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China has a carbon market now

Context:

China’s national carbon market, the world’s largest emissions trading system, will begin its online trading in July 2021.

Relevance:

GS-III: Environment and Ecology (Conservation of Environment, Agreements and Treaties on Conservation of Environment and Ecology)

Dimensions of the Article:

  1. What is Carbon Trading and Carbon Market
  2. About Carbon credits
  3. About Kyoto Protocol
  4. Advantages of Carbon Trading
  5. About China’s National Carbon Market

What is Carbon Trading and Carbon Market

  • Carbon trading is an exchange of credits between nations designed to reduce emissions of carbon dioxide.
  • Carbon trading is also referred to as carbon emissions trading. Carbon emissions trading accounts for most emissions trading.
  • Under the prevailing Kyoto Protocol climate agreement, carbon credits are used in market-based system of Carbon Trading.
  • Carbon trading allows countries and companies to sell their carbon credits for money.
  • Carbon markets are regulatory structures that allow, in particular, oil and gas-intensive companies or heavy industry (or, in the case of COP25, countries) to reduce their economic footprint through a series of incentives.
  • The idea behind this system is that the most polluting countries can purchase the right to pollute more from countries that have not reached their emissions limits.
  • The 1997 Kyoto Protocol turned polluting emissions into a commodity.

About Carbon credits

  • A carbon credit (often called a carbon offset) is a tradable certificate or permit.
  • One carbon credit is equal to one tonne of carbon dioxide.
  • Carbon credits are a part of attempts to mitigate the growth in concentrations of GHGs.
  • Carbon credits or carbon offsets can be acquired through afforestation, renewable energy, CO2 sequestration, methane capture, buying from an exchange (carbon credits trading) etc.
  • Carbon trading is the name given to the exchange of emission permits.
  • This exchange may take place within the economy or may take the form of international transaction.
  • Under Carbon Credits Trading mechanism countries that emit more carbon than the quota allotted to them buy carbon credits from those that emit less.
  • In Carbon trading, one credit gives the country or a company right to emit one tonne of CO2.
  • A developing nation such as India, turns out to be a seller of such credits, which eventually provides them with monetary gains.
  • Carbon credits are traded at various exchanges across the world.
  • Multi-Commodity Exchange of India (MCX) launched futures trading in carbon credits in 2009.

About Kyoto Protocol

  • The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change (UNFCCC), which commits its Parties by setting internationally binding emission reduction targets.
  • The Kyoto Protocol was adopted in Kyoto, Japan, in December 1997 and entered into force in February 2005.
  • The first commitment period under the Kyoto Protocol was from 2008-2012. The Doha Amendment to the Kyoto Protocol was adopted in Qatar in December 2012. The amendment includes new commitments for parties to the Kyoto Protocol who agreed to take on commitments in a second commitment period from January 2013 to December 2020 and a revised list of greenhouse gases to be reported on by Parties in the second commitment period.
  • Recognizing that developed countries are principally responsible for the current high levels of Greenhouse Gas (GHGs) in the atmosphere, the Kyoto Protocol places commitments on developed nations to undertake mitigation targets and to provide financial resources and transfer of technology to the developing nations.
  • Developing countries like India have no mandatory mitigation obligations or targets under the Kyoto Protocol.

Advantages of Carbon Trading

  • Emissions trading achieves the environmental objective of reduced emission by incentivizing innovation and identifying lowest-cost solutions to make businesses more sustainable.
  • Emissions trading is better able to respond to economic fluctuations than other policy tools.
  • Determining physical actions that companies must take, with no flexibility, is not guaranteed to achieve the necessary reductions. Nor is establishing a regulated price, since the price required to drive reductions may take policy-makers several years to determine.
  • By allowing the open market to set the price of carbon allows for better flexibility and avoids price shocks or undue burdens. For example, as seen in Europe, prices will fall during a recession as industrial output, and thus emissions, fall. A centrally-administered tax does not have the same flexibility.
  • The combination of an absolute cap on the level of emissions permitted and the carbon price signal from trading helps firms identify low-cost methods of reducing emissions on site, such as investing in energy efficiency – which can lead to a further reduction in overheads. This helps make business more sustainable for the future. Imposing technology on business does not allow for creativity and can actually lead to higher costs as companies look merely to comply with regulations.
  • Emissions trading can provide a global response to a global challenge. Cap and trade provides a way of establishing rigour around emissions monitoring, reporting and verification – essential for any climate policy to preserve integrity.

About China’s National Carbon Market

  • The Chinese Carbon market will initially cover more than 2,200 companies in China’s power sector, which are responsible for 14 per cent of the global greenhouse gas emissions.
  • These companies were assigned emission targets in the beginning of 2021; after trading, they would be required to submit compliance to their government authorities by end of 2021.
  • Companies that over-performed and have surplus targets in hand will sell them in this market; those polluting will have to buy the surplus to submit their compliance statement.

-Source: Down to Earth Magazine, The Hindu

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