Greening of MSMEs through SDGs Framework, Decarbonisations and Development of

Natural Resources Capital1

India as driver of global green economy: India, with other developing and least
developed countries (LDCs) of the world, has always negotiated under United Nations
Framework Convention on Climate Change (UNFCCC) for linking reduction in emission of
GHGs (greenhouse gases) to need for economic growth through “Principle of Equity” and
“Common But Differential Responsibilities (CBDR) among nations” for investments in
emission mitigation and climate adaptation measures. Article 4.7 of UNFCCC identifies
poverty eradication and socio-economic development as an overriding priority of
developing countries -also known as “development agenda”. On 2 October, 2016 India
took upon itself a voluntary commitment under UNFCCC to reduce its carbon emission
intensity (emission per capita GDP) by 35% from 2005 levels and aims to produce 40%
of its electricity from non-fossil fuel and increase of forest cover by 5 million hectares by
2030. Besides, India has also committed to achieving Sustainable Development Goals.

In India, industries including MSMEs (e-CO2 772830 giga gram/ year) and agriculture
(e-CO2 355600 giga gram/year) account for major sources of emissions while Land Use
Land-use Change and Forestry (e-CO2 222567 giga gram / year) is biggest sink for
green-house gases. India has steadily followed industrial model of agriculture
production (specialised and intensive monoculture) and consumption (heavy reliance on
only few sources of food) over last 6 decades that required- i) voluminous use of
synthetic chemicals, water and other inputs; ii) elaborate and energy-intensive
production and distribution systems; iii) unsustainable exploitation of natural resources
including forests; and iv) colossal production of wasteful by-products have proved to be
unsustainable. Impact of this economic model is socially undesirable, environmentally
detrimental and economically unviable as it results into loss of bio-diversity and other
natural resources (soil, water and forests); emits green-house gases; builds reactive
nitrogen burden; and emanate pollutants that adversely affects human life support
systems. Agriculture and rural MSMEs in India have limited capacity to address
environmental and social issues where environmentally hazardous production processes
affects their sustainability, wellbeing of people linked to those enterprises and their
competitiveness in national and international markets.

Achieving the international commitment for emission reduction and SDGs besides
undoing the ill-effects of past development model in agriculture is a herculean task
where Ministry of MSME can leverage its pivotal position to bring together all sectors
including agriculture, environment and forests, industries, textiles, rural development to
steer the country in developing a market mechanism to achieve decarbonisation of
economy and SDGs.

Specific areas where Ministry of MSME can intervene are :

i) Greening of MSMEs and agriculture through adoption of SDG framework
ii) Decarbonisation of economy through emission intensity approach i.e. emission per
capita GDP and supporting unorganised sectors such as MSMEs and agriculture to
benefit from the same
iii) Promote natural capital for development of MSMEs based on forests and other natural
resources and promote efficient management of active nitrogen burden on the
economy.

1
Nareder Singh Rathore; 9900393800 nrathore333@gmail.com
1. Greening of MSMEs: In order to address this situation the Ministry of MSME
needs to develop and implement a social and environmental framework for MSMEs
particularly in Agriculture & Allied and other rural development (on-farm and off-farm)
sectors where SDG-standards can be developed and adopted to avoid, minimize,
reduce, mitigate and compensate for social and environmental risks. In recent decades
much progress had been made in developing tools and techniques of quantifying
environmental and social risks and impacts of production systems (green and social
accounting) and defining their baselines to assess progress on SDGs standards.

Once the standards are developed, through intensive stakeholder consultation, MSMEs
can develop their environmental and social commitment plans. These plans can be
supported through necessary investments from Ministry of MSME to build their capacity
and infrastructure in order to bring them to a minimum threshold level where they can
internalise those standards in their business models. Thereafter, a rating system can be
introduced to assess and demonstrate their performance and link them to green
markets. Social and environmental risks fund can be also be created to manage any
unforeseen events.

The scope of current ZED framework (Zero Effect and Zero Defect) of MSMEs can be
enhanced and aligned with SDGs with an institutional backing to implement the same.
Modified rating system can address environmental, social and economic issues of rural
economy including MSME value chains in an integrated manner where incentives can be
provided to units that adopt socially desirable, environmentally sound and economically
feasible carbon and nitrogen efficient/neutral pathways to meet food and energy
requirement of present and future generations. Baselines can be identified and
standards can be applied to put equitable, common but differential responsibilities
among production units, spread across the country, on how they use their national
resources, develop forests, sustainably link to clean MSME value chains (active nitrogen
neutral) and contribute to national economic growth.

2. Decarbonising economy: Global emission markets2, both under obligatory and

voluntary framework, have grown into a multi-trillion economy in last two decades.
Indian entities participated in global emission markets through Clean Development
Mechanism of the UNFCCC.

