MACROECONOMIC DISCUSSION Overview of Global Economy
The global economy continues to navigate through multiple crises, posing significant challenges to progress towards the Sustainable Development Goals (SDGs). Despite exceeding expectations in 2023 with several major economies demonstrating resilience, underlying vulnerabilities persist due to escalating geopolitical tensions and the increasing frequency of extreme weather events. Additionally, tight financial conditions further exacerbate risks to global trade and industrial production.
According to the latest World Economic Situation and Prospects report for 2024, the global economic outlook remains cautious. The report anticipates a slowdown in global GDP growth from an estimated 2.7% in 2023 to 2.4% in 2024, indicating prolonged sluggish growth. Developing economies, particularly, are grappling with the aftermath of pandemic-induced setbacks, facing high debt burdens and investment shortfalls. In South Asia, growth reached an estimated 5.3% in 2023 and is projected to moderate slightly to 5.2% in 2024, driven largely by Indias robust economic expansion, maintaining its status as the fastest- growing large economy globally.
Global inflation, a major concern over the past two years, appears to be easing. Headline inflation fell from 8.1% in 2022 to an estimated 5.7% in 2023, with projections suggesting a further decline to 3.9% in 2024. However, food price inflation remains a critical issue, exacerbating food insecurity and poverty, especially in developing countries. In 2023, an estimated 238 million people faced acute food insecurity, an increase of 21.6 million from the previous year.
Extreme weather conditions in 2023, including the hottest summer on record since 1880, resulted in devastating wildfires, floods and droughts globally. These events have direct economic impacts, such as damaging infrastructure, agriculture and livelihoods. Predictions indicate substantial economic losses due to climate change, with some estimates suggesting a potential 10% reduction in global GDP by 2100 if events like the collapse of the Greenland ice shelf occur. Other models forecast that without mitigating global warming, average global incomes could be 23% lower by 2100. The IPCC estimates that temperature impacts alone could lead to global GDP losses ranging between 10% and 23% by 2100.
The global carbon market is currently experiencing significant challenges and uncertainties. A major factor behind the downward trend is the challenging macroeconomic environment, which led to stagnation in demand by late 2022. Market conditions further deteriorated in 2023, with a 25% reduction in credit issuance compared to 2021. There was a noticeable shift in demand towards current vintages, causing older credits to lose value and marketability. Geopolitical conflicts, rather than being resolved, continued to expand, compounding the situation. Regulatory developments also introduced challenges, requiring greater compliance and accountability from market participants. The lack of concrete agreements at COP28, especially concerning the operationalization of Article 6 mechanisms, further complicated the landscape, creating a challenging short- term environment for businesses.
In conclusion, while the global economy shows some resilience, it remains beset by multiple challenges. Addressing these issues requires concerted efforts from all stakeholders to ensure sustainable economic growth, manage inflation, combat climate change and stabilize the carbon markets.
Indian Economy Overview
According to a recent report by Morgan Stanley, India is on track to become the worlds third largest economy by 2027, surpassing Japan and Germany, and have the third largest stock market by 2030. With an average gross domestic product (GDP) growth of 5.5% over the past decade, India has solidified its position as the worlds fastest-growing economy. Now, three significant megatrends—global offshoring, digitalization, and energy transition—are poised to pave the way for unparalleled economic expansion in this populous nation of over 1 billion people.
Indias GDP is projected to more than double from $3.5 trillion in 2022 to over $7.5 trillion by 2031. During this period, Indias share of global exports is expected to double, and the Bombay Stock Exchange (BSE) could see an annual growth rate of 11%, potentially reaching a market capitalization of $10 trillion within the next decade.
For years, companies worldwide have outsourced services like software development, customer support and business process outsourcing to India, leveraging the countrys talent and cost advantages. Today, tighter global labor markets and the rise of distributed work models are infusing new energy into Indias role as the worlds back office. Additionally, India is set to become a global manufacturing hub, fueled by corporate tax reductions, investment incentives and significant infrastructure investments.
Multinational corporations are increasingly optimistic about investing in India, a sentiment bolstered by the governments substantial infrastructure investments and provision of land for factory construction. According to Morgan Stanley, the investment outlook for India among multinationals is at an all-time high. The share of manufacturing in Indias GDP could rise from the current 15.6% to 21% by 2031, simultaneously doubling Indias share in the global export market.
The report further indicates that Indian consumers are expected to see a significant increase in disposable income. Over the next decade, Indias income distribution could shift dramatically, resulting in overall consumption rising from $2 trillion in 2022 to $4.9 trillion bv 2031. This growth will likely be most pronounced in non-grocery retail sectors such as apparel and accessories, leisure and recreation and household goods and services, among other categories.
The Indian government has initiated multiple reforms to stimulate economic growth, including structural changes in agriculture, labor and taxation. Efforts to enhance digitalization and streamline the business environment are ongoing. Indias foreign exchange reserves have consistently increased, reaching a historic high of $648.56 billion as of April 5, 2024. In the reporting week alone, reserves grew by $2.98 billion, following a cumulative increase of $29.45 billion over the previous six weeks. By May 31, 2024, foreign exchange reserves reached an all- time high of $651.5 billion. The countrys external sector remains robust, with key vulnerability indicators showing continuous improvement.
Further, latest data on the countrys inflation based on Consumer Price Index (CPI) and Consumer Food Price Index (CFPI) shows that Indias inflation is better managed than most countries around the world. The annual inflation rate based on all India Consumer Price Index (CPI) number was 4.83% (Provisional) for the month of April, 2024 (over April, 2023). Corresponding inflation rate for rural and urban was 5.43% and 4.11%, respectively.
| Apr: 2024 (Prov.) | Mar: 2024 (Final) | Apr: 2023 | ||||||||
| Rural | Urban | Combd. | Rural | Urban | Combd. | Rural | Urban | Combd. | ||
| Inflation | CPI (General) | 5.53 | 4.11 | 4.83 | 5.51 | 4.14 | 4.85 | 4.68 | 4.85 | 4.70 |
| CFPI | 8.75 | 8.56 | 8.70 | 8.55 | 8.41 | 8.52 | 3.89 | 3.69 | 3.84 | |
| Index | CPI (General) | 188.5 | 184.7 | 186.7 | 187.8 | 183.6 | 185.8 | 178.8 | 177.4 | 178.1 |
| CFPI | 188.9 | 195.4 | 191.2 | 187.8 | 193.4 | 189.8 | 173.7 | 180.0 | 175.9 | |
Notes: Prov.-Provisional, Combd - Comined
The Indian governments emphasis on infrastructure development, digital initiatives and manufacturing has created investment opportunities. The "Make in India" campaign, aimed at promoting domestic manufacturing, and various sector-specific policies have attracted foreign direct investment (FDI). Sectors such as renewable energy, technology and healthcare have seen significant investments.
