticism after multiple fraudulent carbon offset projects through which carbon credits were sold to top companies globally came to light. According to Rajamani, “Oversight for the carbon offset market is in catch-up mode; this is true not just of regulators in India, but around the world. As a result, on one hand, we have a shortage of high-quality offset projects… on the other, we have no credible mechanisms to ensure their quality and transparency. Given these limitations, offsets should remain a last resort after a company has taken all other direct actions to reduce their emissions.”
There have been several instances of the lack of oversight that Rajamani alludes to, both at home and abroad. In Gujarat, one of the biggest producers of the Clean Development Mechanism carbon offset credits, the GFL gas project, was found to have profited immensely from selling credits to the biggest polluters in Europe, who found a cost-effective way to meet climate targets without actually reducing emissions at all. Some of India’s wind farms have been found to be used for offsetting wherein they were going to be built anyway, thereby inevitably raising emissions by giving the buyers the license to pollute. The Northern Kenya Grassland Carbon Project, a much-celebrated favourite of many companies to buy carbon credits from, was suspended by Verra (a carbon offset verifier) because of a lack of verification of carbon sequestration levels.
Forests in the US which were under no threat of deforestation have been used to generate offsets by generating inaccurate claims of its protection, insufficient oversight by carbon credit registries have fueled negative environmental impacts, and an offset project in Uganda has garnered criticism of “carbon colonialism” because of its displacement of local communities. Without careful social and environmental assessments of carbon offset projects, such issues are bound to be commonplace.
In fact, there is a long history of a plethora of carbon offset projects being notorious for overpromising but underdelivering. Activists also argue that carbon offsets shift the responsibility of bolstering climate action from the wealthy to the poor. All said and done, ‘offsetting’ our way to net-zero emissions reinforces a redundancy. Offsets, to a large extent, have caused more harm than good if each case is scrutinized as a sum of its parts.
A Collective Hope Ahead
Amidst the doom and gloom, carbon markets and carbon offsets can be improved by leveraging technologies to make them more transparent and accountable. When combined, disruptive technologies such as artificial intelligence, machine learning, and the Internet of Things can help monitor the performance of carbon offset projects with greater accuracy across their value chain and lifecycle. Technologies like blockchain and big data analytics can make transactions in carbon markets more transparent, allowing actors to analyze all sorts of data from carbon credit registries.
Saudamini Sharma, who works as a Strategy Manager at Thallo, says the organization is addressing three main challenges causing carbon marketplaces’ inefficacy, namely the “lack of transparency, lack of carbon credit supply availability, and the difficulty of transaction execution”. They do so by “leveraging blockchain technology to establish trust (through immutable data and transferring its ownership), facilitating easy digital transactions, and digitizing carbon credits to ensure the liquidity of supply in carbon markets.” As more carbon offset projects are set to originate in India, companies like Thallo would “help with financing for developing projects on the supply side, and with accessing a global aggregate supply of diverse offsets for Indian enterprises on the demand side”, in the words of Sharma.
“The design of carbon trading scheme is to be prescribed through rules after consideration of all relevant aspects, including the transition of existing schemes of tradable certificates to the single national framework,” said Union Minister of Power RK Singh while laying down the Electricity Amendment Bill (2022) in Parliament in February. The government’s pursuit towards ensuring a single, unified, regulated, and efficient carbon market has initiated consultations and inputs for releasing details of a national carbon market in June.
While integrating digital technologies will certainly be a positive step in the ever-growing carbon offset marketplace, a re-evaluation of what carbon offsets hope to achieve — and are realistically achieving against the backdrop of a climate emergency — is the need of the hour. While those carbon offset projects that act on the principle of additionality by increasing forest cover, or by adding more renewable energy into the energy mix are beneficial in our battle against climate change, they can by no means be used as an excuse for polluters to keep polluting. Things would be fine if ‘less was being done by more’, wherein lesser emissions were actually being achieved through more offset projects; unfortunately, the writing that this is seldom the case is clear on the wall of policymakers. Paying no heed to this reality renders our collective battle against the climate crisis a difficult one to come out on top of.
Featured image of a Solar Power Plant in Telangana by Thomas Lloyd Group