Evolution Of Carbon Markets In Indian Agriculture – Developing A Regulatory Framework

Farmers in India are already reeling under several challenges from water scarcity to labour shortages. In such a scenario, solutions such as carbon credits may incentivize agricultural input companies to help farmers adopt climate-friendly, sustainable agricultural practices

I. Background

The planet’s average surface temperature has risen about 1 degree Celsius since the late 19th century, a change driven largely by increased carbon dioxide emissions into the atmosphere and other human activities. Such increase in temperatures has been leading to climate change which is having unprecedented effects around the world with disproportionate adverse impact on underdeveloped and developing economies.

A little over three decades ago, the 1992 Earth Summit in Rio de Janeiro saw the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) with nations across the globe coming to an agreement and recognition of the urgent need to tackle the harmful effects of climate change. Legally binding limitations on emissions or enforcement mechanisms came into the picture, first under the Kyoto protocol (adopted in December 1997 and entered into force in February 2005) and then under the Paris Agreement in 2015.

In essence, the aim of these international treaties is to “stabilize greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system, in a time frame which allows ecosystems to adapt naturally and enables sustainable development”¹.

II. Carbon Credits

Nations agreeing to take steps to reduce the harmful effects of climate change is just the first step. The Kyoto Protocol and the Paris Agreement took the next few steps to set emission reduction targets and to provide a framework for market mechanisms to achieve the same, and not to rely only on policy initiatives to achieve emission reduction targets.

As explained by the UNFCCC secretariat on its website, any person or entity that reduces emissions has something to sell, an unused right to emit, measured in tonnes of carbon dioxide (CO2) equivalent. Those that don’t meet their target can buy these one-tonne units to make up the shortfall. Each unit represents a true one-tonne reduction below the cap – and each unit is used only once. These units, commonly referred to as carbon credits, are tradable units, akin to shares / debt instruments being traded on stock exchanges, thereby creating a monetary incentive to reduce or manage GHG emissions.

III. Agriculture and Greenhouse gas (GHG) emissions

According to the Food and Agriculture Organization (FAO), the ‘Agriculture, Forestry and Other Land Use’ (AFOLU) sector produces an estimated 21 percent of total global GHG emissions² such as methane and nitrous oxide.

Methane: Why should we worry about it? Methane is the primary contributor to the formation of ground-level ozone, a hazardous air pollutant and greenhouse gas. Methane is also a powerful greenhouse gas. Over a 20-year period, it is 80 times more potent at warming than carbon dioxide.

As per India’s 4th Biennial Update Report (BUR-4) to the UNFCCC on 30th December 2024, the energy sector was the largest contributor accounting for 75.66% of emissions while agriculture contributes to 13.72% of its emissions³. Within agriculture, it is estimated that conventional agricultural practices involved in rice cultivation themselves contribute around 8-10% of global methane emissions⁴. Traditional rice cultivation practices also consume significant amounts of water, and, in countries such as India, are heavily dependent on availability of human labour.

Given that 43.86 Mn hectares of land is used for cultivation of rice in India, there is a significant opportunity to adopt water saving and methane reducing agricultural practices while earning credits for it. This can create a new market for methane / carbon credits while bringing benefits for the environment.

III. Key Elements of an Effective Regulatory Framework

Any effective regulatory framework for carbon credits in Indian agriculture must include the following elements -

a) Standardisation of Measurement, Reporting, and Verification (MRV) protocols tailored to Indian agro-ecological conditions

b) Accreditation and oversight of third-party verifiers

c) Mechanisms for aggregation and collective participation of smallholders

d) Transparent benefit-sharing models and farmer protection measures

e) Integration with national climate goals and international commitments

f) Effective mechanisms to prevent / detect greenwashing claims

IV. Recent Policy Developments and Government Initiatives

In India, till date, there have been several initiatives / policy / regulatory developments for carbon credits in the energy sector – not surprising, considering the sector’s contribution to GHG emissions. These include compliance markets (PAT-ESCerts and RECs) and voluntary (offset) projects such as CDM (Clean Development Mechanism) and similar other instruments. In 2022, the Energy Conservation (Amendment) Act 2022 was notified which allows for issuance and trading of Carbon Credit Certificates to / by registered entities in accordance with the carbon credit trading scheme that is under formulation.

It is noteworthy that India’s voluntary emission reduction declarations under the Paris Agreement exclude mitigation measures in the agricultural sector. Nonetheless, the 4th Biennial Update Report (BUR) submitted by India to the UNFCC records several initiatives to reduce the carbon intensity of agricultural production while sustaining its economic contribution through sustainable practices and increased productivity. These include Direct Seeded Rice (DSR), crop diversification, crop residue management, etc⁵.

In October 2023, the Government of India notified the Green Credit Rules, 2023, under the Environment Protection Act, to “incentivise environmental positive actions through market- based mechanism and generate green credit, which shall be tradable and made available for trading on a domestic market platform”.⁶

However, the current focus remains on afforestation, being the only activity for which methodologies have been notified under which individuals/entities are required to register their activities through a dedicated, where post-verification, tradable Green Credit certificates are awarded by the administrator. The Green Credit Registry and trading platform are yet to be operationalized.

India is also preparing to transition into the Enhanced Transparency Framework (ETF) as set out by the Paris Agreement, and build an IT-enabled system to bring relevant stakeholders together, supporting enhanced coordination and timely reporting. This would explore integrating information from different sources and platforms – GHG inventory inputs through the National Inventory Management System (NIMS); data providers from departments; policy and program level outcomes; in-built MRVs of schemes; and bind state and local level monitoring entities to one system⁷.

VI. Conclusion

Farmers in India are already reeling under several challenges from water scarcity to labour shortages. In such a scenario, solutions such as carbon credits may incentivize agricultural input companies to help farmers adopt climate-friendly, sustainable agricultural practices. It only follows that all players in this ecosystem would like to see a well-defined regulatory framework. This has the added potential of Indian agriculture contributing to the achievement of India’s climate goals. It is imperative therefore for all stakeholders to collaborate in building a sustainable and inclusive carbon market ecosystem in India.

Disclaimer – The views and opinions expressed in this article are those of the authors and do not reflect the official policy, position, or opinions of Bayer. Any content provided in this article is for informational purposes only.