Unlocking Kerala’s Carbon Wealth: A Call for Monetizing Forest Carbon Stock

 

Introduction

Kerala, with its lush forests covering over 54.42% of its landmass, holds a carbon stock of approximately 205.523 million tonnes as per the Forest Survey of India (FSI) 2021. This translates to 754.27 million tonnes of CO₂ equivalent—a resource of immense economic value that remains largely untapped. Given the escalating global efforts to combat climate change and the rising importance of carbon markets, it is imperative that Kerala strategically positions itself to monetize this asset.

Despite global carbon pricing mechanisms offering potential economic returns, India, has yet to integrate carbon stock monetization into its state-level economic frameworks. This article advocates for a paradigm shift in Kerala’s Forest governance, proposing policy interventions, institutional frameworks, and a road-map for leveraging forest carbon wealth to enhance sustainable development, climate resilience, and economic security.

Fig 01: Forest Cover Map of Kerala: This map illustrates the distribution of very dense forest, moderately dense forest, and open forest across Kerala, along with non-forest areas, water bodies, and district boundaries. Source: Forest Survey of India (FSI), Government of India.

Understanding the Valuation of Kerala’s Carbon Stock

Carbon Pricing: A Rational Basis for Valuation

International carbon markets function based on cap-and-trade systems, carbon taxes, and voluntary carbon credit mechanisms. Prices fluctuate based on supply-demand dynamics, regulatory environments, and commitments under agreements like the Paris Accord.

As of 2024, carbon pricing varies widely:

• European Union Emissions Trading System (EU ETS): $90–$100 per tonne of CO₂
• California Cap-and-Trade Program: $30–$40 per tonne of CO₂
• Voluntary Carbon Markets (e.g., REDD+ credits): $5–$20 per tonne of CO₂
• Global average carbon price (World Bank estimate): $50 per tonne of CO₂

Thus, taking a conservative global average price of $50 per tonne of CO₂, Kerala’s Forest carbon stock is valued at approximately $37.7 billion (or ₹3.13 lakh crore). Even at the lower bound of $5 per tonne, Kerala’s forests could still represent a $3.77 billion economic asset. Would be good to know in this context that, the total annual budget of Kerala for the fiscal year 2024-25 is approximately ₹1.74 lakh crore, or $21 billion USD.

India’s National Carbon Credit Trading System:

India is establishing a regulated carbon market under the Energy Conservation (Amendment) Act, 2022. The Bureau of Energy Efficiency (BEE) and the Ministry of Power are working on a National Carbon Credit Trading Scheme, expected to be fully operational by 2025. Initially, it will focus on energy efficiency credits but may later expand to greenhouse gas (GHG) emissions trading.

Under the Perform, Achieve & Trade (PAT) Scheme, a cap-and-trade system launched in 2012 under the National Mission on EnhancedEnergy Efficiency (NMEEE). Here, large industries in energy-intensive sectors (steel, cement, power) are assigned energy consumption reduction targets. Companies exceeding targets earn Energy Saving Certificates (ESCerts), which they can trade with underperforming companies.

The Renewable Energy Certificate (REC) Mechanism encourages industries to invest in renewable energy projects. It allows carbon credit generation from renewable energy, which can be traded in India’s Power Exchanges. India does not yet have a national voluntary carbon market, but companies participate in global carbon credit trading (e.g., Verra, Gold Standard), while some Indian firms like Tata, Infosys, and ITC are engaging in voluntary carbon offsets.

There is no Direct Carbon Tax in India unlike countries such as Sweden or Canada. However, it levies an implicit carbon price through the Coal Cess (National Clean Energy Fund) - ₹400 per tonne on coal production, and through Excise Duties & GST on fossil fuels.

Some Global Practices:

1. Costa Rica’s Payment for Ecosystem Services (PES) Program that pays landowners for carbon sequestration and has attracted over $500 million in climate finance.
2. Colombia’s Carbon Tax & Offsetting System which is a national-level carbon tax mandates emitters to purchase forest-based carbon credits.
3. California’s Cap-and-Trade Linkages allows tropical forest credits from developing nations, offering a precedent for Indian states to access Western carbon markets.

Article 6.2 of the Paris Agreement and Its Relevance to Kerala’s Carbon Market Strategy

The Paris Agreement, under Article 6, establishes mechanisms for international cooperation on carbon markets to help countries achieve their Nationally Determined Contributions (NDCs) more efficiently.

Article 6.2 specifically allows countries to transfer carbon credits between nations through bilateral or multilateral agreements, known as Internationally Transferred Mitigation Outcomes (ITMOs). These credits can be used by countries to meet their emission reduction targets while ensuring transparency and avoiding double counting.

Although Kerala, as a state, cannot independently negotiate ITMO agreements with foreign nations, it can still benefit from India's participation in Article 6.2 mechanisms by:

1.    Contributing to India’s ITMO Strategy

The Government of India (GoI) is responsible for negotiating ITMO agreements with high-emission countries (e.g., Japan, Germany, Canada) that need carbon credits to meet their climate commitments. Kerala can advocate for forest-based carbon credits to be included in India’s ITMO, ensuring that credits generated from its afforestation, conservation, and carbon sequestration projects are recognized and sold internationally.

2.    Generating Revenue from India’s Carbon Market Exports

If India sells ITMOs internationally, revenue from these transactions can be allocated to states that contribute significant carbon sequestration. Kerala could push for a revenue-sharing mechanism where a portion of earnings from international carbon credit sales flows back to the state.