2023: A YEAR OF GLOBAL CLIMATE ACTION
2023 was a year marked by significant climate change action and heightened awareness on a global scale. Governments, organisations and individuals around the world intensified their efforts to tackle the urgent challenges posed by climate change. Countries stepped up their climate commitments in 2023, building on the momentum from COP27 conference in 2022 and sustaining progress through and after COP28 in 2023. Major emitters reinforced their net-zero emissions targets and outlined concrete plans to achieve them. This heightened ambition showcases a collective recognition of the need to limit global warming and pursue sustainable development.
The transition to clean and renewable energy gained significant traction in 2023. The year saw a surge in renewable energy installations, with solar and wind power leading the way. Governments and businesses worldwide made substantial investments in renewable energy infrastructure and implemented policies to accelerate the decarbonization of their energy sectors. This shift marks a crucial step toward reducing greenhouse gas emissions and achieving a sustainable energy future.
Businesses played a pivotal role in addressing climate change in 2023. Many corporations embraced sustainability as a core principle, recognizing the long- term risks associated with climate change and the importance of transitioning to low-carbon business models. Companies committed to ambitious emissions reduction targets, implemented renewable energy solutions and incorporated climate considerations into their supply chains. Sustainable busines practices gained further prominence and were prioritized by investors and consumers alike.
Global collaborations and partnerships to combat climate change were fortified in 2023. Countries, organisations and stakeholders worked together to drive climate action and enhance cooperation. Initiatives such as the Paris Agreement, the Race to Zero and the Global Methane Pledge expanded their memberships and mobilized collective efforts. International platforms and forums provided avenues for sharing best practices, exchanging knowledge and fostering collaboration to address the global climate challenge collectively.
Recognizing the importance of adaptation, efforts to build climate resilience gained momentum in 2023. Governments and communities focused on enhancing their capacity to withstand climate-related risks, including extreme weather events, rising sea levels and changing agricultural conditions. Investments in climate-resilient infrastructure, improved disaster response systems and nature-based solutions were prioritized to protect vulnerable populations and ecosystems.
Climate activism, particularly led by young people, continued to shape the global discourse in 2023. Youth movements, climate strikes and advocacy campaigns captured public attention and generated pressure on decision-makers to take bolder climate action. The demand for systemic change and climate justice resonated across communities, influencing policies, elections and corporate practices.
Financial institutions and governments increasingly recognized the importance of climate finance in addressing climate change. In 2023, there was a surge in sustainable investments, green bonds and funding mechanisms dedicated to climate-related projects. Public and private sector entities committed substantial resources to support climate mitigation, adaptation and resilience-building efforts in developing countries.
In summary, 2023 witnessed an unprecedented surge in climate change action, characterized by enhanced global commitments, renewable energy expansion, increased corporate sustainability, strengthened collaborations, resilience measures, youth activism and climate finance mobilization. The collective determination and intensified efforts in this pivotal year highlighted the worlds growing recognition of the urgent need to address climate change and work towards a more sustainable future.
Though there has been significant progress in global climate action, we still need drastic and urgent action to reduce greenhouse gas emissions significantly. This involves transitioning to renewable energy sources, phasing out fossil fuels, improving energy efficiency and promoting sustainable transportation and land- use practices. Rapid emission reductions are crucial to mitigate the worst impacts of climate change and achieve the long-term goals outlined in international agreements like the Paris Agreement. The impacts of climate change are already being felt and delaying action will only exacerbate the challenges we face. By acting decisively, we can mitigate the worst effects of climate change, protect vulnerable communities and ecosystems and create a sustainable future for all. The time for action is now.
CLIMATE ACTION IN INDIA
Climate action in India is gaining significant momentum. The Indian government, civil society and various stakeholders have recognized the urgent need to address climate change and are taking proactive steps to mitigate its impacts.
As per Invest India, India ranks 4th globally in Renewable Energy Installed Capacity (including Large Hydro), 4th in Wind Power capacity, and 5th in Solar Power capacity (as noted in the REN21 Renewables 2023 Global Status Report). At COP26, the country set a target of achieving 500 GW of non-fossil fuel-based energy by 2030, under the Panchamrit initiative. This is the largest renewable energy expansion plan worldwide.
Over the past 8.5 years, Indias installed non-fossil fuel capacity has surged by 396%, reaching over 199.85 GW (including large Hydro and nuclear) as of April 2024, which constitutes about 45.1% of the nations total capacity. In 2022, India experienced the highest annual growth in renewable energy additions at 9.83%. Solar energy capacity alone has expanded 30-fold in the last 9 years, now standing at 82.63 GW as of April 2024. The National Institute of Solar Energy (NISE) estimates Indias solar potential at 748 GWp. Since 2014, the installed renewable energy capacity (including large hydro) has increased by approximately 128%.
As of April 2024, the combined installed capacity of renewable energy sources, including large hydropower, is 191.67 GW. India aims to reduce the carbon intensity of its economy by less than 45% by the end of the decade, achieve 50% of cumulative electric power installed capacity from renewables by 2030, and reach net-zero carbon emissions by 2070. The goal is to attain 500 GW of renewable energy capacity by 2030.
India also targets producing 5 million tonnes of green hydrogen by 2030, supported by 125 GW of renewable energy capacity. Additionally, 50 solar parks with a combined capacity of 37.49 GW have been approved and offshore wind energy targets are set at 30 GW by 2030, with potential sites identified.
