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Kuniya Institute of IAS Examination

Mains – 25th Oct 23

Green Credit Programme

Why in News?

The Government of India’s Ministry of Environment, Forest, and Climate Change has recently issued the preliminary implementation regulations for the ‘Green Credit Programme (GCP)’ for the year 2023.

This program was initially introduced in the 2023-24 Union Budget, aiming to harness a competitive market-oriented strategy, encourage voluntary environmental initiatives from diverse stakeholders and promoting a sustainable lifestyle known as ‘LiFE’ (Lifestyle for Environment)

 

About

  • As per the scheme, individuals, industries, farmers producers organisations (FPOs), urban local bodies, gram panchayats and private sectors, among a host of other entities, will be able to earn green credit for undertaking environment friendly actions.
  • The Green Credit Programme serves as a supplementary system to the national Carbon Market. While the domestic carbon market primarily concentrates on decreasing CO2 emissions, the Green Credit System seeks to fulfill various environmental responsibilities, motivating corporations, individuals, and local authorities to adopt sustainable practices.
  • These green credits will be exchangeable, allowing those who earn them to offer them for sale on a forthcoming domestic market platform.
  • The Indian Council of Forestry Research and Education (ICFRE) shall be the administrator of the programme which will develop guidelines, processes and procedures for implementation of the programme.

 

Key Sectors identified for the programme

Under the scheme, there are certain sectors that government has identified to qualify as Green Credits. These are –

  • Tree Plantation – based Green Credit
  • Water – based Green Credit
  • Sustainable Agriculture – based Green Credit
  • Waste Management – based Green Credit
  • Air Pollution Reduction – based Green Credit
  • Mangrove Conservation and Restoration – based Green Credit
  • Ecomark – based Green Credit
  • Sustainable building and infrastructure  – based Green Credit

 

Potential benefits

  • The Green Credit Programme will also motivate private sector businesses, companies, and other organizations to fulfill their current responsibilities under various legal frameworks. This can be achieved by engaging in activities that align with the generation or acquisition of green credits.
  • These guidelines combine methods for quantifying and endorsing ecosystem services, making them particularly beneficial for organic farmers and Farmer Producer Organizations (FPOs).
  • It’s a pioneering tool that aims to assess and incentivize multiple ecosystem services, enabling green initiatives to attain maximum benefits beyond carbon alone.

Concerns

  • Experts worry that Greenwashing could result from the market-based process of green credits.
    • The term “greenwashing” describes the practise of making inflated or deceptive claims about environmental sustainability or accomplishments in order to promote a positive image while failing to provide substantive environmental advantages.
  • There is a concern that businesses or other organisations may participate in tokenistic or flimsy actions to earn green credits without making real attempts to alleviate environmental problems.
  • Concerns exist over the efficiency of these systems in achieving immediate carbon reductions as well as the allocation of funds to monitoring and fraud prevention instead of more revolutionary government-led initiatives.

 

About Carbon Markets

They are essentially a tool for putting a price on carbon emissions i.e. establish trading systems where carbon credits or allowances can be bought and sold.

They are broadly of two types namely Voluntary and Compliance Market.

  • Voluntary Markets- Emitters buy carbon credits to offset emission of one ton of CO2 or equivalent greenhouse gases. Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
  • Compliance Markets- They are set up by policies at national, regional, or international level and are officially regulated. They mostly operate under ‘cap-and-trade” principle.

 

Related Development

Recently, Parliament passed Energy Conservation (Amendment) Act 2022 to establish carbon markets in India and specify a carbon trading scheme.

 

Amendments to Energy Conservation Act 2001

Energy Conservation Act, 2001 provides a framework for regulating energy consumption and promoting energy efficiency and energy conservation.

Amendment in 2010

The Act was first amended in 2010 to expand its scope and bring the following subjects under its ambit

  • Energy conservation norms for buildings; enhanced energy efficiency norms for appliances and equipment.
  • A framework for the trade of energy savings among energy-intensive Designated Consumers (DCs).
  • Increased penalties for offences committed under the Act, including violation of norms for efficiency and consumption standards.
  • Provided room for appeals to be heard by the Appellate Tribunal for Electricity (APTEL).

Amendment in 2022

  • While 2001 act deals with saving energy, 2022 amendment deals with saving the environment and tackling climate change, thus broadening scope and objective of principal Act.

