Carbon Trading

Carbon trading is the process of buying and selling permits and credits that allow the permit holder to emit carbon dioxide. It is a market-based system aimed at reducing greenhouse gases that contribute to global warming, particularly carbon dioxide emitted by burning fossil fuels.

Context: Parliament passed the Energy Conservation (Amendment) Bill-2022 that enables the Union government to set up a carbon credit trading scheme and specify the minimum amount of non-fossil sources to be used by designated energy consumers.

What is carbon trading?

Carbon Credits can also be traded on both public and private markets. The current rules of training allow the international transfer of credits as well.

The prices of Carbon Credits depend on the levels of demand of supply in the markets. So the price fluctuates on the supply and demand in different countries.
Carbon Credits have proven beneficial to society. However, it is not easy for the average investor to start using credits as an investment vehicle.
Certified Emissions Reductions are the only product that can be used as investments in credits. However, the CERs(Certified Emissions Reductions) are sold by special carbon funds, which have been established by big financial institutions.
The carbon funds give an opportunity for small investors to enter the market.

What are the types of carbon trading?

Emissions Trading

It is also known as “cap and trade” or “allowance trading,” is a method of reducing pollution that has been successfully used to protect human health and the environment.
Emissions trading programmes consist of two major components: a pollution limit (or cap) and tradable allowances equal to the limit that allow allowance holders to emit a specific quantity (e.g., one tonne) of the pollutant.
This limit ensures that the environmental goal is met, and the tradable allowances give individual emissions sources the flexibility to choose their own compliance path.
These programmes are often referred to as “market-based” because allowances can be bought and sold on an allowance market.

Carbon Offset Trading

Every carbon “cap and trade” program that is now in place or that is planned includes offsetting credits in some way.
Credits, which can be purchased from nations or enterprises beyond the cap, mainly in the developing world, are an additional source of permits to pollute.
By paying someone else to lower their emissions in place of them, their purchase enables the emitter to exceed the emissions cap.
It is crucial to keep in mind that offsets just substitute for emissions, not reduce them.
These schemes enable individuals and businesses to invest in environmental projects all over the world to offset their own carbon footprints.
This could include implementing clean energy technologies or purchasing and reselling carbon credits from an emissions trading scheme.
Other schemes work by absorbing CO2 directly from the air via tree planting.

How does carbon trading operate?

Carbon Markets and Carbon Credits are a market-based approach to reduce the concentration of Greenhouse gases (GHG) in the atmosphere. It works by providing economic incentivesfor reducing the emissions of the designated pollutants.
A carbon market allows investors and corporations to trade both carbon credits and carbon offsets simultaneously.
When a company buys a carbon credit, they gain permission to generate more CO2 emissions.One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided.
If emissions are below the allowed limit, the emitter earns carbon credits. If emissions are above the allowed limit, the emitter must buy carbon credits from those who have excess credits.
The idea is that this cost will force the emitters to be more efficient and reduce emission.
There are two types of carbon markets:
- (a) One is a compliance market, set by “cap-and-trade” regulations at the regional and state levels;
- (b) The other is a voluntary market where businesses and individuals voluntarily buy credits (of their own accord) to offset their carbon emissions.

What are the Significance of Carbon Trading?

Help achieve current and future climate ambitions by tapping existing markets.
Bring about development co-benefits: improve air quality and health outcomes and ensure energy security.
- For eg. trading in sulphur dioxide permits helping to limit acid rain in the US.
Carbon trading is much easier to implement than expensive direct regulations, and unpopular carbon taxes.
If regional cap and trade schemes can be joined up globally, with a strong carbon price, it could be a relatively pain-free and speedy method to help the worlds decarbonise.
Boost competitive advantage of businesses by reducing risk of stranded assets.
Open low carbon opportunities for MSMEs through
Technology transfer
Spur clean innovation
Provide liquidity to Indian credits
Unlock climate finance

What are the Challenges of Carbon Trading?

Creating a market in something with no intrinsic value such as carbon dioxide is difficult.
Need to promote scarcity – and you have to strictly limit the right to emit so that it can be traded.
In the world’s biggest carbon trading scheme, the EU ETS, political interference has created gluts of permits.
On account of corruption, carbon credits have often been given away for free, which has led to a collapse in the price and no effective reductions in emissions.
Another problem is that offset permits, gained from paying for pollution reductions in poorer countries, are allowed to be traded as well.
The importance of these permits in reducing carbon emissions is questionable and the effectiveness of the overall cap and trade scheme is also reduced.
Greenwashing – in which companies falsely market their green credentials, for example, misrepresentations of climate-neutral products or services
Double-counting of GHG emission reductions.

Rules released by the government for Carbon trading:

Two types of tradeable certificates are already issued in India- Renewable Energy Certificates (RECs) and Energy Savings Certificates (ESCs). These are issued when companies use renewable energy or save energy, which is also activities which reduces carbon emissions.
Parliament passed the Energy Conservation (Amendment) Bill, 2022 which amends the Energy Conservation Act, 2001 to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.
Under the Bill, the central government or an authorized agency will issue carbon credit certificates to companies or even individuals registered and compliant with the scheme. These carbon credit certificates will be tradeable in nature. Other persons would be able to buy carbon credit certificates on a voluntary basis.
A similar trading mechanism is implemented in Perform, Achieve and Trade (PAT) scheme. There are around 1,000 industries have been involved in procuring and trading energy-saving certificates (ESCerts).