[Ashwin Murthy is the Negative Emissions Fellow at Sabin Center for Climate Change Law at the Columbia Climate School, Columbia University, New York.
This post is part of the IndiaCorpLaw Blog Symposium on ‘Corporate Law and Climate Change: Indian and Comparative Perspectives’.]
The climate crisis necessitates immediate action. The IPCC has made it clear that addressing climate change requires a wide suite of approaches. Implementing these measures can prove to be expensive. While the obvious solution is increased government funding (which would be cheaper than continued subsidisation of fossil fuels), actors are also looking to the market for funding. Carbon credits are, in theory, one such unifying instrument. India has emerged as one of the world’s largest new carbon markets, and revenue from voluntary carbon credits in India is projected to reach USD 20–40 billion by 2030. India’s carbon market can’t grow without regulatory clarity. Several agencies could plausibly claim jurisdiction over carbon credits. This post asks a narrower question: can the Securities and Exchange Board of India (SEBI) regulate India’s carbon market?
What is the Carbon Market?
The carbon market is a catch-all term used to describe trading systems where carbon credits are bought and sold. A carbon credit represents one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, removed or avoided. Once the carbon credit is used to compensate for emissions, the credit is retired (i.e., it cannot be used or sold again).
Carbon credits are either used in compliance markets, where certain entities (who are generally emissions-intensive) are mandated to meet emissions targets, or voluntary markets, where buyers voluntarily buy carbon credits to, among other reasons, meet their independent climate commitments and offset their emissions. Buyers in the voluntary market generally publicise their carbon credit offsets through marketing statements and financial disclosures. Disclosures of beneficial climate actions can have positive effects in the market and for companies.
Carbon Markets in India
The Center on Global Energy Policy has conducted a detailed review of India’s carbon market regulation, as part of its review of regulatory frameworks for project-based carbon credit markets. Briefly, India has recently developed a comprehensive carbon market framework through the Carbon Credit Trading Scheme (CCTS) 2023. The CCTS establishes a dual track system, with a compliance mechanism and an offset mechanism. The compliance mechanism requires obligated entities from nine energy-intensive industrial sectors to meet binding emission intensity reduction targets. The offset mechanism allows for entities to voluntarily buy credits and develop projects that reduce, remove, or avoid greenhouse gas emissions, thereby generating tradable carbon credit certificates (CCCs). The Bureau of Energy Efficiency governs the implementation of the offset mechanism, and recently published the Detailed Procedure for Offset Mechanism Under Carbon Credit Trading Scheme to clarify the process of registering an offset project and purchasing CCCs.
SEBI Regulation of Carbon Credits
It remains an open question as to whether SEBI can regulate carbon credits. SEBI’s authority depends on what type of financial instrument a carbon credit offers. SEBI possesses the authority to regulate securities and the securities market under the SEBI Act. Scholars have noted that it is unlikely that a carbon credit would be considered a security in the U.S. Similarly in India, it is unlikely that a carbon credit would be considered a security under the Securities Contracts (Regulation) Act, 1956 (SCRA). The SCRA defines a security as “shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate”. Carbon credits do not fall under any of these descriptors, thereby limiting SEBI’s authority to regulate carbon credits directly.
SEBI does however have the authority to regulate commodity derivative trading. Commodity derivatives are standardised, exchange-traded contracts whose value is tied to an underlying commodity; traders typically use derivatives to hedge or speculate rather than to buy or sell the underlying commodity. A derivative’s monetary value tracks some underlying asset without necessarily conveying ownership of the asset. In other words, commodity derivative trading generally stems from an agreement over an exchange to buy or sell something at a fixed price on a future date. For instance, a grain producer sells wheat futures to lock in prices for a harvest it has not yet reaped, or a food manufacturer buys these futures to guarantee predictable supply costs. Typically, the underlying assets in these contracts are fungible commodities. SEBI has the authority to regulate the commodity derivative trading, but not the underlying asset (such as regulating the wheat futures but not the actual growth, harvesting or selling of wheat). In theory, carbon credits could be a commodity, and contracts of sale of carbon credits for future delivery on an exchange could be considered as commodity derivative trading. In this context, SEBI would have the authority to regulate the future trading of carbon credits, but not how the carbon credits are actually generated or used. However, there are two limiting factors that make this unlikely.
