Carbon markets enable the purchase and sale of carbon emissions with the goal of reducing global emissions. Carbon markets existed under the Kyoto Protocol, which will be replaced in 2020 by the Paris Agreement. Carbon markets have the potential to reduce emissions above and beyond what countries are doing on their own.
The Carbon Market
- Carbon markets and carbon credits are components of emissions trading, a market-based approach to reducing greenhouse gas (GHG) concentrations in the atmosphere. It works by offering financial incentives to reduce emissions of the designated pollutants. A carbon market allows investors and businesses to trade both carbon credits and carbon offsets at the same time.
- Carbon credits (or allowances) function as emissions permission slips.
- When a company purchases a carbon credit, it gains permission to emit more CO2.
- One tradable carbon credit is equivalent to one tonne of CO2 or the equivalent amount of another greenhouse gas reduced, sequestered, or avoided.
- Credits are calculated by comparing them to ‘benchmarks’ or allowed GHG emissions. If emissions are less than the permitted limit, the emitter receives carbon credits (reducing 1 tonne of CO2 earns 1 carbon credit).
- If emissions exceed the allowable limit, the emitter must purchase carbon credits from those who have extra credits.
- As a result, exceeding the emissions limit imposes a cost (the amount spent on purchasing carbon credits) on the emitter. The idea is that this cost will make emitters more efficient and reduce emissions.
Possibility of establishing a carbon market framework The country of India
- First, it will aid in mitigating the negative effects of climate change by lowering GHG emissions.
- Second, offset projects have numerous co-benefits such as ecosystem management, forest preservation, sustainable agriculture, renewable energy generation in third-world countries, and so on.
- Third, while the voluntary carbon offset market is smaller than the compliance market, it is expected to grow significantly in the coming years. It is open to individuals, businesses, and other organisations that want to reduce or eliminate their carbon footprint but are not required by law to do so.
- Fourth, consumers are becoming more aware of the significance of carbon emissions. As a result, they are becoming increasingly critical of companies that do not take climate change seriously. Companies that contribute to carbon offset projects demonstrate to consumers and investors that they are doing more than just lip service to combat climate change.
- Fifth, it creates a new revenue stream for environmentally friendly businesses. For example, Tesla, the electric car manufacturer, sold $518 million in carbon credits to legacy car manufacturers in just the first quarter of 2021.
Problems with the carbon market
- There are doubts about the effectiveness of carbon markets in reducing emissions.
- Some businesses simply purchase credits without making any effort to reduce their own emissions. It is less expensive for them to purchase carbon credits rather than invest in emission-reducing technologies.
- Old carbon credits (certified carbon emissions, or CERs) issued under the Kyoto Protocol’s Clean Development Mechanism are still valid.
- Counting them as valid would slow climate action because those with commitments to reduce emissions would simply buy the CERs and call it a day; however, declaring them invalid would disappoint all entities that were given the credits.
- There is a phenomenon known as “double counting.” If one country reduces emissions and another entity in another country purchases carbon credits, only one of the two countries should be allowed to use the activity against its own commitments — not both.
- Concerns about a fee levied on each carbon trading transaction to fund a fund to assist poor countries in adapting to the vagaries of climate change.
- Purchasing carbon credits may divert rich countries away from the path of reducing emissions. They can simply keep emitting and purchasing cheap carbon credits from developing countries.
- The amount of carbon reduced by offset projects is difficult to calculate (like afforestation or wind energy project). The difficulty comes from determining baseline emissions (Emissions baseline represents what would happen if your project did not occur i.e., the emissions in the absence of the project).
- This makes verifying emission reductions and allocating carbon credits difficult.
- India’s own PAT (Perform, Achieve, Trade) Scheme has failed to reduce emissions significantly. According to a Center for Science and Environment analysis, the scheme reduced emissions by only 1.57% and 1.44% over the two cycles.
The establishment of a domestic carbon market is a significant step forward. However, the actual benefit will be determined by the market’s effectiveness. To accomplish this, the government must ensure that proper regulations are in place. Furthermore, its operation must be evaluated on a regular basis, and any necessary corrective actions must be taken. Climate change is real and imminent, and the government must do everything possible to mitigate the challenges.