Carbon credits need more than a nod

Earlier this month, Britain recognised India's Carbon Credit Trading Scheme (CCTS) as a qualifying carbon-pricing mechanism under its Carbon Border Adjustment Mechanism (CBAM). India, thus, joins an established club of recognised carbon-pricing jurisdictions. The move lends international credibility to its market-based carbon-pricing system, even before its real-world functioning has been tested.

But inclusion in the scheme is no exemption from CBAM. When calculating the carbon levy at Britain's border, Indian exporters of aluminium, iron and steel, cement, and fertilisers will be able to deduct their cost of complying with CCTS. Exporters of hydrogen, included in CBAM but not CCTS, will have to pay the full amount of the levy.

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The total CBAM levy will depend on the amount of embedded carbon in the product, and applicable price under the Indian domestic system. With the anticipated CCTS opening price of $10 a tonne, relief for Indian exporters is relatively small. However, because Britain will offset compliance costs under CCTS, it could incentivise Indian industry to buy credits domestically and could help with decarbonisation.

The recognition, however, doesn't automatically strengthen India's efforts to achieve equivalence with existing or future carbon border adjustment mechanisms. It does, though, demonstrate the value of sustained technical engagement in addressing complex issues in a mutually beneficial manner. It should make India consider joining platforms like the Brazil-sponsored Open Coalition on Compliance Carbon Markets. Like the EU, Britain says CBAM is a climate measure. While the recognition addresses the issue of double taxation, it leaves questions about equity and retention of CBAM revenues unresolved.