 

Key Features of 2022 Amendment Act

  • Carbon credit trading: It empowers central government to specify a carbon credit trading scheme.
    • Carbon credit implies a tradable permit to produce a specified amount of carbon dioxide or other greenhouse emissions.
    • Central government or any authorized agency may issue carbon credit certificates to entities registered and compliant with scheme.
  • Obligation to use non-fossil sources of energy: The 2001 Act empowered the central government to specify energy consumption standards.
    • The amendment adds that government may require designated consumers to meet a minimum share of energy consumption from non-fossil sources like green hydrogen, green ammonia, etc.
    • Failure to meet obligation will be punishable with a penalty of up to Rs 10 lakh.
  • Energy Conservation code for buildings: The 2001 Act empowered central government to specify Energy Conservation Code for buildings.
    • The amendment amends this to provide an ‘Energy Conservation and Sustainable Building Code’.
    • This new code will provide norms for energy efficiency and conservation, use of renewable energy, and other requirements for green buildings.
    • Under 2022 amendment, new Code will also apply to the office and residential buildings meeting above criteria. It also empowers state governments to lower the load thresholds.
  • Standards for vehicles and vessels: Under 2001 Act, energy consumption standards may be specified for equipment and appliances which consume, generate, transmit, or supply energy.
    • The amendment expands the scope to include vehicles (as defined under the Motor Vehicles Act, 1988), and vessels (includes ships and boats).
  • Regulatory powers of SERCs: The 2001 Act empowers State Electricity Regulatory Commissions (SERCs) to adjudge penalties under the Act.
    • The 2022 amendment adds that SERCs may also make regulations for discharging their functions.
  • State Energy Conservation Fund: The amendment requires State Governments to constitute energy conservation funds for promotion of energy efficiency and conservation measures. This fund shall receive contribution by both Union and State govt.
  • Composition of governing council of BEE: The 2022 amendment increases and diversifies number of members and secretaries in governing council of BEE

 

Concerns with the amendment

  • Concept of Carbon Trading: The principles of carbon markets were established in the 1997 Kyoto Protocol, but to date there have been few, if any, measurable reductions in greenhouse gas (GHG) emissions that can be attributed to these measures.
    • The two most important carbon markets so far – the EU Emissions Trading System (EU-ETS) and the UN’s carbon offsetting scheme, Clean Development Mechanism (CDM) – are failures, yet, new carbon markets based on these schemes are being planned in both developed and developing nations.
  • Challenges in meeting obligations: There may not be a widespread generation of power from some of these sources that the consumer can access. For instance, share of biomass in India’s total installed electricity generation capacity was 2.5%, as of August 2022.
    • Technologies like green hydrogen and green ammonia are still at a nascent stage. Currently, it may not be feasible to produce energy from them affordably. Energy is a key input to industrial activity, and such an obligation may adversely impact competitiveness of industry.
  • Some experts raised concerns that the amendment has a centralized structure, despite the fact that each state has its own dynamics of energy production and consumption. 2022 amendment proposes only five representatives of the States in governing council of BEE. It means that a majority of the States would not be able to register their opinion in BEE.

Experts have also raised concerns about issues related to overlap between the existing policies – Energy Saving Certificates, Renewable Energy Saving Certificates and the new policy – carbon credit certificates trading.

 

 

Sixteenth Finance Commission

Why in News?

  • Many critical changes have taken place since the constitution of the Fifteenth Finance Commission in November 2017 and the Sixteenth Finance Commission is due to be set up shortly.
  • The 16th FC will primarily determine how much of the Centre’s tax revenue should be given away to States (the vertical share) and how to distribute that among States (the horizontal share).

Fifteenth Finance Commission Recommendations (applicable from 2021 to 2026)

  • Distribution of Tax Proceeds: The Commission has recommended a fair distribution of tax proceeds between the central government and the states, ensuring a balanced fiscal sharing mechanism.
  • Impact of GST
    • The FC emphasises the need to study the impact of the Goods and Services Tax (GST) on the economy.
    • This assessment aims to understand the implications of GST implementation and its effects on various sectors.
  • Performance-based Incentives: These incentives would be based on the efforts of the States to address issues such as population control, ease of doing business, and other relevant factors.
  • Grants to States
    • The FC has proposed the provision of revenue deficit grants, grants to local bodies, and disaster management grants to the states.
    • These grants aim to support the financial needs of the states and ensure effective governance.

Critical Changes Since the Constitution of 15th FC

  • The biggest challenge and change were the pandemic COVID-19 and the subsequent geopolitical challenges i.e., China’s aggression on LAC.
  • The combined government debt-GDP ratio had shot up close to 90% at the end of 2020-21.
  • Many States are facing large fiscal imbalances.

