Implications of emissions trading scheme for India’s net-zero strategy: A modelling-based assessment

Abstract

To help meet its near-term NDC goals and long-term net-zero 2070 target, the Government of India has planned to establish a Carbon Credit Trading Scheme (CCTS), i.e., a domestic emission trading scheme (ETS). An ETS is an inherently cost-effective policy instrument for emission reduction, providing the greatest flexibility to reduce emissions from within and across sectors. An effective ETS requires design features that consider country-specific challenges and reflect its role within the larger policy package to achieve long-term emission reduction. Within the Indian context and in this study we therefore investigate - i) What might be the role of the ETS in achieving India’s long-term mitigation targets? ii) How might the various sectors interact under an emissions cap? iii) How might the ETS interact with existing energy and climate policies? We do this analysis by running four main scenarios using the integrated assessment model GCAM (v6.0), adapted to India-specific assumptions and expectations. These scenarios are - i) NZ (net-zero), ii) NZ + ETS, iii) NZ + CC (command and control), and iv) NZ + RPO (renewables purchase obligations) + ETS. The NZ scenario assumes India’s near-term and long-term climate commitments of net zero by 2070. Scenarios with ETS (ii and iv) apply an emissions cap on four sectors - electricity, iron and steel, cement, and fertilizer. The scenario with CC applies a homogenous emission cap on each of the chosen sectors but doesn’t allow cross-sectoral trading. The last scenario includes renewables purchase obligations (RPOs along with an ETS. We show that under a specific ETS emissions cap: i) the electricity sector emerges as the largest source of cost-effective greenhouse gas (GHG) reduction options; ii) ETS with trading across sectors is 30-50% more cost-effective than ETS with trading only within sectors, iii) RPOs can be complementary to an ETS although the impact of RPOs on GHG reductions in the electricity sector would need to be considered when setting the level of the ETS cap (or emissions intensity targets) or the RPO targets to avoid low carbon prices, and iv) the direction and volume of financial transfers across sectors depends on allocation targets set by the government. Based on these results we provide design recommendations for India’s ETS.