Green Credit Programme | A step towards India’s commitment to Climate Change

Green Credit Programme | A step towards India’s commitment to Climate Change

At the 26th edition of the COP held in Glasgow, United Kingdom, India presented its five nectar elements (Panchamrit) of climate action, which was a step towards achieving India’s long-term goal of net zero by 2070.

In the past, India had ratified the United Nations Framework Convention on Climate Change, 1992 (“UNFCCC”) with an aim to stabilise the greenhouse gas emissions. Guided by the principles of Equity and Common but Differentiated Responsibilities and Respective Capability (‘CBDR-RC’) stipulated under the UNFCCC and Paris Agreement, India made the following commitments at the 25th edition of the Conference of Parties (“COP”) held at Madrid, Spain: (a) reduce the emission intensity of its greenhouse gas emissions by 33%-35% over 2005 levels by 2030; (b) generate 40% of its installed power capacity from non-fossil sources by 2030; (iii) additional carbon sink equivalent to 2.5-3 billion tonnes of carbon di-oxide through forest and tree cover by 2030.

Subsequently, at the 26th edition of the COP held in Glasgow, United Kingdom, India presented its five nectar elements (Panchamrit) of climate action, which was a step towards achieving India’s long-term goal of net zero by 2070. As part of ‘Non-Quantified Goal’, the concept of Lifestyle for the Environment (“LiFE”) was introduced by the Prime Minister of India, calling upon “mindful and deliberate utilization instead of mindless and destructive consumption”. LiFE puts individual and collective duty on everyone to live a life that is in tune with earth and does not harm it.

To take the concept of LiFE ahead, the Ministry of Environment, Forest and Climate Change (“MoEFCC”) has introduced the Green Credit Programme (“GCP”) by enacting the Green Credit Rules, 2023 on 12 October, 2023 (“GC Rules”) which lays down a framework to protect the environment by incentivizing pro-environmental actions propagating healthy, sustainable and environment friendly development.

Recently, the Hon’ble Prime Minister Narendra Modi together with President Shiekh Mohammed bin Zayed Al Nahyan of UAE, co-hosted high level event on GCP at the 28th edition of COP held in Dubai, and launched a web platform (https://ggci-world.in/) which would serve as international platform for dialogue, collaboration, repository of policies and best practices which incentivizes the environmentally friendly actions by way of issuance of instruments i.e. green credits¹. Green Credit Initiative (“GCI”) was also launched under the broader framework of the GCP with a primary focus on afforestation. The GCI aims to register land on the web portal for plantation activities which would be accessible for compensatory afforestation and corporate social responsibility driven plantations2. All activities relating to plantation can be registered by eligible entities (whether from land bank or other sources), pursuant to which green credits would be issued to such entities based on methodologies notified by the Central Government³.

Broader framework of GCP regime in India

Under the GCP, industries, companies, and other entities can offset their environmental obligations by generating or buying green credits. Green credit is a singular unit of an incentive provided for a specified activity under the GC Rules having a positive impact on the environment and which can be traded on a domestic market platform. Under the GC Rules the following activities would entitle a person or an entity to green credits⁴ : (a) tree plantation to enhance green cover across the country; (b) water management to promote conservation, harvesting, treatment and reuse of water; (c) sustainable agriculture which would focus on land restoration improving productivity, soil health and nutritional value of food produced; (d) sustainable and improved practices for waste management; (e) reduction of air pollution and other pollution abetment activities; (f) mangrove conservation and restoration; (f) ecomark label development under the under the Ecomark Certification Rules, 2023 (“Ecomark Rule”) to encourage the manufacturers to produce environmentally friendly products. Ecomark Rules was enacted for labelling of products which will have lesser adverse impact on the environment and encourage the consumers to adopt such products⁵; (g) sustainable building and infrastructure activities to encourage construction of sustainable buildings and using environment friendly technology and materials.

