Give Due Carbon Credit, How Indian Cities Can Turn Green Projects into Revenue Streams
With the budget approaching, there is growing discussion about the weak financial position of cities. Urban centres are often blamed for traffic congestion, pollution, CO₂ emissions and climate change, yet, little attention is paid to how the costs of climate change can be internalised or how cities can generate additional revenue through mechanisms such as carbon credits.
This is a missed opportunity. Cities are on the front lines of climate action, but they are also starved of resources. Carbon credits offer a way to align environmental goals with fiscal needs.
The Indore Model
A novel example of such a system comes from Indore, which has initiated the measurement of GHG emission reductions, defining one carbon credit as equivalent to 1 tonne reduction in CO₂ emissions. Carbon credits are treated as tradable goods, with prices currently around $5 per credit.
India is also developing its Carbon Credit Trading Scheme (CCTS), launched in 2024, to regulate emissions in energy-intensive sectors, with prices roughly ₹500-700 per credit (around $5). This creates a domestic market alongside international opportunities.
Indore has emerged as a pioneering urban local body in South Asia in exploring the feasibility of carbon finance, having initiated work on carbon credits several years ago. As a designated Smart City, Indore successfully registered three projects in the first phase of the carbon credit system: wet-waste management through composting, biomethanation and solar energy generation.
Between October 2017 and June 2019, these projects generated approximately 1.70 lakh carbon credits, yielding revenues of about ₹69 lakh. In the second verification period (July 2019-December 2020), the same projects generated revenues of ₹8.34 crore, realised in September 2021. The revenue jumped from less than ₹70 lakh to over ₹8 crore in just a few years—proof that the model works.
How It Works
Projects such as sewage treatment plants, decentralised composting, forestry, plastic recycling and LED lighting can qualify for relevant carbon credit mechanisms, subject to eligibility. Renewable energy projects with carbon credit potential include solar, hydro and wind.
In the transport sector, bus rapid transit systems (such as those in Ahmedabad and Hubballi-Dharwad), EVs (despite charging challenges) and metro rail systems are also eligible. Afforestation initiatives, energy-efficiency measures such as improved cook stoves and LED lighting, and plastic recycling and related activities may likewise earn carbon credits.
The range of eligible activities is broad. Almost any project that reduces emissions compared to a business-as-usual baseline can potentially generate credits. This means cities with diverse portfolios of green projects can monetise multiple streams.
Why More Cities Aren’t Doing It
At first glance, this appears straightforward, which raises the question of why more cities are not resorting to carbon credits. There are several challenges, as highlighted by Indore Smart City Development Limited.
First, project registration charges are high, at about ₹10,000. This may seem modest, but for a small project, it can be a barrier. Second, the process flow is complicated and requires a team of dedicated, trained HR professionals. This is not something a city can do with existing staff; it requires specialised expertise.
Third, there are no open online trading platforms for carbon credits. Moreover, the carbon credit market is subject to fluctuations, which may reduce incentives for cities to rely consistently on this revenue source. Prices can go up and down, making revenue uncertain.
The Role of SPVs
Nonetheless, some SPVs, such as ISCDL, provide consultancy assistance to ULBs that wish to capitalise on green projects by helping them monetise these initiatives, subject to market conditions. Revenue-sharing arrangements are typically limited to cover the costs of project registration, complex processes, auditor fees and related expenses.
This is a model worth scaling. A specialised entity that understands the carbon market can help cities navigate the complexity. In return, it takes a share of the revenue to cover costs. The city gets additional income without having to build expertise from scratch.
Opportunities for Other Cities
Other Indian cities can similarly benefit from carbon credits by engaging in green projects. For instance, Bengaluru has a metro system—as do Chennai, Mumbai and Kolkata—and has also undertaken measures such as large-scale tree planting and incentives for sustainable real estate development, including green buildings. These initiatives present an opportunity to leverage carbon credits as an additional revenue-generating mechanism.
Delhi has its metro, CNG buses, and efforts to green the Yamuna. Mumbai has its suburban rail network and coastal road project. Chennai has its tree planting drives. All of these could potentially generate carbon credits.
The Budgetary Ask
The budget should provide cities with incentives to initiate carbon credit trading, with support from SPVs such as ISCDL, to help them become more financially resilient. This could take the form of seed funding for project registration, training programs for municipal staff, or the creation of a central facility to help cities navigate the carbon market.
The amounts involved are not trivial. Indore earned over ₹8 crore from just three projects in a single verification period. For a cash-strapped city, that is real money. It can fund additional green projects, creating a virtuous cycle.
Conclusion: A Win-Win Opportunity
Carbon credits offer Indian cities a win-win opportunity. They incentivise green projects that reduce emissions and improve urban environments. And they generate revenue that can be reinvested in further sustainability initiatives.
The Indore example shows it can be done. The challenges are real but surmountable. With the right support from the central government, from specialised SPVs, and from a well-functioning carbon market, Indian cities can turn their green projects into gold.
The budget should seize this opportunity. It costs little to provide the enabling framework. The returns, in both environmental and fiscal terms, could be substantial.
Q&A: Unpacking Carbon Credits for Cities
Q1: What are carbon credits and how do they work for cities?
Carbon credits represent a reduction of one tonne of CO₂ emissions. Projects that reduce emissions compared to a baseline can earn credits, which can then be sold on carbon markets. Cities implementing green projects—waste management, renewable energy, transport, afforestation—can generate and sell these credits for additional revenue.
Q2: What has Indore achieved with carbon credits?
Indore registered three projects: wet-waste management (composting and biomethanation) and solar energy generation. Between 2017-19, these generated 1.70 lakh credits yielding ₹69 lakh. In 2019-20, the same projects generated ₹8.34 crore—proof that the model works at scale. Indore is South Asia’s pioneering urban body in carbon finance.
Q3: What types of projects can earn carbon credits?
Eligible projects include sewage treatment plants, decentralised composting, forestry, plastic recycling, LED lighting, solar/hydro/wind energy, bus rapid transit systems, EVs, metro rail, afforestation, and improved cook stoves. The range is broad—almost any project reducing emissions can potentially qualify.
Q4: Why aren’t more Indian cities doing this?
Challenges include high project registration charges (about ₹10,000), complicated processes requiring trained staff, absence of open online trading platforms, and market price fluctuations. Special Purpose Vehicles like ISCDL now offer consultancy assistance to help cities navigate these barriers through revenue-sharing arrangements.
Q5: What should the budget do to promote carbon credits?
The budget should provide cities with incentives to initiate carbon credit trading, with support from SPVs like ISCDL. This could include seed funding for registration, training programs for municipal staff, or creating a central facility to help cities navigate the carbon market. This low-cost intervention could generate significant revenue for cash-strapped cities.