In 2023 Union Budget, Green Growth was highlighted as one of the key priorities in the SAPTARISHI initiative:
• A $2.4 billion National Hydrogen Mission aims to produce 5 million metric tonnes of hydrogen by 2030, with an additional $36 million allocated in the budget.
• 4 GWh Battery Energy Storage Systems are supported through Viability Gap Funding.
• Pumped Storage Projects have received a boost with a new detailed framework.
• A $1.02/2.5 billion central sector support is designated for ISTS infrastructure to facilitate 13 GW of renewable energy from Ladakh.
Energy efficiency is a critical component of Indias climate action agenda. The government has implemented various programs and regulations to improve energy efficiency across industries, buildings, and appliances. Initiatives such as the Perform, Achieve, and Trade scheme, the Energy Conservation Building Code and the UJALA scheme (LED bulb distribution program) have contributed to reducing energy consumption and greenhouse gas emissions.
India is also focusing on promoting electric mobility as a means to reduce carbon emissions in the transportation sector. The government has launched schemes and incentives to encourage the adoption of electric vehicles (EVs) and set a target of achieving 30% EV penetration by 2030. This includes measures such as subsidies for EVs, setting up charging infrastructure and promoting domestic manufacturing of EVs and batteries.
India recognizes the importance of sustainable agriculture and forestry in climate change mitigation. Initiatives such as the Pradhan Mantri Krishi Sinchayee Yojana (irrigation scheme), Soil Health Card scheme and agroforestry programs aim to promote climate-resilient and sustainable farming practices. The government is also implementing measures to increase forest cover, enhance afforestation efforts and reduce deforestation. Given its vulnerability to climate change impacts, India has been focusing on enhancing climate resilience and adaptation measures.
The National Action Plan on Climate Change includes adaptation strategies in sectors such as water resources, agriculture, coastal zones and Himalayan ecosystems.
Efforts are being made to strengthen early warning systems, improve disaster management capabilities and build climate-resilient infrastructure.
THE ADVENT OF THE INDIAN CARBON MARKET
The Energy Conservation (Amendment) Act 2022 was passed by the upper house, Rajya Sabha in December 2022 enabling the act to be in place. It was passed by the Lok Sabha in June 2022. The amended act gives space for regulators to form the regulation policy as well as the policy framework to set up Indias national emission trading system. It will revolutionize the Indian carbon credit market by unlocking new market potentials and opening new opportunities for Indian buyers/sellers of carbon j credits. Once the national emission trading system is in place, it will merge the present form of energy efficiency trading and renewable energy trading and there will be a single entity that will be entitled to trade the carbon credit certificates. In 2023, India introduced the Carbon Credit Trading Scheme (CCTS), which encompasses both compliance and voluntary sectors. In a further progressive move, the government amended the CCTS in June 2023 to include the Offset Market and allow non-obligated entities to participate, opening new opportunities for decarbonization projects within the national carbon market. While specific sectoral scopes, standards and methodologies for accepting Voluntary Carbon Market (VCM) credits are yet to be defined, Indias progress in this sector is commendable.
Further, Green Credit Programme is a key focus area of the Government. The programme aligns with the vision for Lifestyle for Environment (LiFE), Panchamrit and net-zero carbon emissions by 2070. It aims to encourage behavioural change and incentivise environmental services and ecosystem services across different sectors and activities that support LiFE. The Green Credit Programme is a unique initiative of the Government of India. Once developed and established, it will prove to be a crucial approach in advancing a countrys sustainable goals and facilitating energy transition.
The Government of India recently finalized activities to be considered for trading of carbon credits under Article 6.2 mechanism to facilitate transfer of emerging technologies and mobilise international finance in India. Heres a list of the activities finalized to be considered for trading of carbon credits under bilateral/cooperative approaches under Article 6.2 mechanism.
1. GHG Mitigation Activities including renewable energy with storage (only stored component), solar thermal power, off- shore wind, green hydrogen, compressed bio-gas, emerging mobility solutions like fuel cells, high end technology for energy efficiency, sustainable aviation fuel, best available technologies for process improvement in hard to abate sectors, tidal energy, ocean thermal energy, ocean salt gradient energy, ocean wave energy & ocean current energy, and high voltage direct current transmission in conjunction with the renewal energy projects
2. Alternate Materials including green ammonia
3. Removal Activities including carbon capture utilization and storage
Its great to see how India is inching closer to its climate goals (Nationally Determined Contributions or NDCs) and demonstrating a strong commitment to achieving them by 2030, well ahead of schedule as well as taking actions to fulfill its commitment to achieving net-zero by 2070 and its five-fold strategy, "Panchamitras", proposed by Prime Minister Narendra Modi at COP26 which includes:
• I ndia will take its non-fossil energy capacity to 500 gigawatts by 2030
• India will reduce its carbon emission by one billion tonnes by 2030
• India will meet 50 percent of its energy requirements with renewable sources by 2030
• I ndia will reduce its carbon emission intensity by 45 percent by 2030
• India will achieve net-zero by 2070
To achieve these climate goals, rapid and drastic actions towards decarbonization of countrys development momentum is required. While much of the necessary reduction can be achieved by modifying operating practices, carbon credits / offsets form one of the imporatnt pillars of abatement efforts to achieve net-zero emissions. A robust and effective carbon credits market would make it easier for companies to locate trustworthy sources of carbon credits, benefiting both buyers and sellers and ultimately, supporting progress toward a low- carbon future. It is a valuable tool and a long-term solution for hard-to-abate emissions and sectors.
IMPORTANCE OF NATIONAL EMISSIONS TRADING SYSTEM
Carbon markets, also known as emissions trading systems or cap-and-trade systems, are mechanisms that allow the buying and selling of carbon credits. These credits represent a reduction in greenhouse gas emissions, and they can be traded between entities to help achieve emission reduction targets.
