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Home » What are the advantages of a Carbon Market?

What are the advantages of a Carbon Market?

The Union Government has introduced the Energy Conservation (Amendment) Bill 2022 to the Parliament. The purpose of this Bill is to improve the Energy Conservation Act, 2001. The Amendments are anticipated to aid in the achievement of higher-level climate goals and guarantee a faster transition to the low-carbon economy. This legislation, known as the Energy Conservation Act, 2001 had powered the first phase of India’s move towards an energy-efficient and sustainable future. Over time in the past, the efficiency (energy consumed per unit of GDP) of the Indian economy has consistently decreased. However in the context of India embarks on more ambitious climate action pledged under the Paris Agreement, there is an urgent need to expand the coverage of the Act to include tools which will help in the attainment of these lofty goals. One of the amendments proposed is to create a national carbon market in order to facilitate the trading of carbon credits.

What are the proposed amendments in the Energy Conservation (Amendment) Bill, 2022?

The bill has two primary objectives: (a) It seeks to require certain groups of commercial, industrial and even residential customers to switch to green energy. A predetermined minimum percentage of the energy they consume is to come from non-fossil or renewable fuel sources. (b) It seeks to create a carbon market in the United States and encourage trade in carbon credits. The goal is to broaden the scope of energy conservation to include large residential buildings as well. At present, energy conservation rules applied mainly on commercial and industrial complexes.

What is what is a Carbon Market?

Carbon Markets and Carbon Credits are the components of emission trading, which is a system of market-based approaches to reduce the level of Greenhouse gases (GHG) in the atmosphere. They work by offering incentives that encourage the reduction of emission of the pollutants of which it is a part. A carbon market allows corporate and investor to trade carbon credits and carbon offsets simultaneously.

Carbon credits (or allowances) serve as permits for emissions. When a company purchases a carbon credit it grants the right to increase their CO2 emissions. A carbon credit that is tradable equals one tonne of carbon dioxide or the equivalent amount of a greenhouse gas that is reduced by sequestration or avoidance.

Credits are compared to benchmarks’ or allowed GHG emissions. If emissions are less than the allowed limit, the emitter earns carbon credits (reducing 1 tonne of CO2 earns 1 carbon credit). If emissions exceed the limit allowed, the emitter has to purchase carbon credits from people who have excess credits. So, exceeding the emissions limit is an expense (amount used to purchase carbon credits) to the emitter. The idea is that this price will force the emitters to improve their efficiency and reduce emission.

There are two types that exist for markets dealing with carbon. (a) There is a regulated market, set in place by “cap-and-trade” regulation at the regional and state levels; (b) The second is a free market where people and businesses purchase credits (of their own initiative) to offset their carbon emissions.

Carbon Markets were granted in the year 1997 under the UN Kyoto Protocol. The Kyoto Protocol’s Clean Development Mechanism (CDM) allowed industrialized countries to reduce emissions in other countries where it could be less expensive than in their home countries through planting trees in tropical regions.

How can businesses reduce carbon emissions?

There are multiple ways for companies to neutralize carbon emissions. They are broadly classified into (a) Carbon Avoidance/Reduction Projects (i.e., reduce the amount of carbon emitted); (b) Carbon Removal/Sequestration Project (i.e., remove the carbon already emitted from the atmosphere).

Investing in renewable energy by investing in hydro, wind, solar, and geothermal power generation projects and switching to these power sources wherever possible.

Improving energy efficiency across all over the world, for example with the help of better cookstoves for people living in poorer or rural regions.

Capturing carbon dioxide from the atmospheric air and using it to create biofuel, which creates a carbon neutral fuel source.

Returning biomass to the soil as mulch following harvest instead of removing or burning. This practice reduces evaporation from the soil’s surface and aids in preserving the water. The biomass can also feed earthworms and soil microbes. allowing nutrients to cycle and strengthen soil structure.

Reforestation of forests through tree planting and reforestation initiatives.

The switch to alternative fuels, such as lower-carbon biofuels like corn , biomass-derived bioethanol and biodiesel.

What is the current status of Carbon Markets across the world?

National or Regional

Domestic or regional carbon markets exist in a variety of places, most notably in Europe which has an Emission Trading Scheme (ETS) operates using similar principles. Industries in Europe have set emission standards that they have to comply with and buy and sell credits on the basis of their performance. China has an internal carbon market.

A similar scheme for incentivising efficiency in energy has been operating in India for more than 10 years. In this BEE scheme, dubbed PAT (or perform, achieve and trade) allows units to receive efficiency certificates when they exceed the required efficiency standards. The laggards can buy these certificates to keep operating.

International

Under the Kyoto Protocol, carbon markets have worked at the international level too. In the Kyoto Protocol had prescribed emission reduction targets for a set of of developed countries (Annex I, Developed Countries). Other countries did not have specific targets, but when they did reduce their emissions, they could earn carbon credits. These carbon credits could then be sold off to those developed countries which could not meet their reduction goals. The system worked well for a couple of years. However, the market crashed because of the lack of consumer demand to purchase carbon credits.

