What are carbon markets and how do they operate?

Why in News?

• The Parliament of India recently passed the Energy Conservation (Amendment) Bill, 2022, declining the Opposition’s demands to send it for scrutiny to a parliamentary committee amid concerns expressed by members over carbon markets. 
• The Bill amends the Energy Conservation Act, 2001, to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.
• The article attempts to bring out the meaning of carbon market, underscores its various types and challenges to carbon markets.

 

What are carbon markets?

Image Caption: Working of Carbon Market

• They are simply a technique for placing a price on carbon emissions by creating trading systems where carbon credits or permits can be purchased and sold.
• A carbon credit is a trading permit that, according to the UN standards, equals one tonne of CO2 eliminated, decreased, or sequestered from the atmosphere.
• Countries or governments set carbon allowances or caps based on their emission reduction goals.

 

What is the need to develop carbon markets?

• In order to keep global warming within 2°C (ideally within 1.5°C), global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% over this decade.
• Under the 2015 Paris Agreement, nearly 170 nations have submitted their nationally determined contributions (NDCs), which must be updated every five years.
  • NDCs are climate commitments by countries setting targets to achieve net-zero emissions. India, for instance, is working on a long-term roadmap to achieve its target of net zero emissions by 2070.
  • To achieve their NDCs, numerous nations are turning to carbon markets as a mitigation tool as the Paris Agreement (under Article 6) calls on countries to use international carbon markets to meet their NDCs.
• Previously, developing countries, particularly India, China, and Brazil, benefited considerably from a similar carbon market under the Kyoto Protocol's Clean Development Mechanism (CDM) in 1997
  • For instance, India registered 1,703 projects under the CDM which is the second highest in the world.
  • CDM allowed a country with an emission-reduction commitment under the Kyoto Protocol (Annex B Party) to implement emission-reduction projects in developing countries.
  • However, with the 2015 Paris Agreement, the global scenario changed as even the developing countries had to set emission reduction targets.

 

What are different types of Carbon Markets?

• Compliance markets:
  • These are set up by policies at the national, regional, and/or international level and are officially regulated and mostly operate under a principle called ‘cap-and-trade’.
  • Governments issue annual allowances or permits to entities in this sector in proportion to the emissions they can create.
  • Companies that emit more than the capped amount must purchase additional licenses, either through official auctions or from companies that emit less than the maximum.
  • Companies can use carbon trading to determine if it is more cost-effective to use renewable energy technologies or to purchase additional credits.
  • Compliance markets are most popular in the EU and China launched the world's largest emission trading system (ETS) in 2021.
• Voluntary markets:
  • It refers to the issuance, buying and selling of carbon credits, on a voluntary basis by emitters such as corporations, private individuals, and others, to offset the emission of one tonne of CO2 or equivalent greenhouse gases.
  • In a voluntary market, a corporation compensates for its unavoidable GHG emissions by purchasing carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.
  • The climate projects are listed by traders and online registries for buying certified credits and are verified by private firms as per popular standards.
  • For Instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate.

 

What is the significance of carbon markets

• These markets may promote the reduction of energy use and encourage the shift to cleaner fuels.
• Since government-regulated trading schemes provide a clear trajectory, indicating how emission limits would be made tighter and allowances made decreasingly available, they may prompt companies to innovate, invest and adopt cost-efficient low-carbon technologies.
• The World Bank estimates that trading in carbon credits could reduce the cost of implementing NDCs by more than half - by as much as $250 billion by 2030.

 

What are the challenges to the carbon markets?

• Double counting of GHG reductions and quality and authenticity of climate projects that generate credits to poor market transparency.
• There are also concerns about what critics call greenwashing - companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions or investing in clean technologies.
  • Green washing refers to the practice of making false claims in order to mislead consumers into believing that a company's products are more environmentally friendly.
• IMF notes that including high emission-generating sectors under carbon trading schemes may increase net emissions.

 

What are the concerns related to Energy Conservation (Amendment) Bill, 2022

• The bill does not specify market regulator for carbon credit trading.
• While carbon market schemes in other jurisdictions like the U.S., United Kingdom, and Switzerland are framed by their environment ministries, the same has been tabled by the power ministry in India.
• The bill does not offer clarity whether the trading of carbon credit certificates will be like the cap-and-trade schemes or some other method.
• Two types of tradable certificates are already issued in India namely Renewable Energy Certificates (RECs) and Energy Savings Certificates (ESCs).
  • Bill does not specify whether these certificates would also be interchangeable with carbon credit certificates and tradable for reducing carbon emissions.

 

What is the way ahead to resolve the issue?

• The UNDP emphasizes that for carbon markets to be successful, emission reductions and removals must be real and aligned with the country’s NDCs.
• It says that there must be transparency in the institutional and financial infrastructure for carbon market transactions.

 

Conclusion

• According to a 2022 UNDP report, 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce GHG emissions.
• Thus, holistic policy formulation and robust implementation is needed at national-regional-international level to enhance climate commitments by carbon markets.

 

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Q1) What is a carbon credit?

A carbon credit is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere. 

 

Q2) What is greenwashing?

The practice refers to misleading and exaggerated claims to deceive people about the environmental worthiness of a product or action. This can include use of terminology such as “eco-friendly” or “sustainable,” which are vague and not verifiable.

 

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Source: India to bolster carbon trading market with stabilisation fund