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  • GS-3 Science and Technology
    • What are carbon markets and how do they operate
  • Fact File
    • US-Canada Great Lakes turning acidic: Study seeks to establish details

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

US-Canada Great Lakes turning acidic: Study seeks to establish details


  • Scientists are building a sensor network to detect the trends in the water chemistry of Lake Huron.
  • This system would be capable of measuring the carbon dioxide and pH levels of the Great Lakes.
  • Note: The increase in atmospheric carbon dioxide has caused the world’s oceans to turn more acidic. 

Great lakes

  • Largest group of freshwater lakes in the world.
  • Five interconnected bodies of water straddling the US-Canada border.
  • Drain into the Gulf of St Lawrence in the North Atlantic through the St Lawrence River.
  • Out of five, Lake Michigan lies entirely in the US.
  • Sometimes, Lakes Michigan and Huron are considered as a single water body and thus, they are the world’s largest freshwater lake by surface area.
  • Lake Huron is the world’s third largest freshwater lake, after Lake Superior and Lake Victoria.


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