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Approach:

  1. Intro – state the provision of the Bill w.r.t. carbon markets.
  2. Briefly refer to the Kyoto protocol & Paris deal.
  3. Mention the context for carbon pricing.
  4. Mention India’s actions regarding carbon pricing.
  5. Challenges associated in introducing C-markets.
  6. Conclusion.

The Energy Conservation (Amendment) Bill, 2022 proposes a momentous carbon market framework in India to incentivize carbon emission reduction. The Bill empowers the government to specify a carbon credit trading scheme as well as issue tradable carbon credit certificates. Any other authorized agency may also issue these certificates, as per the Bill. These can be traded by entities registered for the carbon credit trading scheme, which may involve the sale of such credits by entities reducing emissions in excess of the required levels to those unable to meet their reduction requirements.

The origins of carbon trading can be traced to 1997, when the Kyoto Protocol established carbon as an internationally tradable commodity and developed countries (except economies in transition) were mandated to have carbon markets. This changed with the Paris Agreement making it voluntary for countries.

Rapid industrial growth, an outcome of the Industrial Revolution and its spread, led to the accumulation of carbon in the atmosphere. Climate change is already being experienced and would only intensify once a tipping point is reached. This uncertainty is a worry for all.

In the absence of a carbon price, economic agents do not factor in the social cost of their emissions. Setting a price for carbon emissions has been conceded as an optimal strategy. Carbon pricing is often done explicitly through specific carbon taxes and carbon markets, and implicitly through indirect taxes, subsidies, etc. Additionally, it is widely accepted that a portfolio-based approach with non- pricing policy measures can positively incentivize a gradual shift to low-carbon & green alternatives. Regulatory instruments nudge polluters to consider their emission levels as they try to meet the regulatory requirements. Policy support for the funding of R&D for low-carbon technology and support for testing of prototypes can boost innovation and its diffusion.

India’s Actions: India has already put in place implicit prices on carbon emissions. The current regime of indirect taxes imposes high tax incidence on petroleum fuels. The GST compensation cess levies a tax on coal. Moreover, the market-based Perform, Achieve and Trade (PAT) scheme works to enhance energy efficiency and thus indirectly reduce carbon emissions from energy consumption in energy-intensive industries, as does ethanol blending in petrol. The move to establish a carbon market—an explicit pricing mechanism—is therefore a natural next step.

Explicit and implicit carbon pricing are external stimuli impacting the composition of energy use, bringing about a change in consumption patterns and production decisions. A shift to low carbon technologies can, however, be successful only if developing countries have access to resources, including finance, on concessional terms. It also depends on the availability of critical minerals. There are also transition costs, as developing countries move towards less carbon-intensive production in a shorter period than their developed peers. The role of developed nations in mobilizing capital at reasonable/concessional terms for enabling this transition is a sine qua non, and part of their promise made at the Earth Summit in 1992 and as part of the Paris Agreement in 2015.

Instead, one of the biggest contributors to the world’s cumulative carbon emissions in the last 150 years, the EU, is now using disparities in carbon prices across countries as a tool to justify carbon border taxes. Europe is responsible for around 22% of the world’s carbon emissions, while India has contributed only 3%. These taxes are being promoted as a way to prevent supposed carbon leakage from a country with stringent carbon-control policies to those with laxer policies.

Seeking to establish a uniform emission trading system, similar regulations and comparable carbon taxes across countries violates the principle of common but differentiated responsibilities and respective capabilities set out in the Rio convention and Paris Agreement. In principle, carbon mitigation should be a shared responsibility, but the burden of carbon prices cannot be shared uniformly among all.

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