Establishments of Carbon Markets and their Operation.

NEWS HIGHLIGHT

Theme : Environment & Biodiversity
Paper:GS - 3

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

TABLE OF CONTENT

1. Context
2. Carbon Markets
3. Types of Carbon Markets
4. EU’s Emission Trading System (ETS)
5. Determination of Carbon Pricing
6. Significance of  Carbon Market
7. Challenges to Carbon Markets.

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

Carbon Markets : 

• Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfill 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 permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
• Carbon allowances or caps, meanwhile, are determined by countries or governments according to their emission reduction targets.

Types of Carbon Markets : 

There are broadly two types of carbon markets that exist today— compliance markets and voluntary markets : 

1. Voluntary Markets

• They are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO 2 or equivalent greenhouse gases.
• Such carbon credits are created by activities which reduce CO 2 from the air, such as afforestation. In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.
• For Instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate.
• In voluntary markets, credits 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.

2.Compliance Market

• Compliance markets— set up by policies at the national, regional, and/or international level— are officially regulated.
• Today, compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU).

EU’s Emission Trading System (ETS) : 

• Under the EU’s ETS launched in 2005, member countries set a cap or limit for emissions in different sectors, such as power, oil, manufacturing, agriculture, and waste management.
• 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.
• If companies produce emissions beyond the capped amount, they have to purchase additional permits, either through official auctions or from companies.

Determination of Carbon Pricing : 

• 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.
• 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.
• These markets may promote the reduction of energy use and encourage the shift to cleaner fuels.

Significance of  Carbon Market : 

• 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.

Challenges to Carbon Markets : 

• Double counting: of greenhouse gas reductions
• Quality and authenticity: These parameters of climate projects that generate credits to poor market transparency
• Greenwashing: Companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions or investing in clean technologies.
• Inefficiency: The IMF points out that including high emission-generating sectors under trading schemes to offset their emissions by buying allowances may immensely increase emissions on net.

FAQs : 

1. What is the Carbon Market ?

ANS. Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfill 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.

2. What are Voluntary Markets ?

ANS. 

• They are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO 2 or equivalent greenhouse gases.
• Such carbon credits are created by activities which reduce CO 2 from the air, such as afforestation. In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.