The world was in the process of negotiating the new climate treaty that would replace Kyoto Protocol, Kyoto Protocol, the developed nations did not feel the need to follow their commitments under the Kyoto Protocol. A carbon market like the Kyoto Protocol is being planned for implementation under the successor Paris Agreement, but its details are still being worked out.

What are the benefits of an Carbon Market?

First, it will help in limiting the negative effects of climate change through in reducing GHG emissions.

There are a variety of benefits of offset projects, for example: conservation of forests, ecosystem management sustainable agricultural practices, the generation of renewable energy in third-world countries, etc.

Third, the voluntary offsetting market in carbon is less than the compliance market, but expected to grow much bigger in the coming years. It’s available to individuals businesses, individuals, and other organizations that want to reduce or completely eliminate their carbon footprint however they are not required to by law.

Fourth, the public is becoming conscious of the significance of carbon emissions. Therefore, they’re becoming increasingly critical of companies that don’t take environmental issues seriously. Through donating to offset carbon projects, businesses signal to investors and consumers that they’re doing more than only lip service to combat climate change.

Fifth, it creates an additional revenue stream for eco-friendly companies. For instance, Tesla, the electric automaker also sold carbon credits to older automobile manufacturers for a total of $518 million in just the first quarter of 2021.

What are the issues that hinder running Carbon Markets?

There are some concerns about the efficacy of carbon markets in reducing emissions. Some businesses simply purchase carbon credits, without making an effort to reduce emissions on their own. It’s more economical for them to purchase carbon credits instead of investing in emission reduction technology e.g. An analysis by the Center for Science and Environment of the PAT program for thermal power plants revealed that the price of one ESCert* is much lower — INR 700 — when compared to the amount of INR 4,020 that has to be made to cut energy consumption equal to one tonne equivalent. In the event that the cost for carbon credit is higher than the price of cutting emissions, there is no incentive for high emitters to work to reduce their carbon emissions (i.e. firms need to spend more on purchasing credits instead of investing in emission reduction technologies).

*(ESCerts are similar to carbon certificates that will be offered for sale and purchase under the scheme of carbon markets).

Environmentalists argue that only high-quality carbon offsets are efficient in reducing emissions. High-quality carbon offsets possess certain advantages like (a) Additionality that means emissions reductions have to be additional i.e. they could not have occurred in the absence of an offset credit market e.g. the renewable project could be set up just because a large emitter has paid for it. (b) Verifiable: There must be proper audits to ensure the monitoring reports and verification of emission cuts; (c) Permanence The reduction in emissions must be irreversible.

But, many of the credits in the market are not of good quality i.e., they do not fulfill the above requirements. Most of the credits are not considered to be ‘additional’ i.e., the emission reduction projects would have been completed even in absence of carbon offset credits (without any possibility for project owners to market carbon offset credits). Additionally, it’s very difficult to establish the ‘additionality’. According to a US-based environmental group, more than 60% percent of the credits available come from projects with “questionable claims to additionality”..

In some cases the reduction in emissions may not always permanent. There have been instances where wood-based projects were carried out to purchase carbon credits. Then, in the end, the trees that were planted were cut off, thus reversing the reduction.

Thirdly, purchasing carbon credits could divert rich nations from the path of reducing emissions. They could keep emitting and buy cheap carbon credits from developing countries.

Fourth, there is a an enormous excess of carbon credits available on the voluntary markets. According to an estimate credit for around one billion tons of CO2 have been offered to be sold on the market of voluntary auctions. There have been more sellers than buyers. Supply exceeding demand reduces carbon credits’ price and it become easier for emitters to offset and despite the continuing high emissions.

Fifth, It is difficult to quantify the amount of carbon reductions caused by offset projects (like the afforestation or wind energy project). The problem is determining emission baselines (Emissions baseline is what would happen if the project was not implemented i.e., the emissions in the absence of the project). This is why it’s difficult to verify emission reductions and assigning carbon credits.

India’s own PAT (Perform, Achieve, Trade) Scheme hasn’t managed to achieve meaningful emissions reduction. According to an analysis conducted by the Center for Science and Environment the reduction in emissions as a result of the scheme was only 1.57% and 1.44 percent for the two cycles.

What can be done to prepare ahead?

There is a necessity to establish a national -level environment regulator based on the models of SEBi (Stock Market Regulator), RBI (Banking Regulator) to ensure carbon markets work efficiently.

Second, there must be strong regulatory safeguards to ensure that the emission offsets traded are of high quality. Otherwise, as experts say an ineffective carbon market could end up doing more damage.

There is also a necessity to raise awareness about environmental issues for the public at large to help them be aware of their environmental obligations. For instance, consumers could purchase offsets for emissions from particular high-emissions activities, such as a long flight, or purchase offsets regularly to reduce their carbon footprint.

Fourth, it’s crucial that cap-and-trade does not be a check-and-extort system in India. To do this, a technologically-enabled model of open verification could be used by the government.

Conclusion

The establishment of a domestic carbon market is an incremental step. But, the real benefit will be contingent on the efficiency in the operation of the market. To achieve this, the government must ensure that proper regulations are established. Moreover, there must be periodic assessment of its functioning and corrective steps that are needed. Climate change is real and imminent, the government should take all steps to ease the burden.