by Alistair Ritchie, Nishtha Singh, and Yi Chen

Climate finance is crucial for the energy transition, with high demands in regions like India, where a study estimates a need for USD 2 trillion by 2050 for a just energy transition. To meet rising needs in India and Asia, policymakers are exploring revenue generation tools. Carbon pricing, through mechanisms like GHG emissions trading systems (ETSs) and carbon taxes, has gained global traction as a key decarbonization policy by addressing the market failure of unaccounted-for emissions.

The financial impacts of climate change, including revenue loss from externalities and increased government spending due to extreme weather events, make ­carbon pricing essential. It creates incentives for lower-carbon products and can generate significant government revenue to support the low-carbon transition. Effective carbon pricing must include robust climate finance mechanisms.

The Energy Conservation Amendment Act of 2022 has laid the foundation for India’s Carbon Credit Trading Scheme (CCTS), which includes a mandatory ETS for power and energy-intensive sectors and a voluntary offset mechanism. These tools aim to help India meet its Nationally Determined Contribution (NDC) targets under the Paris Agreement, drive decarbonization, attract investments in clean technologies, and mitigate the impacts of international policies like carbon border adjustment mechanisms (CBAMs).

A key component of an effective ETS, as recognized globally, is the auctioning of allowances for sectors not vulnerable to carbon leakage. This aligns with the “polluter pays principle” and strengthens the carbon price signal to reduce GHG emissions. Auctioning also enables governments to generate revenue that can be allocated to climate and energy purposes, such as supporting clean energy investments and vulnerable communities. The CCTS compliance mechanism has the potential to generate substantial revenue, strategically earmarked to support India’s low-carbon transition, positioning the country as a global leader.

This policy paper examines the potential for revenue generation through India’s ETS to support a just transition. It highlights the importance of auctioning allowances within the ETS, draws on international experiences with auctioning and revenue earmarking, and offers recommendations for maximizing the effectiveness of the CCTS.