A carbon credit market is a system where a price tag is attached to the carbon emissions of companies. The idea is to encourage businesses to reduce their emissions and improve energy efficiency. For instance, if an industrial unit surpasses emission standards, it gains credits. Another unit struggling to meet these standards can buy these credits and show compliance. This establishes a trading system where carbon credits can be bought and sold.
The Energy Conservation (Amendment) Bill, 2022
The Indian Parliament has recently passed the Energy Conservation (Amendment) Bill, 2022. The goal of this bill is to establish Carbon Markets in India and specify a Carbon Trading Scheme. The Bill amends the previous Energy Conservation Act of 2001.
Under the new Bill, the government or an authorised agency will issue carbon credit certificates to companies or individuals registered and compliant with the scheme. These certificates are tradeable, so other persons can buy them on a voluntary basis. However, concerns have been raised as the Bill does not clearly specify the mechanism to be used for the trading of carbon credit certificates and who will regulate such trading.
The Concept of Carbon Markets
Carbon markets are platforms for the exchange of carbon credits with the purpose of reducing overall emissions. A carbon credit is a permit that equals one tonne of carbon dioxide reduced, removed, or sequestered from the atmosphere. Carbon allowances are set by countries or governments according to their emission reduction targets.
Types of Carbon Markets
There are two types of Carbon Markets – Compliance Markets and Voluntary Markets. Compliance markets are those regulated by policies at national, regional, and/or international levels. In a cap-and-trade compliance market, like that of the European Union (EU), the countries set a cap for emissions in different sectors. If companies produce emissions beyond the capped amount, they have to purchase additional permits. Voluntary markets, on the other hand, are where corporations, private individuals, and others buy carbon credits to offset their emissions.
Challenges in Carbon Markets
Despite the potential of carbon markets as a tool for reducing emissions, they face several challenges. These range from double counting of greenhouse gas reductions, quality issues in climate projects generating credits, to poor market transparency. There are also concerns about companies buying credits to offset carbon footprints instead of reducing their overall emissions.
Indian Initiatives Related to Carbon Market
In India, under the Kyoto Protocol, the clean development mechanism covered the primary carbon market. The secondary carbon market includes the perform-achieve-trade scheme, which falls under the energy efficiency category, and the renewable energy certificate.
Way Forward
For global warming to be limited within 2°C, ideally no more than 1.5°C, global greenhouse gas emissions need to be cut by 25 to 50% this decade. About 170 countries have submitted their nationally determined contributions (NDCs) under the 2015 Paris Agreement. For successful carbon markets, the United Nations Development Programme emphasises that “emission reductions and removals must be real and aligned with the nation’s NDCs”. Transparency in institutional and financial infrastructure for carbon market transactions is also essential.
Relevant UPSC Civil Services Examination Questions
Several questions related to carbon credit and carbon market have appeared in the UPSC Civil Services Examination over the years. Here are a few examples:
Prelims Q1. The concept of carbon credit originated from which one of the following? (2009)
(a) Earth Summit, Rio de Janeiro
(b) Kyoto Protocol
(c) Montreal Protocol
(d) G-8 Summit, Heiligendamm
Mains Q1. Should the pursuit of carbon credits and clean development mechanisms set up under UNFCCC be maintained even though there has been a massive slide in the value of a carbon credit? Discuss with respect to India’s energy needs for economic growth. (2014)
These questions illustrate the importance of understanding carbon markets and their potential role in addressing climate change.
