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What Are Carbon Markets?

Context:

Recently, The Energy Conservation (Amendment) Bill, 2022 was passed in Parliament. The Bill empowers the government to establish carbon markets in India and specify a carbon credit trading scheme.

Relevance:

GS II: Environment and Ecology

Dimensions of the Article:

  1. What are carbon markets?
  2. What are the challenges?
  3. About Energy Conservation (Amendment) Bill

What are carbon markets?

  • 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.
  • Article six of the 2015 Paris Agreement provides for the use of international carbon markets by countries to fulfil their nationally determined contributions (NDC) to keep global warming within 2°C.
Carbon Credit:
  • A carbon credit is a kind of tradable permit that, as per UN standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
  • United Nations Development Program (UNDP) release this year noted that interest in carbon markets is growing globally — 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce greenhouse gas emissions.

Two types of Carbon markets:

Voluntary markets.
  • Voluntary markets are those in which emitters — corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO2 or an equivalent greenhouse gas.
  • Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
  • In a voluntary market, a corporation looking to compensate for its unavoidable 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 footprint of the flights they operate.
Compliance markets:
  • Compliance markets on the other hand which are set up by policies at the national, regional, and/or international level are officially regulated.

What are the challenges?

  • The UNDP points out serious concerns pertaining to carbon markets — ranging from double counting of greenhouse gas reductions, quality and authenticity of climate projects that generate credits to poor market transparency.
  • There are also concerns about ‘greenwashing’ — companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions.

About Energy Conservation (Amendment) Bill

  • By amending the Energy Conservation Act of 2001, the Bill gives the central government more authority to designate a carbon credit trading system.
  • A percentage of the energy demands of designated users may need to come from non-fossil fuels.
  • India made promises pertinent to efforts to increase energy efficiency at the COP-26 meeting in 2021.
  • In light of this, in August 2022, the Energy Conservation (Amendment) Bill, 2022 was presented to Lok Sabha.

Key features of the bill

Carbon credit trading:
  • The Bill empowers the central government to specify a carbon credit trading scheme.  
  • Carbon credit implies a tradable permit to produce a specified amount of carbon dioxide or other greenhouse emissions.
Obligation to use non-fossil sources of energy:
  • The Act empowers the central government to specify energy consumption standards for designated consumers to meet a minimum share of energy consumption from non-fossil sources. 
  • Designated consumers include:
    • industries such as mining, steel, cement, textile, chemicals, and petrochemicals,
    • transport sector including Railways,
    • commercial buildings, as specified in the schedule.
Energy conservation code for buildings: 
  • The bill empowers the central government to specify norms for energy efficiency and conservation, use of renewable energy, and other requirements for green buildings.  
  • Under the Act, the energy conservation code applies to commercial buildings:
    • erected after the notification of the Code,
    • having a minimum connected load of 100 kilowatt (kW) or contract load of 120 kilo volt ampere (kVA).
Standards for vehicles and vessels: 
  • Under the bill, the energy consumption standards may be specified for equipment and appliances which consume, generate, transmit, or supply energy. 
  • The Bill expands the scope to include vehicles (as defined under the Motor Vehicles Act, 1988), and vessels (includes ships and boats).
Composition of the governing council of BEE: 
  • The Act provides for the setting up of the Bureau of Energy Efficiency (BEE). 
  • The Bureau has a governing council with members between 20 and 26 in number.

Concerns

  • Carbon credit trading aims to reduce carbon emissions, and hence, address climate change. 
  • The question is whether the Ministry of Power is the appropriate Ministry to regulate this scheme.
  • A further question is whether the market regulator for carbon credit trading should be specified in the Act.
  • Same activity may be eligible for renewable energy, energy savings, and carbon credit certificates.
  • The Bill does not specify whether these certificates will be interchangeable.
  • Designated consumers must meet certain non-fossil energy use obligation. 
  • Given the limited competition among discoms in any area, consumers may not have a choice in the energy mix.

-Source: The Hindu


February 2023
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