Challenges to Monetizing Forest Carbon in Kerala

1. Absence of a Regulatory Carbon Market Framework

India currently lacks a comprehensive domestic carbon pricing policy. While initiatives like the Perform, Achieve, and Trade (PAT) scheme and the Renewable Energy Certificate (REC) system exist, they do not address carbon sequestration in forests. Kerala has recently announced policies promoting green hydrogen and is engaging in broader discussions about climate resilience financing. While this is not directly linked to carbon credit trading, it indicates the state's awareness of global carbon markets. Programs like Haritha Keralam focus on tree planting and ecosystem restoration, which could align with voluntary carbon markets if formalized.

2. Limited Participation in Voluntary Carbon Markets

There have been informal discussions within policy circles about leveraging Kerala’s extensive forests, particularly in the Western Ghats, for carbon sequestration projects. However, no official legislation or structured market participation has emerged. Projects such as REDD+ (Reducing Emissions from Deforestation and Forest Degradation) offer pathways for carbon trading, but Kerala has yet to register large-scale afforestation or conservation programs in these markets. Kerala is aligned with India’s commitments under the UNFCCC, but lacks a dedicated state-level REDD+ strategy.

3. Lack of Institutional Mechanisms for Carbon Credit Accounting

Institutions like Kerala State Biodiversity Board (KSBB) and Centre for Climate Change Studies (CCCS) have explored carbon sequestration potential but have not yet moved towards implementation of carbon credit programs. Effective monetization requires a robust MRV (Monitoring, Reporting, and Verification) system for Kerala’s carbon sequestration. While India’s National Adaptation Fund for Climate Change (NAFCC) supports climate resilience projects, no dedicated institution oversees state-level carbon financing.

A key bureaucratic hurdle is determining which agency should oversee Kerala’s carbon credit system. Should it fall under the Forest Department, which manages conservation efforts, the Kerala State Pollution Control Board (KSPCB), which handles environmental regulations, or should the state establish a dedicated Carbon Trading Authority? The absence of clarity in governance can slow down policy adoption and deter private sector investments.

Additionally, there are State vs. Centre conflicts in approvals that must be resolved. Carbon trading mechanisms require alignment with India’s national carbon market and international commitments. Kerala would need explicit approvals from the Union Ministry of Environment, Forest and Climate Change (MoEFCC) to integrate its carbon credit projects with India’s emissions trading system. The state would also require new legislation or amendments to existing forestry laws to enable private sector participation, ensuring compliance with national and global carbon credit frameworks.

Given Kerala’s fiscal constraints, integrating carbon monetization into economic planning could be a future move. The idea has not yet become a major policy priority, but it could gain traction if economic benefits are clearly demonstrated.

What can Kerala start doing in this regard.

1. Establishing a Kerala Carbon Credit Registry (KCCR) and develop a Kerala Green Bond Initiative

A state-level carbon registry should be developed to catalogue forest carbon assets, facilitate carbon credit trading, and ensure transparency in Kerala’s carbon market. This registry can integrate with national carbon credit mechanisms, allowing the state to position itself as a major player in nature-based climate solutions. Additionally, a Kerala Green Bond Initiative can be introduced to attract domestic and global investors, raising capital for large-scale afforestation, sustainable forestry, and carbon sequestration projects. These bonds can help finance the transition to a low-carbon economy while offering attractive returns for investors focused on sustainability.

.2. Engaging Private Sector Participation

Kerala can actively engage the private sector by creating public-private partnerships (PPPs) that facilitate corporate investments in afforestation, biodiversity conservation, and sustainable agroforestry projects. Companies with net-zero commitments can be incentivized to purchase Kerala’s carbon credits through a state-managed carbon exchange, helping industries offset their emissions while contributing to local environmental sustainability.

Potential buyers of Kerala’s carbon credits include Tech & IT firms (e.g., Infosys, TCS) looking to enhance their sustainability profiles, hospitality & eco-tourism sectors seeking carbon-neutral operations, and manufacturing & logistics industries aiming to balance their environmental impact.

To ensure practical implementation, the state must identify specific areas for afforestation under PPP models. Given Kerala’s increasing land-use pressures from road network expansion, urbanization, and developmental projects, afforestation commitments should focus on:

Degraded forest patches and buffer zones around existing protected areas to enhance biodiversity corridors, Riparian zones along Kerala’s rivers and backwaters, restoring ecological functions while providing natural flood mitigation, and Hillside plantations in selected non-forest revenue lands to prevent soil erosion and maintain watershed health.

Additionally, increasing human-wildlife conflicts resulting in casualties and fatalities pose a growing concern. Any afforestation initiative must be designed to reduce habitat fragmentation and mitigate human-wildlife interactions, ensuring a balance between conservation and community safety. Integrated solutions such as wildlife corridors, community-managed buffer zones, and compensation mechanisms for affected populations should be incorporated into the afforestation strategy.

Projected Economic Gains for Kerala

As mentioned earlier, if Kerala successfully integrates its forest carbon into structured trading mechanisms, it stands to gain Carbon credit revenue at $50 per tonne = ₹3.13 lakh crore, and an annual carbon offset revenue (at 1% sequestration rate) = ₹30,710 crore

Conclusion:

Kerala stands at a historic crossroads where it can choose to lead India’s climate finance revolution. By harnessing its vast forest carbon reserves, Kerala can achieve climate mitigation, economic resilience, and sustainable development. The time for inaction has long passed—Kerala must move swiftly to convert its natural wealth into a financial asset that secures economic stability and environmental justice for future generations.

Carbon is no longer just an environmental concern—it is an economic opportunity waiting to be seized. As the world accelerates toward net-zero, Kerala must not remain a spectator but take its rightful place in the global carbon economy. The time for action is now.