Establishing a carbon market can have several advantages for a country like India. A carbon market provides economic incentives for businesses and industries to reduce their carbon emissions. By creating a market for carbon credits, entities that reduce their emissions below a certain level can sell their excess credits to those who have not met their emission targets. This incentivizes emission reductions and encourages the adoption of cleaner technologies and practices.
Carbon markets offer a cost-effective approach to achieving emission reduction targets. Instead of relying solely on regulatory measures or direct government interventions, a market-based system allows for flexibility and encourages innovation. It provides a mechanism for the most efficient and economically viable emission reduction activities to take place, thereby minimizing the overall cost of achieving climate goals.
A well-functioning carbon market can attract domestic and international investments in clean technologies and low-carbon projects. The availability of a carbon market signals that there is a demand for emission reductions, creating opportunities for businesses and investors to participate in the transition to a low-carbon economy. This can drive innovation, create green jobs, and contribute to sustainable economic growth. Establishing a carbon market aligns with global efforts to combat climate change. It allows countries to participate in international carbon trading, fostering cooperation and collaboration between nations. It provides a platform for countries to share experiences, technologies, and best practices, further enhancing their climate mitigation efforts.
EVOLUTION OF GLOBAL CARBON MARKET
Carbon markets have evolved over the years as key policy instruments to address climate change and reduce greenhouse gas emissions.
By the late 1980s, there was growing global concern that acid precipitation was damaging forests and aquatic ecosystems. This was a result of sulphur dioxide and nitrogen oxides (NOx) reacting in the atmosphere to form sulfuric and nitric acids. In response to this, the U.S. launched a grand experiment in market-based environmental policy as the country established the path- breaking SO2 allowance trading program.
While the concept of cap-and-trade is now quite popular, in 1990 this approach to regulating the environment was quite novel. A few years after the launch, the approach had come to be seen as both innovative and successful. It led to a series of policy innovations not only in the United States but also, globally to address the threat of global climate change.
The concept of carbon markets emerged in the 1990s with the implementation of the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol. The Kyoto Protocol introduced the Clean Development Mechanism (CDM) and Joint Implementation (JI) as market-based mechanisms to promote emission reduction projects in developing and transitioning countries.
One of the most significant milestones in the evolution of carbon markets was the establishment of European Union Emissions Trading Scheme (EU ETS) in 2005. It was the first large-scale international carbon market, covering various sectors and greenhouse gases within the European Union. The EU ETS created a market for trading emission allowances and became a model for subsequent carbon market designs. In addition to the EU ETS, several other countries and regions have implemented their own carbon markets. Examples include the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States, the California Cap-and-Trade Program, and the New Zealand Emissions Trading Scheme. These regional and national carbon markets have aimed to establish emissions reduction targets, allocate allowances, and facilitate the trading of carbon credits.
Alongside regional and national initiatives, international market mechanisms have continued to evolve. The Paris Agreement, adopted in 2015, introduced provisions for countries to cooperate through internationally transferred mitigation outcomes (ITMOs). The Agreement also encouraged the development of a new market mechanism to support emission reductions and sustainable development. Several countries have introduced pilot carbon markets or initiatives to explore market-based approaches. China launched its national ETS in 2017, which has become the worlds largest carbon market in terms of emissions coverage. Other countries, such as South Korea, Canada, and Japan, have also implemented or are in the process of implementing their own carbon markets.
In recent years, voluntary carbon markets have gained momentum. These markets allow organisations, individuals, and businesses to voluntarily offset their emissions by purchasing carbon credits from projects that reduce or remove greenhouse gas emissions. Voluntary markets provide additional opportunities for emission reductions and allow entities to demonstrate environmental responsibility beyond regulatory requirements.
The market for carbon credits purchased voluntarily is important for other reasons. It has become a mainstream tool for driving finance to climate action activities or projects that reduce greenhouse gas emissions. These projects can have additional benefits such as pollution prevention, biodiversity protection, public-health improvements amongst others. Over time, the voluntary carbon markets have evolved into a robust and effective means to tackle climate change.
There are different standards of carbon credit within the voluntary carbon market such as Gold Standard, Verified Carbon Standards, Clean Development Mechanism and Global Carbon Council amongst other international standards.
Its important to note that the design and effectiveness of carbon markets vary across regions and countries. Challenges such as ensuring environmental integrity, preventing market manipulation, and addressing social equity considerations continue to be important considerations in the evolution of carbon markets.
CURRENT STATE OF THE CARBON MARKET AND PROSPECT
Voluntary carbon offsets play a crucial role in assisting both companies and countries in achieving ambitious climate targets. These offsets allow the private and public sectors to purchase "credits" from projects that remove or reduce carbon emissions. This mechanism provides a means to mitigate the impact of emissions in the short term while working towards the ultimate goal of eliminating carbon emissions all together.
Achieving the sustainability goals set out in the 2015 Paris Climate Agreement, as well as various national and company-level targets, requires significant efforts in carbon reduction. According to Morgan Stanley Research, the world must remove at least 1 gigaton of carbon dioxide annually by 2030 to meet these targets. Additionally, there is potential for avoidance or reduction credits to contribute up to 10 gigatons per year.
The voluntary carbon offsets market is poised for substantial growth, with projections indicating an increase from approximately $2 billion in 2022 to about $100 billion by 2030, and around $250 billion by 2050. This expected expansion underscores the increasing reliance on carbon offsets as a critical tool in the global effort to combat climate change.
Amidst the shifting tides of the industrys landscape, the carbon market has been navigating through a multifaceted environment marked by challenges and uncertainties. One of the main catalysts behind the downward trend was the challenging macroeconomic environment, which led to stagnation in demand in late 2022. In 2023, market conditions continued to deteriorate, with a 25% reduction in credit issuance compared to 2021. There was an increasing trend in demand for current vintages, resulting in substantial credit assets from older vintages losing their valuation and marketability. The situation was exacerbated by unresolved geopolitical conflicts, which were expanding rather than being resolved. Regulatory developments also posed challenges to the market, with evolving rules requiring greater compliance and accountability from market participants. The lack of concrete agreements at COP28, particularly regarding the operationalization of Article 6 mechanisms, further complicated the landscape, creating a challenging environment in the short term.
