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Carbon Pricing

Context:

Recently, Pennsylvania becomes the first major fossil fuel-producing state in the US to adopt a carbon pricing policy to address climate change. It joins 11 states where coal, oil and natural gas power plants must buy credits for every ton of carbon dioxide they emit.

Relevance:

GS III- Environment and Ecology

Dimensions of the Article:

  1. What is Carbon pricing?
  2. Types of carbon pricing mechanisms
  3. India and Paris Agreement

What is Carbon pricing?

Carbon pricing is an instrument that captures the external costs arising from greenhouse gas (GHG) emissions and ties them to the sources of emissions through a price, usually in the form of a price on the carbon dioxide (CO2) emitted

Types of carbon pricing mechanisms:

  • Emissions Trading Systems (ETS): It is a system where emitters can trade emission units to meet their emission targets. By creating supply and demand for emissions units, an ETS establishes a market price for GHG emissions.
  • The two main types of Emission Trading Systems are:
    • Cap-and-trade systems:  which apply a cap or absolute limit on the emissions within the ETS and emissions allowances are distributed, usually for free or through auctions, for the amount of emissions equivalent to the cap.
    • Baseline-and-credit systems: where baseline emissions levels are defined for individual regulated entities and credits are issued to entities that have reduced their emissions below this level. These credits can be sold to other entities exceeding their baseline emission levels.
  • Carbon tax: It directly sets a price on carbon by defining a tax rate on GHG emissions or more
  • commonly – on the carbon content of fossil fuels.
    • For example, the carbon tax on production and import of coal in India.
  • An offset mechanism designates the GHG emission reductions from project- or programme based activities, which can be sold either domestically or in other countries. Offset programmes issue carbon credits according to an accounting protocol and have their own registry. These credits can be used to meet compliance under an international agreement, domestic policies or corporate citizenship objectives related to GHG mitigation.
  • Results-Based Climate Finance (RBCF): It is a funding approach where payments are made after pre-defined outputs or outcomes related to managing climate change such as emission reductions, are delivered and verified. Many RBCF programmes aim to purchase verified reductions in GHG emissions while at the same time reduce poverty, improve access to clean energy and offer health and community benefits.
  • Internal carbon pricing: It is a tool an organization uses internally to guide its decision-making process in relation to climate change impacts, risks and opportunities.

India and Paris Agreement

  • India, as a party to the Paris Agreement, has made commitments which include
    • reduction in the emissions intensity of GDP by 33 to 35 per cent by 2030
    • creation of an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent by 2030.
Carbon pricing can help India achieve its objectives in the following ways:
  • It provides an opportunity to shift the burden on those responsible for it by allowing them to decide to either transform their activities and lower their emissions or continue emitting and paying for their emissions.
  • Internalizing the external cost of climate change in the economic decision making would incentivize businesses to invest in clean technology and market innovation.
  • It would fuel new, low carbon drivers of economic growth and help India to reduce emission intensity.
  • Long-term investors may use carbon pricing to analyze the potential impact of climate change policies on their investment portfolios, allowing them to reassess investment strategies and reallocate capital toward low- carbon or climate-resilient activities.
  •  It would help to evaluate the impact of mandatory carbon prices on the operations of businesses and to identify potential climate risks and revenue opportunities. Overall, these actions would promote the adoption of clean technologies and investment in green projects.
  • Considering the developmental needs and economic constraints, if businesses decide to pay for emissions, it would help the government to mobilize finances which can be used for adaptation and mitigation measures such as reforestation, energy efficiency, evacuation plans etc.

-Source: Indian Express

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September 2022
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