Explained | What are carbon markets and how do they operate?

Source: The post is based on the article “Explained | What are carbon markets and how do they operate?” published in The Hindu on 20th December 2022

What is the News?

Parliament passed the Energy Conservation (Amendment) Bill, 2022. The Bill amends the Energy Conservation Act, 2001 to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.

What is the Carbon Market?

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What are the types of carbon markets?

There are two types of carbon markets:

Voluntary markets: It is a decentralized market in which emitters— corporations, private individuals, and others— voluntarily buy and sell carbon credits that represent certified removals or reductions of greenhouse gases (GHGs) in the atmosphere. For instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate. 

Compliance Carbon Market: It is used by companies and governments that by law have to account for their GHG emissions. It is regulated by mandatory national, regional or international carbon reduction regimes.

– Today, compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU).

What is the size of the carbon market?

According to an analysis by Refinitiv, the value of global markets for tradeable carbon allowances or permits grew by 164% to a record 760 billion euros ($851 billion).

The EU’s ETS contributed the most to this increase, accounting for 90% of the global value at 683 billion euros. As for voluntary carbon markets, their current global value is comparatively smaller at $2 billion.

What does the Paris Agreement say about the carbon market?

Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs.

But this article is yet to kick off as multilateral discussions are still underway about how the inter-country carbon market will function. 

Under the proposed market, countries would be able to offset their emissions by buying credits generated by greenhouse gas-reducing projects in other countries. 

What are the challenges to carbon markets?

The challenges to carbon markets are: 1) Double counting of greenhouse gas reductions, 2) Quality and authenticity of climate projects that generate credits to poor market transparency and 3) Greenwashing—companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions or investing in clean technologies.

What does the Energy Conservation (Amendment) Bill, 2022, say about carbon markets and what are the concerns?

The Bill empowers the Centre to specify a carbon credits trading scheme. Under the Bill, the central government or an authorized agency will issue carbon credit certificates to companies or even individuals registered and compliant with the scheme. These carbon credit certificates will be tradeable in nature. Other persons would be able to buy carbon credit certificates on a voluntary basis.

Concerns with the bill

Firstly, the bill does not provide clarity on the mechanism to be used for the trading of carbon credit certificates— whether it will be like the cap-and-trade schemes or use another method— and who will regulate such trading.

Secondly, there is a question of whether the Ministry of Power is the appropriate Ministry to regulate this scheme or whether should it be the Ministry of Environment.

Thirdly, the bill does not specify whether certificates under already existing schemes would also be interchangeable with carbon credit certificates and tradeable for reducing carbon emissions. 

– Note: Two types of tradeable certificates are already issued in India— Renewable Energy Certificates (RECs) and Energy Savings Certificates (ESCs). These are issued when companies use renewable energy or save energy, which is also activities which reduces carbon emissions.