Explained: What is a carbon market, and why does India want to create one?

Source: The post is based on the article “Explained: What is a carbon market, and why does India want to create one?” published in Indian Express on 6th August 2022.

What is the News?

The Energy Conservation (Amendment) Bill 2022 seeks to establish a domestic carbon market and facilitate trade in carbon credits.

What are Carbon Markets?

Carbon markets allow the trade of carbon credits with the overall objective of bringing down emissions. These markets create incentives to reduce emissions or improve energy efficiency. 

For example, an industrial unit which outperforms the emission standards stands to gain credits. Another unit which is struggling to attain the prescribed standards can buy these credits and show compliance to these standards.

The unit that did better on the standards earns money by selling credits while the buying unit is able to fulfil its operating obligations.

Where do Carbon Markets stand at the International level?

Kyoto Protocol: Under the Kyoto Protocol, carbon markets have worked at the international level as well. The protocol had prescribed emission reduction targets for a group of developed countries. Other countries did not have such targets, but if they did reduce their emissions, they could earn carbon credits. 

– These carbon credits could then be sold off to those developed countries which had an obligation to reduce emissions but were unable to. This system functioned well for a few years. But the market collapsed because of the lack of demand for carbon credits. 

– A similar carbon market is envisaged to work under the successor Paris Agreement, but its details are still being worked out.

Europe: There is an emission trading scheme (ETS) in Europe. Under this, industrial units in Europe have prescribed emission standards to adhere to and they buy and sell credits based on their performance. 

India: There is a scheme called PAT(or perform, achieve and trade). It allows units to earn efficiency certificates if they outperform the prescribed efficiency standards. The laggards can buy these certificates to continue operating.

What does the Bill seek to create?

The new carbon market that is proposed to be created through this amendment to the Energy Conservation Act, would be much wider in scope.

Although the details of this carbon market are not yet known, it is likely to be on the lines of the European ETS, facilitating the buying and selling of carbon credits.