A carbon market’s form must follow its function

Source: The post is based on the article “A carbon market’s form must follow its function” published in the Live Mint on 9^th August 2022.

Syllabus: GS 3 Ecology and Environment; Infrastructure and Energy

Relevance: Market Intervention for Combating Climate Change

News: This week, the Lok Sabha passed the Energy Conservation (Amendment) Act of 2022 before sending an update of India’s plans to the United Nations Framework Convention on Climate Change (UNFCCC).

Prime Minister of India revised India’s climate commitment at last year’s CoP-26 summit in Glasgow

(1) By 2030, India aims at around 50% energy drawn from sources other than fossil fuels.

(2) India would release 45% less dirty emissions for every rupee of economic output than we did in 2005.

(3) India would also achieve carbon neutrality by 2070.

Proposed bill

The bill amends the Energy Conservation Act 2001. The move will let the government specify standards of energy use by various groups of users, with mandates for clean sources in their usage mix.

The bill proposes to set up a market platform locally for the trading of carbon credits.

About the carbon market

The idea works by placing a price tag on a fungible tonne of carbon exhaust. Further, the prices of carbon units are based on the forces of demand and supply in a system of dynamic burden sharing. In this, the emitters pay the cost to buy credit for their own financial well-being, and the ones outperforming the green energy target will sell those credits.

The carbon market functions with a ‘cap and trade’ mechanism. In this, a legal limit is set on emissions.

It allows the entities which are spouting more gases than their annual allowance to buy add-on rights, while efficient carbon compressors could sell their surplus to the defaulters.

Why did India need a carbon market?  

It is a form of market intervention, which is a key element of economic success. For example, it works upon private incentives.

The deployment of private incentives and market signals helps to stall climate change.

What should be done?

The cap-and-trade limit should be tightened over the years in accordance with our climate goals.

For this, emission caps should be placed and should be calibrated with full transparency. For instance, the scientific data used for their basis, devices used for exhaust evaluation, and other elements of our policy frame must always be kept amenable to scrutiny.

It’s crucial that cap-and-trade does not end up as an inspect-and-extort regime in India. For this, a tech-enabled model of open verification can be adopted by the government.

The past certificates issued by the Bureau of Energy Efficiency (BEE) could be enlisted under a cap-and-trade plan.