Context: The Parliament passed the Energy Conservation (Amendment) Bill, 2022, declining the Opposition’s demands to send it for scrutiny to a parliamentary committee amid concerns expressed by members over carbon markets.

What are carbon markets?

• Carbon markets are a tool for putting a price on carbon emissions. It allows the trade of carbon credits with the overall objective of bringing down emissions.
  • For example, an industrial unit which outperforms the emission standards stands to gain credits.
• It establishes trading systems where carbon credits or allowances can be bought and sold.

What are the types of carbon markets?

(A) Voluntary Markets

• They are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO 2 or equivalent greenhouse gases.
• Such carbon credits are bring by activities which reduce CO 2 from the air, such as afforestation. In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.
• For Instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate.
• In voluntary markets, credits are verified by private firms as per popular standards.
• There are also traders and online registries where climate projects are listed and certified credits can be bought.

(B) Compliance Market

• Compliance markets— set up by policies at the national, regional, and/or international level— are officially regulated.
• Today, compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU).
• Successful example of Carbon Market: EU’s emissions trading system (ETS)
• Under the EU’s ETS launched in 2005, member countries set a cap or limit for emissions in different sectors, such as power, oil, manufacturing, agriculture, and waste management.
• This cap can be determine as per the climate targets of countries and is dropped successively to reduce emissions.
• Entities in this sector are list annual allowances or permits by governments equal to the emissions they can generate.
• If companies produce emissions beyond the capped amount, they have to purchase additional permit, either through official auctions or from companies.
• This makes up the ‘trade’ part of cap-and-trade.

What are the Significance of Cabon Market?

• Carbon markets are essentially a tool for putting a price on carbon emissions.
• They establish trading systems where carbon credits or allowances can be buy and sold. 
• A United Nations Development Program (UNDP) release this year noted that interest in carbon markets is growing globally, i.e, 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce greenhouse gas emissions.
• The World Bank estimates that trading in carbon credits could reduce the cost of implementing NDCs by more than half — by as much as $250 billion by 2030.

What are the Challenges to carbon markets?

• Questionable Authenticity & Double Counting:
  • The UNDP points out serious concerns pertaining to carbon markets- ranging from double counting of greenhouse gas reductions. The quality and authenticity of climate projects that generate credits to poor market transparency. 
• Greenwashing:
  • There are also concerns about what critics call greenwashing—companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions or investing in clean technologies.
• Lack of Transparency:
  • The UNDP emphasises that for carbon markets to be successful, “emission reductions and removals must be real and aligned with the country’s NDCs”. 
  • It says that there must be “transparency in the institutional and financial infrastructure for carbon market transactions”.
• No Guarantee of Climate Mitigation:
  • As for regulated or compliance markets, ETSs may not automatically reinforce climate mitigation instruments. 
  • The International Monetary Fund points out that including high emission-generating sectors under trading schemes to offset their emissions by buying allowances may increase emissions on net and provide no automatic mechanism for prioritizing cost-effective projects in the offsetting sector.

Way Ahead

• India needs to align public financial flows with announced targets on energy transition, to leverage private finance.

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