Author: Khushi Pursnani, Subodh Law College, Jaipur
To the Point
India’s journey with carbon credits began with participation in the Clean Development Mechanism (CDM) under the Kyoto Protocol (1997). Through this framework, India became one of the largest issuers of Certified Emission Reductions (CERs), particularly in the renewable energy sector. However, post-Kyoto, the global carbon market witnessed volatility due to falling demand for CERs. With the Paris Agreement (2015), a renewed push for carbon trading has emerged, particularly through Article 6 mechanisms.
Domestically, India has sought to institutionalize its carbon trading system through the Energy Conservation (Amendment) Act, 2022, empowering the central government to design a Carbon Credit Trading Scheme. Yet, definitional ambiguities, lack of integration with international markets, and enforcement challenges persist. The absence of a uniform statutory framework has also created uncertainties regarding ownership, taxation, and the legal status of carbon credits as “securities,” “commodities,” or “capital receipts.”
Abstract
Climate change mitigation has emerged as a pressing global concern, necessitating market-based mechanisms that balance sustainable development with economic growth. Carbon credit trading is one such mechanism, designed to incentivize emission reductions by allowing companies to trade credits derived from reduced greenhouse gas (GHG) emissions. India, as a signatory to international environmental conventions, has actively participated in the global carbon market and is now taking strides toward developing a domestic carbon trading framework. However, the regulatory and legal architecture remains underdeveloped. This article critically examines the evolution of carbon credit trading in India, the intersection of international commitments with domestic law, judicial precedents, taxation implications, and the multifaceted policy challenges. It argues that without a comprehensive and harmonized legal framework, India risks undermining its ability to leverage carbon markets as a robust tool for achieving its climate targets under the Paris Agreement.
Use of Legal Jargon
The regime of carbon credit trading is not merely economic but profoundly juridical, involving concepts of:
Precautionary Principle – regulatory actions must be taken even in the face of scientific uncertainty to prevent environmental degradation.
Polluter Pays Principle – entities emitting greenhouse gases are financially liable, directly or indirectly, for the harm caused.
Intergenerational Equity – legal obligation to preserve resources and a stable climate for future generations, embedded in Indian constitutional jurisprudence.
Common But Differentiated Responsibilities (CBDR) – an international environmental law doctrine recognizing India’s right to development while still participating in climate action.
Lex Specialis Derogat Legi Generali – specialized carbon trading laws must override general provisions of commercial or securities law to avoid conflicts.
The lack of a codified lex specialis on carbon credits in India creates jurisprudential uncertainty, forcing courts and regulators to interpret credits through tax law, commodity law, and environmental jurisprudence.
The Proof
1. International Commitments
Kyoto Protocol (1997) – Introduced CDM; India was among the top issuers of CERs.
Paris Agreement (2015), Article 6 – Introduced a new market mechanism enabling countries to trade emission reductions toward their Nationally Determined Contributions (NDCs).
COP27 and COP28 Outcomes – Highlighted the importance of transparency, double-counting prevention, and market integrity in carbon credit trading.
2. Domestic Legal Framework
Energy Conservation Act, 2001 (as amended in 2022) – Provides statutory recognition for carbon credit trading.
Bureau of Energy Efficiency (BEE) – Empowered to regulate carbon markets and issue tradable credits.
Perform, Achieve and Trade (PAT) Scheme – A domestic cap-and-trade mechanism for energy efficiency.
Renewable Energy Certificates (REC) – Precursor to carbon credits, allowing utilities to meet renewable purchase obligations.
3. Judicial Recognition
Indian courts have developed significant jurisprudence around the taxation and legal characterization of carbon credits. Notably:
My Home Power Ltd. v. DCIT (2014) 365 ITR 82 (AP HC) – Held carbon credits as “capital receipts,” not revenue income.
Ambika Cotton Mills Ltd. v. ACIT (2014) 27 ITR(T) 44 (Chennai ITAT) – Treated carbon credits as sui generis assets.
CIT v. Subhash Kabini Power Corporation Ltd. (2016) 385 ITR 592 (Kar HC) – Reaffirmed the non-taxable nature of carbon credits as capital receipts.
4. Taxation & Commercial Aspects
The Income Tax Act, 1961 lacks explicit provisions on carbon credits, leading to divergent judicial interpretations.
GST Law Ambiguity – Uncertainty exists whether carbon credits qualify as “goods” or “services,” creating compliance issues.
Case Laws
My Home Power Ltd. v. DCIT (2014) 365 ITR 82 (AP HC) – Carbon credits classified as capital receipts, establishing their distinct legal identity.
Ambika Cotton Mills Ltd. v. ACIT (2014) – Reiterated sui generis nature of credits, excluding them from taxable income.
CIT v. Subhash Kabini Power Corp. Ltd. (2016) – Reaffirmed judicial consensus on non-taxability under regular income streams.
Sterlite Industries (India) Ltd. v. Union of India (2013) 4 SCC 575 – Reinforced constitutional responsibility for environmental protection under Article 21.
MC Mehta v. Union of India (Oleum Gas Leak Case, 1987) – Established absolute liability principle, indirectly relevant to carbon trading as a tool of corporate accountability.
Conclusion
India’s legal and policy architecture for carbon credit trading is at a formative stage. The Energy Conservation (Amendment) Act, 2022 lays a foundation, but the absence of a comprehensive, dedicated statute limits the effectiveness of the regime.
Moving forward, India requires:
Comprehensive Legislation – A specialized “Carbon Credit Trading Act” to harmonize taxation, ownership, and regulatory jurisdiction.
Robust MRV Framework – Independent verification to ensure credibility and prevent fraudulent claims.
Institutional Harmonization – Clear demarcation of roles between BEE, SEBI, MoEFCC, and other regulators.
Integration with Global Markets – Alignment with Paris Agreement’s Article 6 to enable cross-border trading.
Constitutional Backing – Operationalizing Articles 21, 48A, and 51A(g) to anchor carbon trading within India’s constitutional ethos.
If implemented with legal clarity and institutional robustness, carbon credit trading can serve as a transformative instrument, enabling India to achieve its net-zero commitment by 2070 while safeguarding economic and ecological equilibrium.
FAQS
Q1. What is a carbon credit?
A carbon credit is a tradable certificate representing one metric ton of reduced or removed CO₂ emissions, earned through projects like renewable energy or afforestation.
Q2. Is carbon credit trading legally recognized in India?
Yes. The Energy Conservation (Amendment) Act, 2022 and the Carbon Credit Trading Scheme, 2023 provide statutory recognition.
Q3. What are the challenges in Indian carbon markets?
Ambiguity in ownership, regulatory overlaps, lack of demand in international markets, and absence of effective monitoring mechanisms.
Q4. Which authority regulates carbon credit trading in India?
The Bureau of Energy Efficiency (BEE), under the Ministry of Power, is the nodal agency.
Q5. How does the judiciary view carbon credit trading?
Though not directly adjudicated, the judiciary’s environmental jurisprudence—polluter pays, precautionary principle, and sustainable development—supports carbon market mechanisms.