Although India is strongest proponent of emission intensity (emission per capita GDP)
approach to addressing global warning it has not developed any domestic emissions
market where MSMEs can participate and benefit from use of market instruments. The

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Trading schemes in various parts of the world: EU Emissions Trading Scheme (EU ETS) which allows trading
in European Allowances (EUAs) by 28 countries ; CDM-JI Project under UNFCCC; Regional Greenhouse Gas
Initiative (RGGI) of 9 US States; EEA countries (Norway, Iceland and Liechtenstein ) emissions trading
schemes; Swiss emissions trading scheme ; Kazakhstan cap-and-trade; New Zealand emissions trading
scheme; South Korea cap-and-trade system; Quebec's cap-and-trade scheme; California's cap-and-trade
scheme; UK's CRC (Carbon Reduction Commitment) Energy Efficiency Scheme ; Aviation emissions trading
scheme (ETS); Voluntary Emission Reduction (VER) schemes where VER units are issued.
Perform Achieve and Trade (PAT) scheme of the Bureau of Energy Efficiency in India
(BEE) is meant for only high energy consuming designated industries. Under PAT,
Government of India has set standards for consumption of energy for identified energy-
intensive industries, known as designated consumers, and they are given targets for
reducing their energy consumption. Tradable Energy Saving Certificates (ESC) are issued
by the Government to industries which over-achieve their energy reduction targets.
Industries with excess ESC are allowed to sell their energy saving credits to
underperforming units. This scheme also does not take into account issues of carbon
intensity in line with international climate change policy of Government of India. It
does not recognize the change in contribution made to GDP by each industrial unit while
reducing its energy consumption. Within PAT there is no mechanism whereby units
contributing more to GDP within a given energy efficiency profile and c emission levels
can be rewarded more and vice-versa. Moreover, there is no market mechanism to
incentivise MSMEs, agriculture and forestry for their contribution to environment and
socio-economic development of the country.

India will have develop its own model of emission intensity based domestic trading
markets wherein i) baselines of emissions for individual entities or cluster of related
entities are defined ii) targets for emission per unit of contribution to GDP in a given
time frame is established iii) emission performance vis-à-vis contribution to GDP is
assessed iv) credits are allocated to entities who overachieve targets set for them v) a
market system is developed where entities who fail to meet their obligations can buy
credits from a common pool (managed by the Government) or trade credits with well
performing entities thus minimizing overall cost of managing their emissions.

India needs to develop a market system that is:

 sensitive to ‘need for development with economic growth’ i.e. it allows various
regions individually and country as a whole to set priorities for regulating its
energy consumption, green-house gas emissions and economic growth;
 links “energy reduction” and “reduction GHG emission” to “contribution to GDP”
through a market mechanism that supports SDGs (poverty alleviation though
sustainable production, distribution and use of resources);
 provides a general framework for credit trading which is flexible enough to be
applied in different regions to suite their geo-political and socio-economic
conditions;
 can use pre-negotiated ratio (carbon emissions by an entity to its contribution to
GDP), as a proxy for quantitative caps under “cap and trade” arrangements as
applied in developed countries;
 enables application of differential ratios (mentioned above) across industries
(including MSMEs) and production systems as per national priorities;
 recognizes and reward contribution made by each entity to the economic growth
while meeting emission targets;
 allows organized sector in the country to support the unorganized sectors such as
MSMEs, agriculture, rural development etc. which not only makes significant
contribution to economic growth but also has immense potential for poverty
alleviation, livelihood generation and reduction GHG and nitrogen burden;
 Links emission-intensity credits to financial and commodity markets through
derivative products, cross-listing of international contracts on global exchanges,
development of global contracts, indices and enabling inter-exchange clearing
and settlement systems such that efficient use of resources that leads to
achievement of SGDs;
  Provides opportunity to the Government of to regulate economic activities of
various entities in the country with regard to their energy use, impact on climate
change and contribution to the country’s economic development;
 Provides a market based mechanism for industrial entities to control and self-
regulate their environmental impact without compromising on needs of economic
development and to develop emission intensity credits as an important asset
class.

2.1 Developing emission-intensity credit markets: The ‘emission intensity’

approach can pave a way for a completely new form of trading market, which, if
developed, can address many limitations posed by Cap and Trade (CAT) or PAT market
structures. This approach that links level of GHG emission by an entity to level of its
contribution to the GDP is based on the premise that most activities that contribute to
GDP or Net Domestic Product (NDP - value of GDP net of resources utilized) can be
assessed for their allowed and actual level of emissions through a pre-defined ratio of
‘tCO2-e per unit contribution to NDP’ in value terms. We can call this ratio as CN Ratio.

The corollary of relating NDP to emission levels is that unlike CAT markets there will be
no quantitative cap on emissions but each industrial unit will have to contain its emission
in a predefined CN ratio. These ratios can be modified periodically as country progresses
on its growth trajectory.

