Carbon credit trading and India's green transition

Saurav Kumar (), Taniya Ghosh () and Shesadri Banerjee ()
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Saurav Kumar: Indira Gandhi Institute of Development Research
Taniya Ghosh: Indira Gandhi Institute of Development Research
Shesadri Banerjee: Reserve Bank of India

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: This study examines the macroeconomic dynamics under the recently announced intensity based Carbon Credit Trading Scheme (CCTS) in India using an Environmental Dynamic Stochas tic General Equilibrium framework. The policy freely allocates carbon certificates in the primary carbon market and aims to incentivize their trading by monetizing emission intensity reductions in the secondary carbon market. Distinguishing between thermal power and green electricity we find that the incentive mechanism of this policy promotes the adoption of green electricity and reduces emissions in the long term. Although phasing out the use of fossil fuels remains a challenge in the short term, an ambitious intensity target, coupled with cheaper green electricity, can accelerate the energy transition. In addition, it stabilizes the economy against volatility in fossil fuel prices. Our results highlight that the rate-based CCTS outperforms the price-based carbon tax policy in promoting the energy transition while sustaining the growth objectives.

Keywords: E-DSGE; Secondary carbon market; Intensity target; Free allocation (search for similar items in EconPapers)
JEL-codes: D47 E32 Q48 Q58 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2025-12
New Economics Papers: this item is included in nep-dge and nep-sea
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