The world faces challenges in dealing with ever-growing environmental pollution leading to climate change and global warming. The greenhouse gas emissions are still higher than expected, and scientists apprehend a further rise in temperature exceeding 2 degrees Celsius worldwide if proper and immediate action is not taken to drastically cut down harmful gas emissions and carbon footprint. An extensive and collaborative effort is required to achieve the climate action goals, which also require sufficient investment and funding. Countries are falling short of their goals to be achieved by 2030 due to insufficient financial support. It is a genuine concern about how to drive and finance the changes to handle the climate crisis. The concept of carbon markets has been introduced in this regard as a part of the solution to this issue. The carbon market intends to control the climate crisis by effectively putting a price on pollution and creating an economic incentive for countries to reduce harmful emissions.
Carbon Market
Carbon Market
The carbon market defines the scope of earning credits by emission reduction and removal of pollutants. The benefits are achieved through the actions taken through emission reduction projects like solar energy sources or forest conservation initiatives. The credits are then sold to buyers who can be government organizations or private companies working on targets related to climate solutions and emission reductions. One unit of tradable carbon credit is equivalent to one ton of carbon dioxide estimated to be reduced or avoided from emissions. The benefits of solutions can be observed globally, no matter where the emissions are reduced or avoided. Carbon markets provide financial support to countries in dealing with climatic pollution and open up opportunities to implement actions towards achieving the goal of lower emissions.
Carbon Market Under Paris Agreement
- The provisions regarding the setting up of the carbon market are based on the clauses described in the Paris Agreement that deal with actions and measures to reduce emissions and improve climate conditions on a global scale.
- Article 6 of the Paris Agreement states the carbon market mechanism to encourage emission reductions by countries in collaboration with each other. For example, if a country fails to meet its emission reduction target, it can provide money or technology to another country, and then claim the reduction of emission as its own. The receiving country can invest and then offer on sale the emission reduction, called carbon credits. Any other country looking for support to meet its reduction targets can buy these credits and use these in its process implementations. The countries can earn carbon credit by avoiding greenhouse gas emissions, decreasing the volume of greenhouse gasses, or carrying out projects that remove greenhouse gasses from the atmosphere.
- Bilateral agreements for the transmission of emissions reductions are permitted as per Article 6.2
- Article 6.4 discusses a larger carbon market in which anyone can sell or buy reductions.
- Article 6.8 suggests that governments can use non-markets strategies to meet their objective.
Functioning of the Carbon Market
- The provisions regarding the setting up of the carbon market are based on the clauses described in the Paris Agreement that deal with actions and measures to reduce emissions and improve climate conditions.
- The carbon market mechanism is conceived to encourage emissions reductions on a global scale but not limited to the countries. For example, suppose a country fails to meet its emission reduction target. In that case, it can provide money or technology to another country and then claim the emissions reduction as its own. The receiving country can invest and then offer on sale the emission reduction, called carbon credits.
- Any country looking for support to meet its reduction targets can buy these credits and use them in its process implementations.
- The organizations can earn carbon credit by avoiding greenhouse gas emissions, decreasing the volume of greenhouse gasses, or carrying out projects that remove greenhouse gasses from the atmosphere.
Types of Carbon Markets
There are two types of carbon markets which are mentioned as follows:
- Compliance: Compliance markets are carbon markets created due to regional, national, or international policy or regulatory requirements.
- Voluntary: This is a carbon market where buying and selling carbon credits are done voluntarily. Voluntary participation in carbon markets is mainly observed by private players aiming to develop carbon reduction projects or government organizations that plan and implement carbon reduction or removal programs.
Significance of the Carbon Market
- The carbon markets allow countries to earn revenue by taking appropriate steps to minimize pollution, reduce carbon emissions, and limit global temperature rise.
- Primarily, the carbon market focuses on voluntary involvement by companies to declare their commitments, action plans, and measures taken to control emissions.
- Later on, a more compliance-oriented approach can be taken by the carbon market to the industries to operate within the given emission targets as regulatory compliance.
- The popularity of the carbon market is still not very encouraging, with a limited number of buyers. Still, with more involvement of key players and a competitive pricing structure, it is likely to get momentum in the future.
- The market will let the green and energy-efficient industries increase earnings through carbon trading, boosting profitability. This will help them finance more projects on climate transformation.
Challenges in the Carbon Market
- The challenge of the carbon market is a lack of awareness and clarity about different carbon assets, often resulting in unreasonable price expectations.
- There are still requirements for sufficient initiatives from different countries regarding governance and basic regulations to promote voluntary participation in carbon markets.
- There are doubts about the efficiency of carbon markets. Some companies just purchase credits, making no attempt to lower their own emissions.
- Credits available in the market are of poor quality.
India’s Stand in the Carbon Market
- India saw a growth in the voluntary carbon market by about 60% in 2021. It grew to a $1 billion market in 2021 and is expected to be $50 billion in 2050.
- India has no direct carbon pricing but does that in the form of levies like fuel excise taxes.
- India doesn’t plan to export carbon credits but intends to use it internally to meet climate goals.
- The government is aiming to strengthen the Energy Conservation Act of 2001. This will help to facilitate the achievement of more ambitious climate change targets and ensure a faster transition to a low-carbon economy.
Important Data About The Carbon Market
- Cambodia in Southeast Asia has extensive experience with the voluntary carbon market in the forest sector.
- COP26, held in Glasgow, approved Article 6 of the Paris Agreement governing global carbon markets.
Conclusion:
To address the increasing environmental pollution and subsequent climate crisis, all countries need to come forward and put a concerted effort into handling the situation. But it is observed that there are more action gaps than what is required to prevent the catastrophic impacts of climate change. The concept of carbon markets is an essential tool to make countries more accountable for contributing to emission reduction and enables them to invest in pollution control programs.