Government of India can define CN ratio for each activity/industry based on national
priorities instead of putting energy consumption caps on identified industries. A ratio
defined for a particular type of industry/sector can be made applicable either uniformly
or differentially for each unit in that industry/sector based on national priorities and
growth potential of that industry/sector. Under the system each industrial unit will have
to restrict its CN Ratio to the limit prescribed for that unit/industry. Instead of trading in
ESCs (Energy Saving Certificates) the units can maintain their prescribed CN ratio by
trading in tCO2-e thus enabling conformity to internationally traded carbon instruments.
Entities with favourable CN ratio will have excess credits and vice versa. We can call
them Carbon Intensity Credits (CIC) each representing one tCO2-e. Therefore, entities
with excess CIC should be able sell their credit to entities that have shortage of these
credits like any other emission trading scheme. Therefore, each entity will have to value
its contribution to NDP vis-à-vis emission done by it in a given period and trade in tCO2-
e to maintain a CN ratio thus giving rise to a new market linked to carbon intensity i.e.
emission per unit of GDP/NDP. In this manner India will be able to link ‘energy reduction’
with ‘emissions reduction’ and ‘contribution to GDP/NDP’ i.e. need for development.

2.2. Supporting unorganised sectors: It is important that unorganized sectors such

as MSMEs, agriculture3, forestry and rural development also participate in the new
systems as they make significant contribution to Indian economy. The organized sector
may be encouraged to pay for cost of involvement / development of unorganized sector
in an environmentally friendly manner in a similar manner in which developed countries
are expected to support the developing countries under Kyoto Protocol. Government
may allocate a quantum of CICs for these unorganised sector each year and apex

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46.1% of land is under agriculture on which 70% of population depend on their livelihood and 23.9% of
geographical area is under forest and tree cover
financial institutions like National Bank for Agriculture and Rural Development (NABARD)
can act as repository of these credits. All installations in the organized sector who fail to
maintain their required CN profile may buy tCO2-e carbon credits either in the national
carbon market or from NABARD. Thus funds collected in this manner can be used by
NABARD to finance carbon offset projects in agriculture and rural development sectors to
achieve desired CN profile for these sectors. This will provide much needed impetus for
capital formation in sustainable rural enterprises and for employment generation in rural
areas and reducing emission from agriculture and forestry sectors.

2.3. Linking financial market to green economy: The relationship between the
contribution to NDP i.e. value of goods and services produced by a company and its
market capitalization can be established. On the basis of this concept exchange traded
derivative products can be developed linking market capitalization of an entity, value of
goods and services produced by it and its CN efficiency. Given a CN ratio, a higher
market capitalization could mean eligibility to do higher level of carbon emissions and
vice-versa. With each unit of value added to NDP companies can increase their available
credits for their eligible emission levels. The CN Ratio based systems would provide
incentive to companies in a given industry for either switching to low carbon intensive
products and processes or engage in trading emission credits (tCO2-e) based on the
value of goods and services produced by them. Thus, CIC trading system would directly
link financial markets with the carbon markets unlike CAT mechanism under EUETS or
Kyoto Protocol where financial market and carbon markets exist in isolation, each
determined by different guiding factors. Development of internationally linked trading
platforms will enable Indian corporates to build carbon credits as an important asset
class.

Development of CIC markets would provide Government of India opportunity to exhibit

its seriousness to the international community to meet its voluntary obligation for carbon
emission reduction and show that there is a market mechanism to integrated concerns of
climate change with ‘need for economic growth’ in developing countries. CIC system will
provide market based mechanism for Indian industries to control and self-regulate their
emissions without compromising on needs of economic development. It will help them
in making best use of arbitrage opportunities on international climate exchanges besides
providing them long term price signals and opportunities for investment and hedging
against the adverse price movement. A vibrant domestic market that links financial
sector with environmental sector will also enable financial institutions to gain from
investment opportunities in environmentally friendly ventures. Besides, an all-
encompassing approach will help development of unorganized agriculture and rural
development sectors through technological support and purchase of carbon credits by
organized sector from apex financial institutions like NABARD which may act as
repository of allocated CICs