Expected Deliberations upon the Constitution of the 16th Finance Commission

  • Assessment of the Vertical and Horizontal Distribution
    • The 14th Finance Commission had raised the share of States in the divisible pool of central taxes (Vertical Distribution) to 42% from 32%.
    • This was revised to 41% when the number of States in India was reduced to 28.
    • It is likely that during the deliberation on 16th FC, states will demand that this proportion be raised, but there is not much room for stretching this further given the Centre’s expenditure needs and the constraints on its borrowing limit.
    • Therefore, much of the debate will centre on the horizontal distribution formula (Distribution among states).
  • Discussion on Cesses and Surcharges
    • During 2020-21 to 2023-24, the effective share of States in the Centre’s gross tax revenues (GTR) averaged close to 31%, which was significantly lower than the corresponding share of nearly 35% during 2015-16 to 2019-20.
    • This was due to the inordinate increase in the share of cesses and surcharges to 18.5% of the Centre’s GTR during 2020-21 to 2023-24 (BE) from 12.8% during 2015-16 to 2019-20.
    • This heavy reliance on cesses and surcharges requires scrutiny by the 16thFinance Commission.
    • One option is to freeze the share of cesses and surcharges to some base number.
    • Under the 13th Finance Commission, this share was just 9.6%.A 10% upper limit of the share of cesses and surcharges as a percentage of Centre’s GTR may be recommended.
    • The share of States must be increased if the proportion crosses 10%.Thus, there will be one proportion, say 42%, if cesses and surcharges exceed 10%, and another share of 41% if they are 10% or below.
    • The formula may be nuanced by the 16thFinance Commission with the help of the latest data.
  • Decline in Total Divisible Pool
    • The share of individual States in the Centre’s divisible pool of taxes is determined by a set of indicators that includes population, per capita income, area, and incentive-related factors such as forest cover and demographic change.
    • In the case of per capita income, it is the distance of a State’s per capita income from a benchmark, usually kept at the average per capita income of the top three States that is used as a determining factor.
    • This distance criterion implies relatively larger shares for relatively lower income States. At present, it has the highest weight of 45% — it had an even higher weight previously.
    • Many of the richer States have argued for a lowering of the weight given to this criterion.
    • However, due attention needs to be paid to the needs of the lower income States.
    • These States are expected to provide a relatively larger share of ‘demographic dividend’ to India in future provided attention is paid to the educational and health needs of their populations.

Possible Recommendations for the 16th FC

  • Re-examination of 2018 Amendment to the Centre’s FRBM 
    • This was also recommended by the 15thFinance Commission.
    • The debt-GDP ratio for the combined account of central and State governments had peaked at 89.8% in 2020-21, of which the Centre’s debt-GDP ratio excluding any on-lending to the States amounted to 58.7%, and that of States was 31%.
    • While these numbers have begun coming down, these are still considerably above the corresponding Fiscal Responsibility and Budget Management (FRBM) norms of 40% and 20%, as in the 2018 amendment.
    • In 2020-21, the Centre’s fiscal deficit had shot up to 9.2% of GDP and that of States to 4.1%.
    • In view of the large departures of the debt and fiscal deficit to GDP ratios from their corresponding norms and the reduction of the States’ debt-GDP target to 20%, the 2018 amendment to the Centre’s FRBM needs to be re-examined.
  • Restraint on Freebies
    • A few State governments appear to have relatively larger debt and fiscal deficit numbers relative to their GSDPs.
    • In this context, two concerns appear: these relate to the proliferation of subsidies and the re-introduction of the old pension scheme in States without a clear identification of the sources of financing and the resultant fiscal burdens.
    • Often, such subsidies are sought to be financed by raising the fiscal deficit.
    • All political parties are guilty on this count, some more than others, but trying to apportion blame will be a wrong start.
    • In a poor country, where millions of households struggle for basic human needs, it sounds cruel to argue against safety-nets for the poor.
    • But it is precisely because India is a poor country, we need to be more cautious about freebies.
    • The next Finance Commission should issue clear guidelines in the interest of long-term fiscal sustainability and the spending on freebies.

Reform Needed to Restrain Freebies

  • One innovation which may be relevant in this context is to set up a loan council, as recommended by the 12thFinance Commission.
  • This independent body should oversee the loan magnitudes and profiles of the central and State governments.
  • The 16thFinance Commission should examine the subject of non-merit subsidies in detail.
  • The Finance Commission should be strict about States maintaining fiscal deficit within limits.
  • It should incentivise States maintaining fiscal deficit (for example including fiscal performance as a criterion in horizontal distribution) and sticks for those that exceed fiscal deficit limits (by suitably acting on the extent of borrowing allowed).

Conclusion

  • In the pre-reform period, the Finance Commission recommendations were not that critical because the Centre had other ways to compensate States.
  • But after abolition of Planning Commission, Finance Commission remains virtually the sole architect of India’s fiscal federalism. Its responsibility and influence are, therefore, much larger.
  • The recommendation made by 16thFC will be crucial as India is moving towards becoming the world’s third largest economy.