What are Carbon Markets and their Importance

To make it easier to meet more ambitious climate goals and ensure a faster transition to a low-carbon economy, the government is looking to strengthen a 20-year law called the Energy Conservation Act of 2001.  It aims to create a domestic carbon market and facilitate the trading of emissions credits. The issue of carbon trading now becomes an international issue and this has a high chance of coming in exams like UPSC, SSC, Railways, State PSC, and others.

What is a Carbon Market?

• The creation of a domestic carbon market is one of the key provisions of the proposed amendment law. The CO₂ market enables the trading of CO₂ certificates with the overriding goal of reducing emissions.
  
• The markets can create incentives for reducing emissions or improving energy efficiency. For example, industrial units that exceed emission standards can receive credits. Another entity struggling to meet the required standards can purchase these credits to demonstrate compliance with those standards. Units that perform better based on criteria earn a profit by selling credits, allowing purchased units to meet their operational obligations.
  
• Carbon markets also function internationally under the Kyoto Protocol, the predecessor of the Paris Agreement.
  
• The Kyoto Protocol has set reduction targets for emissions for a group of developed countries. Other countries did not have such targets, but they can earn carbon credits if they reduce their emissions.
  
• These carbon credits could be sold to developed countries that needed to reduce their emissions but were unable to do so. This system has worked well for years. But the market collapsed as demand for allowances fell.
  
• A similar post-Paris carbon market is set to work, but the details are still being worked out.
  
• National or regional carbon markets are already working in some places, especially in Europe, where the Emissions Trading Scheme (ETS) works on similar principles.
  
• European industrial companies impose emission standards that they must meet and buy and sell credits based on their performance. China also has a domestic carbon market.
  
• Similar programs to promote energy efficiency have existed in India for more than a decade before him. This BEE program, called PAT (or Execution, Achievement, and Action), enables units to obtain efficiency certificates when they exceed predetermined efficiency standards.   
  
• However, the new CO2 market created by the recent revision of the Energy Conservation Law has an even greater spread. Although the details of this carbon market are not yet known.

Other ways of carbon pricing:

A smart approach is carbon pricing, which can be done in the following ways :

Emissions trading:

• One way to set a carbon price is emissions trading. Set a maximum amount of wastewater from industry and allow companies with low emissions to sell excess land.
  
• It is a market-based approach to controlling pollution by providing economic incentives to reduce pollutant emissions.
  
• This is in contrast to environmental regulations imposed by governments, which are command and control.

Carbon tax

• Another possibility is to impose a carbon tax on economic activity. For example, imposing a carbon tax on the use of fossil fuels such as coal, as is the case in Canada and Sweden.
  
• A carbon tax is a fee for the carbon content of fossil fuels This is strong financial resistance to facilitating clean energy transitions across the economy, just by making the transition to zero-carbon fuels and energy efficiency more economically viable. example: Canada imposed a carbon tax of $20 per tonne of its CO₂ emissions in 2019, which was eventually raised to $50 per tonne. This should reduce greenhouse gas pollution by 80-90 million tons by 2022.
  
• Tax revenues from carbon pricing can be substantial. India’s carbon tax of $35 per tonne of her CO₂ emissions is estimated to produce about 2% of GDP by 2030. 

Carbon tariffs :

Large powers like India should also use their global monopoly or bulk buyer power in international trade to impose carbon tariffs, as envisioned by the EU. If imports remain carbon-intensive, reducing the domestic carbon content of production alone will not avert the damage, so it is important to focus on trade.

Important types of carbon markets :

There are two main types of carbon markets: compliance and voluntary.

• Compliance markets arise due to national, regional, and/or international guidelines or regulatory requirements.
  
• Voluntary market refers to the issuance, purchase, and sale of CO2 certificates voluntarily.
  
• The current supply of voluntary carbon credits is primarily from private companies developing carbon projects or governments developing programs that are certified by carbon standards and produce emissions reductions and reductions.
  
• Demand comes from individuals looking to offset their carbon footprint, businesses with sustainability goals, and other players looking to run high-margin trades to make a profit.

Major Challenges

• Progress has been made toward agreeing on the processes and methodologies that countries must follow to access carbon markets. The benefits of using a portion of the proceeds to help the most vulnerable countries adapt to climate change are among the most important.
  
• However, there are serious concerns such as issues related to double counting of GHG emission reductions, human rights violations, and greenwashing (where companies misrepresent their green certifications, e.g misrepresenting carbon neutral products and services). There is also This is why the Paris Agreement negotiations on this issue have been so complicated and protracted. Emission reductions and reductions should be real and consistent with the country’s NDC. 
  
• The institutional and financial infrastructure for trading on carbon markets must be transparent. Appropriate social and environmental protection measures should also be taken to mitigate negative impacts and promote positive impacts of the project.

Major countries that are leading the world’s carbon market:

• Forest-rich countries like Costa Rica are seeking ways to strategically engage carbon markets related to NDC deployments.
  
• In Southeast Asia, Cambodia has extensive experience in voluntary carbon markets in the forest sector. In line with its updated NDCs and ambitious long-term carbon neutral strategy, in the second phase of its climate pledge, Cambodia will seek opportunities for a regulated and voluntary international carbon market to mobilize investment in priority sectors such as energy.
  
• Meanwhile, international locations like Ghana are already pioneering the implementation of carbon marketplace units advanced via voluntary cooperation amongst international locations beneath Article 6.2 of the Paris Agreement. 

Importance of Carbon Markets for India:

• Developing countries, especially India, China, and Brazil, have greatly benefited from carbon markets under the Clean Development Mechanism (CDM) of the Kyoto Protocol.
  
• India has registered 1,703 projects in its CDM, which is the second highest in the world. The total number of carbon credits issued for these projects, known as Certified Emission Reductions (CERs), is approximately 255 million, or S$2.55 billion. Logically, therefore, India has much to gain from a thriving carbon market. But with the ratification of the Paris Climate Agreement, the rules of the game have changed. In contrast to the Kyoto Protocol, even developing countries must have reduction targets.
  
• Developing countries face the dilemma of selling carbon credits for favorable foreign investment flows or using those credits to meet mitigation targets. This makes Article 6 a very sensitive issue that requires a careful balance of concerns and expectations.
  
• Over 50% of countries have indicated their intention to use market mechanisms to meet their NDC target, while India aims to rely on domestic mitigation efforts to meet their NDC target. Therefore it is not included in it.
  
• Developed countries rely heavily on market mechanisms to meet their climate goals, making market mechanisms a relatively low-cost option.