Despite these challenges, various market corrections have been institutionalized within the regulatory framework of the Voluntary Carbon Market. These include, but are not limited to, certifications such as ICVCM and VCMI, which enhance independent market credibility. Additionally, there has been a substantial increase in corporate commitments to ambitious carbon neutrality and net-zero pledges. Furthermore, international carbon taxation on trade and the evolution of credible sectoral decarbonization mechanisms are contributing factors. Moreover, more countries and regions are launching Emissions Trading Systems (ETS) aimed at pricing greenhouse gas emissions, thereby driving investment in low-carbon technology and supporting efforts to meet climate targets.
On a positive note, consumer attitudes towards sustainability are evolving. A recent Bain & Company report indicates that 64% of global consumers show high levels of concern about environmental sustainability, and this concern is expected to rise. The past two years have seen a noticeable shift in consumer sentiment, driven by increased awareness of climate change, often sparked by extreme weather events. Bains 2023 Consumer Lab ESG Survey found that consumers are willing to pay an average premium of 12% for products with reduced environmental impact, with those who express the highest levels of concern willing to pay even more. This heightened demand for eco-friendly products further validates the importance of carbon markets and their role in promoting sustainability.
IMPACT OF CLIMATE CHANGE ON THE GLOBAL ECONOMY
According to the Swiss Re Institutes report, "The Economics of Climate Change: No Action Not an Option," the global economy might forfeit 10% of its total economic value by 2050 due to climate change. The report also cautions that this potential loss could increase substantially to 18% of gross domestic product (GDP) by the middle of the century if no measures are implemented and temperatures rise by 3.2?C. Further, the report evaluates how global warming will impact 48 countries, which account for 90% of the global economy, and assesses their climate resilience.
| Temperature rise scenario, by mid-century | ||||
| Well-bellow 20C increase | 20C increase | 2.60C increase | 3.20C increase | |
| Paris target | The likely range of global temperature gains | Serve case | ||
| Simulating for economic loss impacts from rising temperatures in % GDP relative to a world without climate change | ||||
| World | -4.2% | -11.0% | -13.9% | -18.1% |
| OECD | -3.1% | -7.6% | -8.1% | -10.6% |
| North America | -3.1% | -6.9% | -7.4% | -9.5% |
| South America | -4.1% | -10.8% | -13.0% | -17.0% |
| Europe | -2.8% | -7.7% | -8.0% | -10.5% |
| Middle East & Africa | -4.7% | -14.0% | -21.5% | -27.6% |
| Asia | -5.5% | -14.9% | -20.4% | -26.5% |
| Advanced Asia | -3.3% | -9.5% | -11.7% | -15.4% |
| ASEAN | -4.2% | -17.0% | -29.0% | -37.4% |
| Oceania | -4.3% | -11.2% | -12.3% | -16.3% |
Global temperature rises will negatively impact GDP in all regions by mid-century.
Image: Swiss Re Institute: The economics of climate change.
Leading global organisations are increasingly making substantial contributions to climate finance, playing a pivotal role in shaping the global response to climate change and driving forward sustainable development.
In the fiscal year 2023, the World Bank Group set a new benchmark by allocating a record $38.6 billion towards climate finance, aimed at advancing efforts to eliminate poverty while ensuring a sustainable planet. This represents a 22% increase from the previous years climate finance contributions. The Banks strategy now focuses on enhancing resources for developing nations, emphasizing a new approach that encourages impactful development and assumes greater risk.
The International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) together provided $29.4 billion in climate finance, with nearly $12 billion earmarked specifically for projects related to adaptation and resilience. The International Finance Corporation (IFC), the World Banks private sector division, contributed $7.6 billion to climate finance, which constituted 46% of its annual investment commitments. Additionally, the IFC successfully mobilized $6.8 billion in private sector capital, bringing its total climate finance contribution to a record-setting $14.4 billion.
Further, in 2023, Asian Development Bank (ADB) committed $10,747 million in climate finance. Of this total, $6,168 million (57.4%) is expected to contribute to climate change mitigation and $4,578 million (42.6%) to climate change adaptation. ADB provided $9,864 million from its own resources and mobilized $883 million from external resources.
OPPORTUNITIES
1. A promising future of carbon market
Global climate action is intensifying, with nations worldwide committing to make the 2020s a pivotal decade for significant climate initiatives, necessitating a swift and substantial reduction in greenhouse gas (GHG) emissions. While new technologies and alternative energy sources are essential for managing emissions, substantial reductions can only be achieved through carbon credits.
Despite the prevailing turmoil in the carbon market, there is a noticeable sense of optimism about the future. The current turbulence results from a complex array of global factors, but it is important to view this period as temporary. Looking forward, the focus remains on the promising developments that lie ahead.
Even with a sluggish economy and budgetary constraints, the demand for voluntary carbon- emissions credits is increasing rapidly. The focus of carbon credit trading is shifting from merely reducing emissions to actively removing them, according to the latest report by BCG in partnership with Shell. This report identifies several key trends: the growing influence of external organizations on buyers decisions, the increasing importance of a credible monitoring, reporting, and verification framework for purchase decisions, and the continuous monitoring of developments related to Article 6 of the Paris Agreement, which companies use to adjust their strategies as needed.
2. Increased corporate and social awareness
The future of carbon markets appears promising due to increasing social and corporate awareness about climate change. There is a heightened global awareness of the urgent need to address climate change. Citizens, communities and organisations are increasingly recognizing the risks and impacts associated with rising greenhouse gas emissions. This heightened awareness is driving demand for action and creating a favorable environment for the development and expansion of carbon markets.
Many companies are voluntarily committing to ambitious sustainability goals, including carbon neutrality or net-zero emissions. These commitments often require companies to reduce their own emissions and offset any remaining emissions through carbon credits or investments in emission reduction projects. Such corporate initiatives are driving the demand for carbon credits, stimulating the growth of carbon markets.