First, carbon credits are not fungible like other commodities (such as gold or oil). The projects that generate carbon credits vary significantly, which undermines their interchangeability. BEE has approved a number of different approaches to generating carbon credits, such as renewables and afforestation. Their ability to store carbon varies greatly, wherein a typical afforestation project may store the carbon for decades, while renewables work towards mitigating emissions, which works on different timescales and are calculated as counterfactuals to continued emissions. BEE plans to integrate other methodologies into the offset mechanism, such as carbon capture utilisation and sequestration, which could, in theory, store carbon dioxide for thousands of years. Further, these approaches are each subject to different risks, such as wildfires threatening the ability for forests to store carbon dioxide. Most carbon crediting programs only allow trading and reimbursement of “like-for-like” credits (i.e., replacing credits from afforestation lost to wildfires with other credits generated from afforestation only). Therefore, while the underlying asset in each of these is technically carbon, it is not fungible because of a number of key differences, including the duration, calculation and approach. This limits the fungibility of carbon credits, thereby limiting their trade on an exchange, and by extension SEBI’s regulatory powers.
Second, and more practically, once operational, the offset mechanism expects trading to be conducted on recognised power exchanges regulated by the Central Electricity Regulatory Commission (CERC) (currently Indian Energy Exchange, Power Exchange India Limited and Hindustan Power Exchange), and not by SEBI. As it currently stands, trading through the offset mechanism is not intended for futures or speculative trading, and is instead focused on treating carbon credits as inventory or intangible assets held for future strategic use rather than resale. SEBI can only regulate the trading of notified commodities, which currently do not include carbon credits. Given that the Government has identified CERC as the responsible authority and controls the power exchanges in question, it is unlikely that they would include carbon credits under SEBI’s notified commodities.
Therefore, while in theory SEBI could have regulated carbon credit trading, carbon credits are distinct from traditional commodity derivatives, and the CCTS envisions CERC as the primary regulator, thereby separating carbon credit trading from typical commodity trading. SEBI does regulate green credits; however, these are (confusingly) unrelated to carbon credits under the CCTS.
SEBI Regulation of Disclosures
While it is unlikely that SEBI regulates either carbon credits or carbon credit trading, it may still regulate disclosures of offsetting. SEBI requires listed entities to disclose climate actions under the Business Responsibility and Sustainability Report (BRSR) and BRSR Core. Disclosures under BRSR and BRSR Core are limited to “business conduct and sustainability issues pertaining to environmental and social matters that present a risk or an opportunity” to the company, and to “mitigation or adaptation measures” that have been taken up for any actions by the company that cause “significant adverse impact to the environment”. These could include voluntary carbon credits purchased through the offset mechanism. Voluntary carbon credits are often purchased by large companies, such as airlines or large technology companies who cause extensive emissions as part of their regular operations, to attain net zero commitments. Therefore, offsetting through carbon credits could potentially be considered as a measure designed to mitigate the company’s continued significant adverse impact to the environment, which would then require disclosure under BRSR and BRSR Core. SEBI can impose liability for misstatements, such as through the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 or the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Disclosures also allow for checks from other areas. The Central Consumer Protection Authority has published guidelines on greenwashing as well, which prohibit deceptive or misleading practices, and require all environmental claims to be supported. Greenwashing cases brought by private plaintiffs may be bolstered by misleading statements on carbon offsetting that are revealed through SEBI-mandated disclosures. However, SEBI has not issued a dedicated carbon credit reporting standard. Without a dedicated standard, the unique nature of carbon credits makes it harder for SEBI to identify claims that are misleading, false or overstated.
Other jurisdictions have identified that claims centred on the use of carbon credits could be greenwashing. The EU has passed a new directive that explicitly states that it is presumptively misleading and therefore illegal to market a consumer product or service as having lower or no greenhouse gas emissions because of carbon credits. This directive has followed a number of cases in the EU, including in France, Germany and Netherlands, that have held that the use of offsets alone does not indicate climate neutrality. The U.S. and the U.K. have similarly held against advertisements, specifically from airliners, where claims were raised that the use of offsets from carbon credits ensured genuine carbon reductions. Similar claims raised against advertisements or disclosures from BRSR/BRSR Core requirements may face similar treatment in India.
Conclusion
With greater developments in technology and science, carbon credits will gain further integration into domestic and international markets. The regulation of carbon credits should match this integration. India has taken concrete steps to that end, with the CCTS providing an ambitious framework that answers a number of regulatory questions. SEBI’s regulation of carbon credits is likely limited to the discrete issue of disclosures, as it is unlikely that carbon credits would be considered either securities or commodity derivatives regulated by SEBI. To that end, further clarity through specific standards for carbon credit usage in the BRSR/BRSR Core disclosure requirements would allow for a more effective disclosure regime, thereby encouraging climate action.
– Ashwin Murthy