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Source: This post on Carbon markets and its significance has been created based on the article ” What are carbon markets and how do they operate? “ published in The Hindu on 28th October 2024.
Why in news?
The Energy Conservation (Amendment) Bill 2022 enables the Government to create carbon markets in India and implement a carbon credit trading scheme.
About Carbon markets
1. Carbon markets are a pricing mechanism for carbon emissions, where carbon credits or allowances can be traded.
2. Paris Agreement Article 6 allows countries to use international carbon markets to help achieve their NDCs.
3. Purpose of Carbon Markets: Carbon Credits are a tradable permit that represents the removal, reduction, or sequestration of one tonne of carbon dioxide.
4. Carbon Allowances/Caps are set by governments based on emission reduction targets, limiting the allowable emissions for companies or sectors.
5. Types of Carbon Markets
| Classification | Voluntary Markets | Compliance Markets |
| Participants | Emitters such as corporations or individuals buy credits to offset emissions. | Established by governments at national, regional, or international levels, these markets are officially regulated. |
| Function | Credits come from projects like afforestation, which reduce atmospheric CO₂. | Cap-and-Trade sets a cap on emissions in specific sectors, with permits issued based on these limits. Companies exceeding limits must buy additional permits |
| Certification | Credits are verified by private firms and can be traded on registries. | |
| Example | Airlines may buy credits to offset flight emissions. | European Union (EU) Emissions Trading System (ETS): A cap-and-trade system launched in 2005, covering sectors like power, manufacturing, and waste. Compliance markets incentivize cleaner energy and technology adoption. |
Advantages of Carbon Markets
1. Cost Efficiency: World Bank estimates carbon trading could reduce the cost of NDCs by over half, potentially saving $250 billion by 2030.
2. Global Expansion: Several national and regional markets exist worldwide, including in China, North America, and Japan.
3. Market Growth: The global carbon market value increased significantly, with the EU’s ETS accounting for 90% of the value.
Challenges of Carbon Markets
1. Quality and Authenticity: Concerns about the quality and real impact of credits generated by climate projects.
2. Greenwashing Risks: Companies may rely on offsets rather than actively reducing emissions or adopting clean technologies.
3. Sector Inclusion Issues: High-emission sectors in trading schemes might not automatically contribute to climate goals and can sometimes increase emissions.
Read more: The Energy Conservation (Amendment) Bill 2022
UPSC Syllabus: Environment