Further, investors are recognizing the financial and environmental risks associated with climate change. They are increasingly integrating environmental, social, and governance (ESG) considerations into their investment strategies. Carbon markets offer an avenue for investment in emission reduction projects and carbon credits, providing financial returns alongside environmental impact.
3. Indian Carbon Market
The Government of India (GoI) has been proactive when it comes to strengthening climate action and transitioning towards green and sustainable growth of the country. GoI is presently working on operationalising the Indian Carbon Market (ICM), as being provisioned under the Energy Conservation Act, Amendment 2022. We will soon have National Cap & Trade Emission Trading System [obligated market] and Offset Market for non-obligated voluntary project developers which will be activated through Carbon Credit Trading Scheme (CCTS), thanks to Government initiatives. The government of India has also notified its priority sectors and activities for Article 6.2, sovereign trade among other interested countries towards meeting their NDC targets. The basic premise of Carbon Market globally is to achieve the emission reduction targets at least cost basis; and India being one of the largest suppliers of carbon offsets globally, is well poised to develop and utilize its strength to enable green / carbon finance flow towards its sustainable development agenda.
CHALLENGES
Since the carbon market is an evolving market, the challenges are typical for any developing initiative. The companys operations and financial conditions can be affected by the following business risks and uncertainties:
• Change in regulations of carbon markets and trading rules
• Change in carbon credit market dynamics
• Dependency on the carbon credits trading business
• Trading in carbon credits exposure to counter parties
• Inability to maintain regular carbon credit order flow
• Adverse fluctuations in foreign exchange rates
• Dependence on promoter and key managerial personnel
• Ensuring credibility and quality of carbon credits to investors
• Regular changes in quality management standards, environmental laws and regulations related to GHG emission
• Adverse financial condition of EKIESLs clients or global economy
• Developments in macroeconomic factors
• Changes in laws and regulations in end customer industries
Over the past few years, we have diligently enhanced our business operations, bolstering our resilience against potential challenges. Our proactive efforts have significantly reduced vulnerability, reinforcing our capacity to thrive in a dynamic environment. However, its important to acknowledge that, while we have made substantial progress, certain challenges may still exert a limited impact on our performance. Embracing these realities, our forward-looking strategy empowers us to proactively address any obstacles, ensuring that we maintain our trajectory of growth and innovation while upholding our commitment to excellence.
EKI IN THE YEAR GONE BY
The year 2023 witnessed an exceptional commitment to climate planning. Our dedication to creating a more sustainable world remained unwavering as we diligently pursued targeted initiatives for climate action, firmly emphasizing the goal of building a greener planet.
As we advance, our position as a global leader in carbon markets has solidified. We consistently engage with businesses worldwide, inviting them to join us in taking meaningful climate action. Central to our mission is educating our customers about the significance of climate and carbon footprints. We invest considerable time and effort in enlightening businesses about their role in contributing to the well-being of our planet and society as a whole. Our ultimate aim is to align with global climate goals and inspire a sense of responsibility towards nature and the broader community.
At EKI, we embrace the opportunity to lead in global climate action. Our dedication extends beyond reducing carbon emissions to include a strong focus on community development and social upliftment. One of our key initiatives in this regard is our exclusive partnership with Indian Oil Corporation Limited (IOCL), promoting "Surya Nutan," an innovative indoor solar cooking system designed to offer clean cooking solutions globally.
Currently, we have emerged as a frontrunner in the market, offering unique and comprehensive solutions that encompass all aspects of carbon markets. Our organization serves as a one-stop destination, providing a wide range of services such as consultancy, advisory support for carbon asset management and certifications related to renewable energy.
As we propel our company to new heights, our paramount objective is to create a safer planet. We prioritize the well- being of the community, our employees and our esteemed customers. We firmly believe that our collective efforts will significantly contribute to a prosperous future. Looking ahead, we are committed to steering the planet towards achieving net-zero emissions and actively pursuing our vision of constructing a greener tomorrow.
Our collaboration with the Jospong Group of Companies Ltd in Africa aims to advance sustainability, net-zero services, climate investments and carbon neutrality. This partnership has ambitious goals, with plans to secure $1 billion in carbon credit financing and create over 1,000 jobs in Ghana and West Africa by 2030.
In FY 2024, EKI achieved significant growth, broadening our global client base and exploring new opportunities through strategic partnerships. By joining forces with industry leaders, we extended our reach in the global carbon asset management space. Our efforts were recognized internationally, with accolades such as the Environmental Finance Awards and inclusion in Fortunes The Next 500 List, reflecting our dedication to excellence.
Our subsidiary, GHG Reduction Technologies Pvt. Ltd., has played a pivotal role in manufacturing improved cookstoves, producing 1.8 million units for India and 300,000 units for three African countries: Ghana, Kenya, and Malawi. We are also proud of our ongoing projects in Nigeria, the Philippines, Tanzania and other regions, with further expansions planned for South East Asia, Uganda, Rwanda, Nigeria, Mozambique, Nepal, Bangladesh and neighboring countries. Furthermore, GHG Reduction Technologies Pvt. Ltd. established a state-of-the-art plant in Dindori, Nashik dedicated to producing biomass briquettes. In Dindori, company purchases agricultural waste from farmers that would otherwise be burned, contributing to GHG emissions. The Dindori Briquettes plant not only generates revenue for farmers but also enhances their livelihoods. By converting this agricultural waste into briquettes, a coal substitute, the plant significantly reduces carbon emissions, thereby aiding in the reduction of carbon footprints.
Additionally, we recently started operations of our two new subsidiaries, EKI Power Trading Pvt. Ltd. and Galaxy Certification Services Pvt. Ltd., demonstrating our continued commitment to innovation, growth and diversification. Operational revenue from both entities will be part of our consolidated financials from FY 2024-25 onwards.
Despite the uncertainties surrounding international carbon market negotiations, we remain optimistic about the industrys future and our role within it. Compliance carbon markets continue to grow, with several high-emitting countries laying the groundwork for implementation. We believe that globally integrated, transparent and well- managed carbon markets will be essential in driving the transition to a low-carbon economy and achieving net- zero targets.
