A clean gamble: On carbon trading

Source: The post is based on the article “A clean gamble: On carbon trading” published in Live Mint on 23rd February 2023.

Syllabus: GS 3 – Environment and Bio-diversity Conservation.

Relevance: About carbon markets.

News: The Centre is expected to clarify the specifics of a carbon trading market in India. 

What does the term carbon trading mean?

A decade ago, they meant stock-market-like exchanges that traded in ‘carbon offsets’ which is mentioned under the Clean Development Mechanism.

But now, industrial projects in developing countries that avoided greenhouse gas emissions were eligible for credits. After verification, these credits could be sold to European companies that could buy them in lieu of cutting emissions themselves.

The objective of carbon markets is to incentivise investments in renewable energy sources. The carbon trading mechanism will mobilise domestic finance and accelerate the shift away from fossil fuels. Thus, carbon trading can meaningfully lead to emissions reductions.

What are the initiatives that facilitate carbon trading?

Earlier, the approval by the UN Framework Convention on Climate Change via the Paris and Glasgow agreements ensured that carbon markets have acquired greater global significance.

The EU-Emissions Trading Systems (ETS) is a government-mandated emission limit on industrial sectors such as aluminium or steel plants that require industries to either cut emissions or buy government-certified permits from companies that cut more emissions than required or were auctioned by governments. Carbon credits became valuable because they could be used as permits in EU-ETS exchanges.

The European Union also runs the oldest emission trading scheme since 2005, had cut emissions by 35% from 2005-2019 and 9% in 2009, over the previous years.

Domestically, a) an amendment to the Energy Conservation Act was passed in 2022, b) a similar trading mechanism is implemented in Perform, Achieve and Trade (PAT) scheme. There are around 1,000 industries have been involved in procuring and trading energy-saving certificates (ESCerts). Since 2015, various cycles of the PAT have shown emission reductions of around 3%-5%.

What are the challenges with Carbon trading?

a) Though Carbon credits are tradeable on an exchange, like shares, these are trading permits which permit the ‘right to pollute’, b) They are expected to fluctuate in value depending on a company’s need to balance profitability and comply with pollution norms.

What should be done to encourage carbon trading in India?

Clear definition: ‘Carbon markets’ is not a specific term. So, it needs clarity in the Indian context.

The government must intervene to bring pressure on the industry to participate in the market and also ignore proven non-market initiatives to achieve greenhouse gas reductions.