22 December 2022

Table of Content

What are carbon markets and how do they operate? 

GS-3: Conservation, Environmental Pollution and Degradation, Environmental Impact Assessment.

Recently, the parliament has passed the Energy Conservation (Amendment) Bill, 2022 to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme. 

Carbon Markets

• Carbon markets are trading system of carbon credits, where carbon credits or allowances can be bought or sold.
• Thus, it is a tool for imposing monetary value on carbon emissions.
• A carbon credit is a permit that allows a country or organization to produce a certain amount of carbon emissions and can be traded if the full allowance is not used.
• It equals one ton of carbon dioxide removed, reduced, or sequestered from the atmosphere.
• These carbon allowances are decided by countries according to their emission reduction targets.

Nationally Determined Contributions (NDCs) 

• Under Paris Agreement (2015), nearly 170 countries have submitted their NDCs in order to keep global warming within 2°C (Ideally 1.5°C).

• For this, Global Greenhouse Gas (GHG) emissions need to be reduced by 25 to 50% over this decade.

• NDCs are voluntarily committed climate targets by countries to achieve net-zero emissions.

• India set to achieve net-zero target by 2070 whereas major developed countries have set to achieve net-zero target by 2050.

• Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs. 

• Thus, Carbon markets became popular tool as a mitigation strategy among countries in order to meet their NDCs.
• As per a United Nations Development Program release, around 83% of NDCs submitted by countries have intent to use of international market mechanisms to reduce greenhouse gas emissions.  

Types of Carbon Markets

• At present, there are two types of carbon markets – voluntary markets and compliance markets.

Voluntarily Markets

• In voluntary markets, emitters such as corporations, private individuals etc. buy carbon credits to offset the emission of one ton of CO 2 or equivalent greenhouse gases. 
• Such carbon credits are generated by activities such as afforestation to reduce CO₂ from the air.
• A corporation looks to offset its unavoidable GHG emissions in a voluntary market by purchasing carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions. 

• For example, Airlines may purchase carbon credits to compensate carbon footprint generated by their flight Credit are verified by private firms based on popular standards in the voluntary markets.

• Certified credits can be bought using online registries where climate projects are listed.

Compliance market

• It is regulated by the government and is set up by a policy at the national, regional, and/or international level.
• Based on popular European Union Model, it operates under a principle called ‘cap-and-trade’.

EU’s emissions trading system (ETS):

• Launched in 2005.
• Cap: Member countries set a limit for emissions in different sectors such as power, agriculture etc.

• The cap is determined as the climate targets of countries.
• It is lowered successively to reduce emissions.

• Trade: If companies produce emissions beyond the capped amount, they have to purchase additional permit.

• They can purchase additional permit either through official auctions or from companies having surplus allowances.

• Market price of carbon: Determined by the market forces.
• Companies can also save up excess permits to use later.

Benefits of carbon markets

• Provides liberty to companies to decide whether it is more cost-efficient to employ clean energy technologies or to purchase additional allowances.
• Promotes the reduction of energy use 
• Encourages the shift to cleaner fuels
• Government regulated trading schemes provide a clear trajectory relating to carbon emission norms and prompt companies to innovate, invest in, and adopt cost-efficient low-carbon technologies. 
• According to World Bank estimates, trading in carbon credits could reduce the cost of implementing NDCs by more than half (Approx. $250 billion by 2030).

Challenges to carbon markets

• Double counting of greenhouse gas reductions.
• Quality and authenticity of climate projects.
• Lack of transparency in the institutional and financial infrastructure for carbon market transactions.
• Greenwashing – Companies offset carbon footprints instead of reducing their overall emissions or investing in clean technologies.
• ETSs may not automatically reinforce climate mitigation instruments for regulated markets.
• High emission-generating sectors under trading schemes offset their emissions by buying allowances, which may increase emissions on net and provide no automatic mechanism for prioritizing cost-effective projects in the offsetting sector.
• Emission reductions and removals are either not real or not aligned with the country’s NDCs.

Energy Conservation (Amendment) Bill, 2022 and carbon markets in India 

• The bill empowers the union government or an authorized agency to issue carbon credit certificates to companies or even individuals registered and compliant with the scheme.
• These carbon credit certificates will be tradeable in nature and can be bought by a person on a voluntary basis.
• Concerns:

• The bill was tabled by the power ministry instead of the Ministry of Environment, Forest, and Climate Change (MoEFCC).
• There is a lack of clarity on – 

• Regulating agency
• Mechanism to be used – like the cap-and-trade schemes or another method 
• Interchangeability – Whether certificates under already existing schemes would also be interchangeable with carbon credit certificates and tradeable for reducing carbon emissions.
• Types of tradeable certificates are issued in India – 1) Renewable Energy Certificates (RECs) and 2) Energy Savings Certificates (ESCs). 

Carbon markets around the world 

• Carbon markets either operate or are under development in North America, Australia, Japan, South Korea, Switzerland, and New Zealand.
• China also launched the world’s largest ETS in 2021 approx. covering one-seventh of the global carbon emissions from the burning of fossil fuels. 

Inter-country carbon market 

• Art 6 of the Paris Agreement provides for the U.N. international carbon market.

• This provision is yet to kick off as multilateral discussions are still underway regrading its functioning across world.

• Under proposed market, Countries would be able to offset their emissions by buying credits generated by greenhouse gas-reducing projects in other countries.
• In the past, Clean Development Mechanism (CDM) had allowed inter-country carbon markets. But the scenario changed with the  2015 Paris Agreement, which forced even developing countries to set emission reduction targets. 

Kyoto Protocal and Clean Development Mechanism (CDM) 

• Annex-B of the Kyoto protocol sets binding emission reduction targets for 37 industrialized countries and economies in transition and the European Union.
• Whereas India and other developing nations such as China, Brazil, etc. were exempted from legally binding commitments on greenhouse gas emissions. 
• Thus, India and other developing countries have gained significantly from a similar carbon market under the CDM of the Kyoto Protocol, 1997. 

• India registered 1,703 projects under the CDM which is the second highest in the world.

[Ref- TH]

Fact File