With the push towards net-zero targets gaining momentum, the importance of well-managed and transparent carbon markets has never been greater. EKI is ready to take the lead in this critical transition, and we are dedicated to fostering innovative solutions that promote a sustainable future for everyone. We believe that through strategic partnerships, pioneering projects and a clear focus on environmental stewardship, EKI will play a central role in the global effort to reduce carbon emissions and combat climate change. Our commitment to sustainability is not only a business imperative but also a shared responsibility toward future generations.
Looking ahead, we see significant opportunities to continue our growth trajectory. We are prepared to meet the increasing demand for high-quality carbon credits and are excited to drive change through innovative solutions and our expanding portfolio of services and projects.
OUTLOOK
1. Strategic Interventions for a Sustainable Future
In an era of heightened environmental awareness, our company is set to make a significant impact on the carbon market landscape. Our forward-thinking business strategy aims to revitalize the carbon offset and credit sector through innovative measures. A cornerstone of this strategy is the implementation of a comprehensive screening process for carbon offsets, supported by integrity ratings. By rigorously assessing the credibility of offset projects and credits entering the market, we aim to build a new level of trust and confidence among buyers and financial institutions. This approach not only ensures the legitimacy of carbon transactions but also promotes transparency in a market that has historically been opaque.
Additionally, we have strategically diversified our operations to reduce reliance solely on carbon credits. Our visionary approach includes expanding into various sectors such as briquette and pellet production, biochar and biogas ventures, CNG and green hydrogen initiatives, as well as power trading and eco-friendly household devices. This multifaceted strategy reduces business vulnerability and demonstrates our commitment to holistic emission reduction through innovative backward integration.
2. Advancing Carbon Offset Development Methodologies
Embracing the evolving landscape of carbon markets, our companys strategy includes a robust plan to strengthen the foundation of carbon offset development methodologies. At the heart of this vision is the strategic integration of Digital Monitoring, Verification, and Reporting (DMVR) mechanisms. By incorporating advanced technology into the verification process, we aim to significantly enhance the credibility of carbon offset initiatives. This crucial step ensures that real emission reductions are accurately tracked and verified, eliminating skepticism and increasing market confidence. Our dedication to refining methodologies with digital precision not only boosts stakeholder trust but also enhances the overall credibility of the carbon market.
3. Pioneering Financial Support for a Sustainable Transition
As the Global Stocktake and IPCCs Carbon Budget assessment emphasize the gap between climate action announcements and implementation, our companys strategic focus gains profound significance. This disparity underscores the urgent need for immediate and substantial emission reductions. In response, we recognize the pivotal role of emission markets in facilitating this transition. Our forward-looking strategy aligns seamlessly with this imperative, positioning us to drive market growth and accelerate the shift towards a sustainable future by directing crucial funds into effective emission reduction initiatives.
4. Leading the Integration of Environmental Considerations in Development
As we witness the integration of carbon costs into mainstream investment decisions through Environmental, Social and Governance (ESG) scores, our company seizes a pivotal opportunity. This moment marks the normalization of carbon valuation, representing a significant stride towards embedding environmental considerations in mainstream development. This shift not only acknowledges the true cost of carbon but also amplifies the influence of the Carbon Market. Our strategic approach seamlessly aligns with this evolution, positioning us to harness this momentum and extend the reach of the Carbon Market. By embracing this transformative change, we stand ready to navigate market dynamics and foster an environment where sustainability guides every investment choice.
5. Charting an Exponential Path for the Carbon Market
In the initial phase, the market is expected to be engrossed in cross-border standardization and system alignment. However, this foundational groundwork serves as the catalyst for the anticipated exponential growth projected in the short to medium term. With this trajectory in mind, our business outlook is strategically poised for positioning. Our approach embraces the challenges of standardization, setting the stage for capitalizing on the dynamic and burgeoning Carbon Market of tomorrow.
SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE
The company is into climate change & sustainability advisory and carbon offsetting, along with business excellence services which includes ISO certification, management training on JIT / Kaizen etc., and electrical safety audits. The Board of Directors has designated the Managing Director as the Chief Operating Decision Maker (CODM), responsible for evaluating company performance and allocating resources based on various performance indicators. As per the requirements of Ind AS 108 - "Operating Segments", the company has two reportable segments as under:
(i) Trading & Other Business Segment, where the carbon credits are purchased from various vendors and are sold to customers among other ancillary activities.
(ii) Generation Segment, where the carbon credits are issued from the projects implemented, developed and owned by the company.
The revenue of both these segments is earned majorly from sale of carbon credits, however the decision of CODM is derived separately in both these segments considering the variable outcomes of the respective segments.
Details of the reportable Operating Segments of the company and the identifiable items of Generation Segment are as under:
| Particulars | Trading & Other Segment | Generation
Segment |
Trading & Other Segment | Generation
Segment |
Total | Total |
| 31 March 2024 | 31 March 2024 | 31 March 2023 | 31 March 2023 | 31 March 2024 | 31 March 2023 | |
| Segment Assets | 56,856.53 | 9,396.29 | 79,267.53 | 8,810.05 | 66,252.82 | 88,077.58 |
| - Intangible Assets | - | 757.63 | - | 314.58 | - | - |
| - Intangible Assets Under Development | 8,612.04 | 8,494.62 | ||||
| - Inventories | 26.62 | 0.05 | ||||
| - Trade Receivables | 0.79 | |||||
| - Other Current Assets | ||||||
| Segment Liabilities | 24,858.35 | 33,755.74 | 438.96 | 24,858.35 | 34,194.70 | |
| - Trade Payables | 438.96 | |||||
| Segment Revenue | 24,892.38 | 992.79 | 122,793.57 | 3,047.08 | 25,885.17 | 1,25,840.65 |
| - Sale of products - Carbon credits | 992.79 | 3,047.08 | ||||
| Segment Expenses | 32,295.46 | 139.53 | 111,243.33 | 149.29 | 39,434.99 | 111,392.62 |
| Depreciation | 98.27 | 78.64 | ||||
| Project Registration, Verification, Validation, Issuance and DOE expenses | 41.25 | 70.65 |
The above details are segregated basis identifiable items of generation segment. Other items of assets, liabilities, income and expenses are either for trading segment or are unallocable.
