Operation of carbon markets

(MainsGS3:Conservation, environmental pollution and degradation, environmental impact assessment.)

Context:

Recently, the Parliament passed the Energy Conservation (Amendment) Bill, 2022 amid concerns expressed by members over carbon markets.
The Bill amends the Energy Conservation Act, 2001, to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.

Energy Conservation (Amendment) Bill, 2022 about carbon markets:

The Bill empowers the Centre to specify a carbon credits trading scheme as under the Bill, the central government or an authorised 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 and other persons would be able to buycarbon credit certificates on a voluntary basis.

Concerns on bill:

Opposition members pointed out that the Bill does not provide clarity on the mechanism to be used for the trading of carbon credit certificates— whether it will be like the cap-and-trade schemes or use another method— and who will regulate such trading.
Members also raised questions about the right ministry to bring in a scheme of this nature, pointing out that while carbon market schemes in other jurisdictions like the U.S., United Kingdom, and Switzerland are framed by their environment ministries, the Indian Bill was tabled by the power ministry instead of the Ministry of Environment, Forest, and Climate Change (MoEFCC).
Another important concern raised is that the Bill does not specify whether certificates under already existing schemes would also be interchangeable with carbon credit certificates and tradeable for reducing carbon emissions.

Carbon markets:

Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs.
Carbon markets are essentially a tool for putting a price on carbon emissions— they establish trading systems where carbon credits or allowances can be bought and sold.
A carbon credit is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
Carbon allowances or caps, meanwhile, are determined by countries or governments according to their emission reduction targets.
A United Nations Development Program 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.

Need of carbon market:

In order to keep global warming within 2°C, ideally no more than 1.5°C, global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% over this decade.
Nearly 170 countries have submitted their nationally determined contributions (NDCs) so far as part of the 2015 Paris Agreement, which they have agreed to update every five years.
NDCs are climate commitments by countries setting targets to achieve net-zero emissions. India, for instance, is working on a long-term roadmap to achieve its target of net zero emissions by 2070.
In order to meet their NDCs, one mitigation strategy is becoming popular with several countries called carbon markets.

Types of carbon markets:

There are broadly two types of carbon markets that exist today i.e. compliance markets and voluntary markets.
Voluntary markets are those in which emitters like 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 created 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.
Compliance markets set up by policies at the national, regional, and/or international level which are officially regulated.
Today, compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU).
If companies produce emissions beyond the capped amount, they have to purchase additional permits, either through official auctions or from companies which kept their emissions below the limit, leaving them with surplus allowances.This makes up the ‘trade’ part of cap-and-trade.

Still underway:

The U.N. international carbon market envisioned in Article 6 of the Paris Agreement is yet to kick off as multilateral discussions are still underway about how the inter-country carbon market will function.
Under the proposed market, countries would be able to offset their emissions by buying credits generated by greenhouse gas-reducing projects in other countries.
In the past, developing countries, particularly India, China and Brazil, gained significantly from a similar carbon market under the Clean Development Mechanism (CDM) of the Kyoto Protocol, 1997.
India registered 1,703 projects under the CDM which is the second highest in the world but with the 2015 Paris Agreement, the global scenario changed as even developing countries had to set emission reduction targets.

Conclusion:

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”.