What are Carbon Markets?

Context

Recently the Parliament passed the Energy Conservation (Amendment) Bill, 2022 amending the Energy Conservation Act, 2001, to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.

Probable Question

What are carbon markets and how do they operate?  (150 words, 10 marks)

Background

• In order to keep global warming within 2°C, ideally no more than 1.5°C, global greenhouse gas (GHG) emissions need to be reduced by 25-50% over this decade. 
• Nearly 170 countries have submitted their nationally determined contributions (NDCs) so far as part of the 2015 Paris Agreement, which they have agreed to update every five years. 
• Nationally determined contributions (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.

About Carbon Markets

• Carbon markets are one of the popular mitigation strategies of nationally determined contributions (NDCs).
• Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfill their NDCs.
• Carbon markets puts a price on carbon emissions; they establish trading systems where carbon credits or allowances can be bought and sold: 

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

Carbon allowances or caps: They are determined by countries or governments according to their emission reduction targets.

Types of Carbon Markets

There are broadly two types of carbon markets viz., compliance markets and voluntary markets.

• Voluntary markets: In this, market emitters (corporations, private individuals, and others) buy carbon credits to offset the emission of one tone of CO₂ or equivalent greenhouse gases. Carbon credits are purchased to compensate for unavoidable Greenhouse gasses (GHG) emissions. These credits are created by activities that reduce, remove, capture, or avoid emissions of CO₂ from the air, such as afforestation. They are verified by private firms as per popular standards. There are also traders and online registries where climate projects are listed and certified credits can be bought.
• Compliance markets: They are set up by policies at the national, regional, and/or international level and are officially regulated. Compliance markets are mostly operated under a principle called ‘cap-and-trade”, most popular in the European Union (EU). This cap is determined as per the climate targets of countries and is lowered successively to reduce emissions. Entities in this sector are issued annual allowances or permits by governments equal to the emissions they can generate. Additional permits have to be purchased for emissions beyond the limit. 

The market price of carbon gets determined by market forces when purchasers and sellers trade in emissions allowances. Notably, companies can also save up excess permits to use later.

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Significance of Carbon Market

• These markets may promote the reduction of energy use and encourage the shift to cleaner fuels. 
• They may prompt companies to innovate, invest in, 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.
• Developing countries, particularly India, China, and Brazil, gained significantly from a similar carbon market under the Clean Development Mechanism (CDM) of the Kyoto Protocol, 1997. 

Challenges to Carbon Markets

• Poor market transparency: Concerns pertaining to carbon markets range from double counting of greenhouse gas reductions and quality and authenticity of climate projects that generate credits to poor market transparency. 
• Greenwashing: In this companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions or investing in clean technologies.
• Automatic Reinforcement: As for regulated or compliance markets, ETSs may not automatically reinforce climate mitigation instruments. 
• Concerns for buying allowances: The International Monetary Fund points out that buying allowances may increase emissions on the net and provide no automatic mechanism for prioritizing cost-effective projects in the offsetting sector.

The Energy Conservation (Amendment) Bill, 2022

• About: The Bill empowers the Centre to specify a carbon credits trading scheme. Under the Bill, the central government or an authorized agency will issue carbon credit certificates to companies or even individuals registered and compliant with the scheme. These carbon credit certificates will be tradeable in nature. Other persons would be able to buy carbon credit certificates on a voluntary basis.
• Concerns for the amendment bill: The Bill does not provide clarity on the mechanism to be used for the trading of carbon credit certificates. Members also raised questions about the right ministry to bring in a scheme of this nature. The Bill also does not specify whether certificates under already existing schemes would also be interchangeable with carbon credit certificates and tradeable for reducing carbon emissions.

Notably, two types of tradeable certificates are already issued in India: Renewable Energy Certificates (RECs) and Energy Savings Certificates (ESCs). 

Way Forward

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

News Source: The Hindu

https://www.thehindu.com/news/national/explained-what-are-carbon-markets-and-how-do-they-operate/article66260084.ece

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