How Carbon Markets Work and Their Challenges

Source: The post How Carbon Markets Work and Their Challenges has been created, based on the article “How would a carbon market function?” published in “The Hindu” on 16th December 2024

UPSC Syllabus Topic: GS Paper3- Environment

Context: The article explains carbon markets, where businesses buy and sell the right to emit carbon. It highlights how these markets help reduce pollution by making companies pay for emissions. It also discusses potential problems, like governments increasing credits or firms cheating emissions. How Carbon Markets Work and Their Challenges?

For detailed information on Carbon Markets: Benefits and Challenges read this article here

What is a Carbon Market?

Carbon markets allow businesses to buy and sell permissions to emit carbon dioxide. Each permission, called a carbon credit, equals 1,000 kilograms of CO2. By controlling the number of credits, governments can manage how much carbon is released into the air. This system started in the U.S. in the 1990s to control sulfur dioxide emissions.

For detailed information on Carbon markets and its significance read this article here

Why are Carbon Markets Useful?

1. Regulation of Emissions: They regulate carbon emissions by issuing carbon credits, with one credit allowing the emission of 1,000 kilograms of CO2. This mechanism helps governments control overall emissions effectively.
2. Economic Incentive: Companies have to buy carbon credits to emit, which economically incentivizes them to reduce their carbon footprint.
3. Market Efficiency: Trading carbon credits in a market allows companies that need more credits to buy from those who need less, promoting efficient distribution of emissions allowances.
4. Encourages Technological Advancements: As companies seek to minimize carbon costs, there’s an incentive for innovation in carbon tracking and reduction technologies.
5. Large Company Support: Major corporations, such as ExxonMobil and General Motors, advocate for carbon markets as they provide flexibility and market-based solutions for managing emissions, unlike direct regulatory interventions.

What Challenges Do Carbon Markets Face?

1. Oversupply of Carbon Credits: Governments that are not serious about reducing emissions may issue too many carbon credits. This can lower the price of credits, making it ineffective in reducing emissions.
2. Cheating and Illegal Emissions: Some governments may allow firms to cheat by illegally emitting more carbon than their credits permit, reducing the credibility of the system.
3. Voluntary Reporting Preferred by Corporations: Large firms like ExxonMobil and General Motors prefer voluntary emission reporting, such as the Carbon Disclosure Project. They oppose strict government-imposed limits, arguing it may lead to higher costs and production restrictions.
4. Economic Growth Concerns: Critics worry that strict caps on carbon credits could unnecessarily slow economic growth. Politicians might impose restrictions without bearing personal economic consequences.
5. Effectiveness of Carbon Offsets: Firms often purchase carbon offsets for public relations rather than ensuring genuine emission reductions. This raises doubts about the actual environmental impact of offsets.
6. Challenges for Small Businesses: Small businesses, particularly in developing countries, face difficulties in monitoring and reporting emissions. Limited access to advanced tracking tools, like real-time energy sector data, hampers their participation.

Question for practice:

Examine the usefulness and challenges of carbon markets in regulating emissions and promoting environmental sustainability.