2.4. Prerequisites: The process of developing CIC markets will involve following
important steps
i) Develop national carbon intensity plan for 2030 as per commitment under
Paris Agreement
o Identify industrial sectors and installations responsible for emission of Green
House Gases (GHG)
o Estimate current level of emissions of units and project the estimated growth of
GHG emission vis-à-vis expected / desired contribution to GDP/NDP .
 o Adopt multi-sectoral approach for both emission reduction (industrial units,
transportation etc.) and carbon sequestration (agriculture, forestry, landfill etc.)
and multifaceted approach where GHG offset project based systems (CDM) and
allocations based systems (CN Ratio) exists in close synergy.
o Develop methodologies for deciding the CN ratio for business as usual (BAU)
baselines for emission for each sector/industry.
o Develop nationwide guidelines for emission factors, use of fossil fuel, emission
monitoring and reporting, emission audit / verification (self-monitoring and third
party verification), compliance etc.
o Allocate CN ratios to installations based on national priorities and need for
competitiveness of various sectors.
o Prepare and implement timetable for emission budgeting and reduction (year
wise reduction). Initially only major industries may be covered and other sectors
may be included in successive phases

ii) Develop national registry

It will be important to develop a national registry of CICs and CERs to :
o track holding, transfer, cancellation and acquisition of carbon credits
o develop early warning systems
o ascertain level of compliance of individual source of emission vis-à-vis targets and
commitments
o devise industry/sector/state specific emission reductions policies and fix penalties
for defaulting entities

Currently, international registry for Certified Emission Reduction (CERs) units for CDM
projects is maintained under UNFCCC which holds project specific accounts of CERs of
buyer and seller countries. Annex B countries are required to establish their respective
registries under Kyoto Protocol. Although it is not obligatory for India under UNFCCC
framework to develop and maintain national registry, establishment of a national registry
will help India to keep track of generation, trade and transfer of CICs / CERs between
various value chain participants in the carbon market and provide a documentary
evidence of its contribution to emission reduction.

iii) Develop electronic trading mechanism with international access

In order to develop domestic carbon market the Government of India will have to
provide special provision for allowing free participation of international entities for
trading in CERs/ CICs on national exchanges. Free participation entails ability of
international entities to:
 trade on national exchanges (hedging and arbitrage)
 transfer funds through international accounts (flow of foreign exchage)
 maintain and transfer CIC/CER accounts between national and exchange
registries
 pool global liquidity on exchange platforms (international retail participation)
 get international counterparty guarantee (international risk management
systems)
 establish transparent and efficient price discovery system for Indian and
international entities (investment in national exchanges by international entities
in India)

iv) Seek international recognition and support for fungibility between CIC and
other products under CAT
International community should recognize the “need for development” in the developing
countries and consider carbon intensity based trading as an alternative to CAT. India
can use BRICS (Brazil, Russia, India, China, South Africa) forum can pursue the
international community to recognize fungibility between the CICs and other forms of
credits such as EUAs, CERs for facilitating better integration of international carbon
markets. In doing so, India will clear the way for similar initiatives in other developing
countries thus preparing ground for international negotiations based on trust and mutual
recognition for “need for development”. Both CER (CDM) markets and CIC markets can
co-exist as two complementary market mechanisms for achieving common goal.

v) Ensure involvement of Financial Institutions

Internationally, financial institutions (FIs) have played active role in the development of
carbon markets. The FIs extend carbon finance through creation of innovative carbon
funds; bring their expertise in financial markets as fund managers; and actively
participate as intermediaries. In absence of policy guidelines from the Reserve Bank of
India and the Ministry of Finance, Indian financial institutions, particularly banks are
slow and cautious in their approach although they recognizes potential and positive
business opportunities in the carbon markets. The Reserve Bank of India needs to
provide special directive to the banks for encouraging their participation in the carbon
Market.

vi) Establish national authority for carbon market and climate change
Government of India can establish a national authority for regulating carbon market and
activities related to climate change such as:
 Providing a suitable policy framework for CICs
 Initiating suitable policies for subsidies, inducements, voluntary programs,
regulations, taxes, and penalties on use and production of GHGs and support
renewable sources of energy through green tariff
 Preparing policy on international trade in emissions and establishment of
exchange platforms for trading in futures, options, indices on carbon credits.
 Developing policy to enhance energy efficiency in all relevant sectors; to promote
R&D related sectors; to ensure transfer of environmentally friendly technologies;
and to promote public awareness, education, and training.

3. Development of natural capital to support MSMEs: Availability and quality of

natural resources such as forests, water, biodiversity and renewable resources of energy
determine livelihood of 450 million rural people. Ministry of MSME can coordinate
operations of different ministries that are primarily responsible for development of
natural capital on which rural MSME depend viz. forests, bio-diversity, water resources,
agriculture and allied activities, tribal and indigenous peoples knowledge etc. especially
in areas related to promote local production and consumption of diversified raw material,
slow foods with recycling of nutrients; minimising use of fertilizers and pesticides; waste
management; introduction of fiscal measures to check unsustainable and nitrogen-
intensive production, processing, storage and transportation of products. The concept of
Nitrogen Added Tax similar to the Value Added Tax can be introduce where each
participant in the any food value chain pays taxes proportional to the nitrogen burden
added/ imposed by that entity; introduction of nitrogen rating, certification and labelling
of food products to make people aware of the negative effect of nitrogen burden on the
socio, cultural, biological and physical environment.

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