Carbon Market

Syllabus: Environment

Source: TH

Context: With COP29 approving standards for establishing an international carbon market, countries aim to create a structured mechanism for trading carbon credits and offsets to meet their climate goals effectively.

What is a Carbon Market?

• A carbon market enables the trading of carbon credits, granting the holder the right to emit one tonne of carbon dioxide (CO2) or its equivalent.

• These markets operate on the principle of limiting emissions and allocating rights through tradable credits or offsets.

• Origin: Introduced in the U.S. during the 1990s under the cap-and-trade system for controlling sulphur dioxide emissions.

Working of a Carbon Market:

• Issuance of Carbon Credits: Governments allocate a limited number of carbon credits, restricting total emissions. Each credit permits the emission of one tonne of CO2.

• Governments allocate a limited number of carbon credits, restricting total emissions.

• Each credit permits the emission of one tonne of CO2.

• Trading: Companies that need more credits can buy from those with surplus. Market forces determine the price based on supply and demand.

• Companies that need more credits can buy from those with surplus.

• Market forces determine the price based on supply and demand.

• Offsets: Companies purchase offsets by funding activities like afforestation or renewable energy projects to balance their emissions.

• Companies purchase offsets by funding activities like afforestation or renewable energy projects to balance their emissions.

• International Mechanism: Articles 6.2 and 6.4 of the Paris Agreement allow cross-border trading of emission reductions.

• Articles 6.2 and 6.4 of the Paris Agreement allow cross-border trading of emission reductions.

India’s Initiatives in Carbon Markets:

• Perform, Achieve, Trade (PAT) Scheme: Targets industries to improve energy efficiency and trade surplus credits.

• Renewable Energy Certificates (REC): Facilitates trade in renewable energy to meet energy compliance targets.

• Energy Conservation Act, 2022 Amendment: Introduced a domestic carbon trading market to incentivize low-carbon technologies.

• Climate Action: Committed to a 45% reduction in emission intensity by 2030 as part of its Nationally Determined Contributions (NDCs).

Positive Consequences of Carbon Markets:

• Emission Reduction: Imposes financial costs on emissions, encouraging companies to adopt cleaner technologies.

• Economic Efficiency: Allows cost-effective allocation of emission rights through market trading.

• Financial Support for Green Projects: Funds projects like afforestation and renewable energy.

• Global Cooperation: Encourages international partnerships under Paris Agreement mechanisms.

Limitations of Carbon Markets:

• Loopholes: Lack of stringent monitoring can lead to fraudulent claims or over-allocation of credits.

• Price Volatility: Fluctuating credit prices can create market uncertainty.

• Limited Impact on Emission Levels: Without strong caps, markets may fail to drive significant reductions.

• Accessibility Issues: Small businesses and developing countries may struggle to participate effectively.

• Criticism of Offsets: Offsets are seen as superficial solutions that don’t address the root cause of emissions.

Way Ahead:

• Stricter Regulations: Enforce robust monitoring and verification to prevent misuse.

• Capacity Building: Support developing countries in accessing carbon markets effectively.

• Incentives for Green Projects: Encourage innovative projects to offset emissions.

• Transparency: Ensure clear guidelines and public reporting of emissions and credits.

Conclusion:

Carbon markets offer a promising mechanism to reduce emissions and achieve global climate targets. However, addressing regulatory gaps, ensuring equity, and fostering international cooperation are essential to maximize their potential and ensure sustainable outcomes.

Insta Links:

• What-are-carbon-markets-and-how-do-they-operate?

Consider the following statements (UPSC-2023)

Statement—I Carbon markets are likely to be one of the most widespread tools in the fight against climate change.

Statement—II Carbon markets transfer resources from the private sector to the State.

Which one of the following is correct in respect of the above statements?

• Both Statement—I and Statement—II are correct and Statement—II is the correct explanation for Statement—I

• Both Statement—I and Statement—II are correct and Statement—II is not the correct explanation for Statement—I

• Statement—I is correct but Statement—II is incorrect

• Statement—I is incorrect but Statement—II is correct

Answer: b)