India-Japan Collaboration for Carbon Trading

Context

India and Japan are exploring a Joint Crediting Mechanism (JCM) under the Paris Agreement to enhance collaboration in Carbon Trading.

What is Carbon Trading?

Carbon trading is the process of buying and selling permits and credits to emit carbon dioxide.
Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their Nationally determined contributions (NDCs).
These markets create incentives to reduce emissions or improve energy efficiency.
Types of Carbon Markets:

Voluntary Markets

Compliance Markets

Participants: Corporations, private individuals, and others purchase carbon credits voluntarily to offset emissions.
Verification: Credits are verified by private firms against established standards.
Purpose: Often used for public relations or personal commitment to sustainability.

Regulation: Governed by national, regional, or international policies, making them official and mandatory.
Mechanism: Operates under a 'cap-and-trade' system where emission allowances are traded.
Examples: Kyoto Protocol, European Union Emissions Trading System (EU ETS), California ETS, Australia ETS, among others.
Recent Development: China launched the world's largest ETS in 2021.

Promotion of Energy Efficiency: Incentivizes reduction in energy use and transition to cleaner fuels.
Cost-Efficiency: Companies can choose between investing in emission-reducing technologies or purchasing allowances, based on cost-effectiveness.
Innovation: Encourages innovation and adoption of low-carbon technologies due to regulatory pressure and market incentives.

Effectiveness Concerns: Some entities may buy credits without reducing emissions themselves, undermining the actual reduction of greenhouse gases.
Quality Issues: Many credits available may not meet quality standards, lacking additionality (additional emission reductions), verifiability (proper auditing), and permanence (ensuring emission reductions are sustained).
Deviating Emission Reduction Efforts: Purchasing credits might divert attention from genuine efforts to reduce emissions directly.
Measurement Difficulty: It's challenging to accurately quantify emission reductions achieved through offset projects like afforestation or renewable energy initiatives.