To obtain a green credit a person or an entity is required to register the activity with the designated administrator under the GC Rules i.e. the Indian Council of Forestry Research and Education (“Administrator”)⁶. The Administrator is required to designate entities which would act as designated agencies to conduct verification and submit reports to the Administrator vis-à-vis verification of activities undertaken by an applicant for issuance of green credits. Apart from the Administrator and the designated agencies, the other key stakeholders in implementation of GCP are the Steering Committee⁷ (to be constituted by the Central Government) and the Technical Committee⁸ (to be constituted by the Central Government on recommendation of the Administrator). Lastly, participation in the GCP is voluntary and the Steering Committee is responsible for generating demand of green credits in the country.

Potential challenges in implementation of the GCP

Nature of Green Credits

The carbon credits are considered as ‘goods’ for the purposes of ‘commodity derivatives’ under the Securities Contracts (Regulation) Act, 1956 (“SCRA”)⁹. A ‘commodity derivative’ under the SCRA includes a contract for: (a) delivery of goods (as notified by the Central Government) and where such contract is not a ‘ready delivery contract’; or (b) for differences, which derive its value from prices or indices of prices of the underlying goods or activities notified by the Central Government¹⁰.

Further, any contract for derivatives is valid and legal if (i) traded on recognized stock exchanges; (ii) settled on the clearing house of a recognized stock exchange in accordance with rules and bye laws of such stock exchange; or (iii) between such parties and on such terms as may be specified by the Central Government by notification in the official gazette¹¹.

In view of the above, SEBI has a jurisdiction over trading of voluntary carbon credits and therefore sale and purchase of majority of voluntary carbon credits are structured either as ‘ready delivery contracts’¹² or ‘non-transferable specific delivery contracts’ to oust the jurisdiction of SEBI. Given the GC Rules do not clarify the nature of the green credits, it is unclear if it would be treated as goods for commodity derivative akin to carbon credits.

Therefore, it is pertinent that the Central Government categorically specify the nature of green credits and modalities around trading of green credits to ensure that there is no jurisdictional tussle between SEBI and the Administrator.

Interplay between carbon credit and green credit

The GC Rules provides that GCP is independent of the carbon credit under the Carbon Credit Trading Scheme, 2023 (“Carbon Trading Scheme”).

However, it stipulates that an environmental activity generating green credit may have climate co-benefits including reduction or removal of carbon emissions. Therefore, an activity generating green credit under GCP may also be eligible for issuance of carbon credit under the Carbon Trading Scheme.

It is relevant to note that a carbon credit is allotted on account of reduction, removal or avoidance of greenhouse gas emissions which is equivalent to one ton of carbon dioxide equivalent, however for green credits no such quantified value is specified under the GC Rules. In absence of a quantified methodology for calculation of one unit of green credit, the benchmark for issuance of carbon credit against the same activity for which a green credit will be issued is unclear and ambiguous.

Moreover, allowing issuance of carbon credits along with green credits for the same activity may result in double counting and dual incentivization for the same activity.

Dispute Resolution with respect to Green Credits

Per the GC Rules, the Administrator is responsible for regulating matters relating to green credits and to safeguard the interest of the sellers and buyers and take preventive and corrective actions to prevent fraud or mistrust. However, the GC Rules are silent on dispute resolution mechanism for any dispute which may occur between the Administrator, stakeholders and the designated agencies. No specific dispute settlement mechanism or forum is provided under the GC Rules.

Quantification of green credit

The Technical Committee is entrusted with the role to develop and recommend to the Administrator, the methodology for calculation of one unit of green credit based on of equivalence of resource requirement, parity of scale, scope, size and other relevant parameters. However, given the wide category of eligible activities under the GCP, the quantification/calculation of one unit of green credit will be challenging.

Way forward

The proposed GCP is certainly a promising step towards India’s decarbonization commitments, but its success will depend on clarity of methodologies and processes implemented vis-à-vis the issuance and trading of green credits. The Central Government also needs to ensure that the regulatory landscape required to implement GCP is evolved prior to issuance and trading of the green credits. The need of the hour requires the stakeholders to come together to ensure a thriving voluntary green credit market is established to help India achieve its commitments at 25th and 26th edition of the COP.