Analysis of Companys revenues (excluding other income) based on the geography
| Particulars | For the year ended | |
| 31 March 2024 | 31 March 2023 | |
| - Domestic | 2,197.68 | 4,774.46 |
| - Exports | 23,687.49 | 121,066.19 |
| Total | 25,885.17 | 125,840.65 |
Analysis of Companys non-current assets (other than financial instruments and deferred tax assets) based on geography
| Particulars | As at | |
| 31 March 2024 | 31 March 2023 | |
| - In India | 35,024.32 | 23,083.55 |
| - Outside India | - | - |
| Total | 35,024.32 | 23,083.55 |
RISK AND CONCERN
The global carbon market plays a pivotal role in addressing climate change by incentivizing carbon emissions reductions and promoting the transition to a low-carbon
economy. However, as with any complex system, there are inherent risks and concerns associated with the carbon market that must be acknowledged and addressed. This statement aims to outline some of the key risks and concerns within the carbon market.
INTERNAL CONTROL SYSTEM
The Company has established a robust internal control system that serves multiple purposes, including ensuring the accuracy of financial reporting, the efficiency of business operations, compliance with policies and procedures, protection of assets, and the optimal use of resources. We have implemented mechanisms for ongoing review and monitoring to ensure the effectiveness and adequacy of these control systems.
Our accounting practices align with the Indian Accounting Standards specified under Section 133 of the Act, as per the Companies (Indian Accounting Standard) Rules, 2015.
To assess the adequacy and effectiveness of our internal controls, we engage external auditing firms to conduct Internal Audits. The findings from these audits are actively scrutinized by the Audit Committee, and corrective actions are taken as needed. Additionally, the Board of Directors periodically reviews the Internal Audit Reports. Importantly, there were no significant weaknesses identified in the design or operation of our controls during the year.
Our Standalone and Consolidated Financial Statements are subject to quarterly reviews by our Statutory Auditors to maintain transparency and accountability.
MATERIAL DEVELOPMENT IN HUMAN RESOURCES/ INDUSTRIAL RELATION FRONT
EKI recognizes that its workforce stands as its most invaluable asset and is integral to its success. Embracing an employee-centric philosophy, the company is dedicated to creating a secure and inspiring workplace environment that enhances productivity. EKI invests in its employees by enhancing their skills, honing their expertise and nurturing their leadership capabilities. In pursuit of this goal, the company offers tailored learning and development programs. EKI places great importance on the diversity of its workforce and aims to fortify its corporate abilities accordingly.
The management at EKI places a strong emphasis on teamwork and fosters a self-motivated work environment to drive the comprehensive growth of its employees. To further strengthen its human capital and attract, nurture, and reward exceptional talent, EKI has crafted human resource policies focused on cultivating a positive work atmosphere.
As of March 31, 2024, EKI had a workforce of 194 permanent employees.
| Ratio | 2024 | 2023 | % change (increase/ decrease) |
| Debtors Turnover (In times) | 7.20 | 14.97 | -52% |
| Inventory Turnover (In times) | 1.20 | 5.01 | -76% |
| Interest Coverage Ratio (In times) | (0.02) | 23.41 | -100% |
| Current Ratio (In times) | 6.75 | 5.20 | 30% |
| Debt Equity Ratio (In times) | 0.00 | 0.12 | -100% |
| Operating Profit Margin (%) | (15.44%) | 28.57% | -154% |
| Net Profit Margin (%) | (48.21%) | 9.50% | -607% |
| Return on Capital Employed (%) | (29.37%) | 26.92% | -209% |
| Return on Net Worth (%) | (30.15%) | 22.19% | -236% |
Explanation in case change is more than 25% as compared to previous year
Volatility in the carbon market is significantly impacting the companys profitability and ratios, particularly, categorized in the following domains:
1. Cost Uncertainty
• Carbon Compliance Costs: Companies that are required to purchase carbon credits to meet regulatory obligations face uncertainty in their compliance costs. If carbon credit prices are volatile, predicting and budgeting for these costs becomes challenging, potentially impacting financial planning and profitability.
• Hedging and Risk Management Costs: Companies might need to engage in hedging strategies to manage price risks, which can involve additional costs. These costs can affect profitability if they are not effectively managed.
2. Operational Costs
• Pass-Through Costs: If carbon credit costs increase due to market volatility, companies might pass these costs onto consumers. However, if the market is highly volatile, pricing adjustments may not keep pace with cost changes, squeezing margins and affecting profitability.
• Investments in Reductions: Companies may need to invest in emissions reduction technologies or processes to lower their demand for carbon credits. While this can reduce long-term costs, the initial investment can be substantial and may impact short-term profitability.
3. Revenue Impact
• Pricing Strategy: Companies involved in carbon trading can experience fluctuating revenues due to price changes in carbon credits. Volatile prices can lead to uncertainty in revenue streams if carbon credits are a significant part of their business model.
• Market Position: Companies that are more efficient in managing their carbon footprint may benefit from lower credit costs during times of high volatility, potentially enhancing their competitive position and profitability compared to less efficient rivals.
4. Investor Sentiment and Stock Performance
• Market Perception: Volatility in carbon prices can affect investor sentiment and stock performance, especially for companies heavily involved in the carbon market. Uncertainty about future carbon costs or regulatory changes can lead to fluctuations in stock prices, impacting the companys market valuation and access to capital.
5. Strategic Decisions
• Long-Term Planning: Volatility can complicate long- term strategic planning. Companies might delay or alter their investments in carbon reduction projects or new technologies due to uncertainty in future carbon costs and market conditions.
• Regulatory Risk: Companies that do not anticipate or adapt to regulatory changes may face higher costs. or penalties. Volatility can reflect underlying regulatory risks, affecting strategic decisions and overall profitability.
Owing to the above prepositions, the carbon markets are extremely volatile and accordingly the profits, ratios and the overall trends of the financial position of the company is effected by more than 25%.
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