Carbon markets and their operation

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

What are carbon markets?

• To meet nationally determined contributions (NDCs), one mitigation strategy is becoming popular with several countries—carbon markets.
• Article 6 of the Paris Agreementprovides for the use of international carbon markets by countries to fulfil their NDCs.
• Carbon markets are essentially a tool for putting a price on carbon emissions— they establish trading systems where carbon credits or allowances can be bought and sold.
• A carbon credit is a kind of tradable permitthat, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
• These markets create incentives to reduce emissions or improve energy efficiency.
  
  

Sentiments of countries about carbon markets

• About 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce greenhouse gas emissions.

What are the types of carbon markets?

• There are broadly two types of carbon markets that exist today— compliance marketsand voluntary markets.

Advantages:

• These markets may promote the reduction of energy use and encourage the shift to cleaner fuels.
• Through this kind of carbon trading, companies can decide if it is more cost-efficient to employ clean energy technologies or to purchase additional allowances.
• Since government-regulated trading schemes may prompt companies to innovate, invest in, and adopt cost-efficient low-carbon technologies.

What are the challenges to carbon markets?

• Effectiveness of carbon markets: Some companies simply buy credits without making any effort to reduce emissions themselves.
  • It is cheaper for them to buy carbon credit than to invest in emission-reducing technologies.
• Environmental activists argue that only high-quality carbon offsets are effective in reducing emissions. High-quality carbon offsets have certain features:
  • Additionality:Emission reductions must be additional i.e., they would not have occurred in the absence of a market for offset credits e.g., a renewable project could be set up only because a high emitter paid for it.
  • Verifiable: There must be proper audits to ensure the monitoring, reporting, and verification of emission cuts.
  • Permanence:The emission reduction should not be reversed.
• However, many credits available in markets are of poor quality i.e., they do not meet the above criteria.
• Buying carbon credits can deviate rich nationsfrom the path of reducing emissions.
• It is difficult to establish the amount of carbon reduced by offset projects(like afforestation or wind energy project).