What are Carbon markets?

• 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.
• In order to meet their NDCs, one mitigation strategy is becoming popular with several countries— carbon markets. Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfill their NDCs.

• NDCs are climate commitments by countries setting targets to achieve net-zero emissions.

• 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.

Types of Carbon markets

• 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 CO2 or equivalent greenhouse gases.

• 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.
• 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.

• Compliance markets: These are set up by policies at the national, regional, and/or international level and are officially regulated.

• Compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU). Eg: Under the EU’s emissions trading system (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 is determined as per the climate targets of countries and is lowered successively to reduce emissions.
• Entities in this sector are issued 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 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.
• The market price of carbon gets determined by market forces when purchasers and sellers trade in emissions allowances.
• These markets may promote the reduction of energy use and encourage the shift to cleaner fuels.
• China launched the world’s largest ETS in 2021, estimated to cover around one-seventh of the global carbon emissions from the burning of fossil fuels.

What are the challenges to Carbon markets?

• The UNDP points out serious concerns pertaining to carbon markets- ranging from double counting of greenhouse gas reductions and quality and authenticity of climate projects that generate credits to poor market transparency.
• 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.
• 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.
• The UNDP emphasizes that for carbon markets to be successful, “emission reductions and removals must be real and aligned with the country’s NDCs”. There must be “transparency in the institutional and financial infrastructure for carbon market transactions”.

Why in news?

• Recently, the Parliament passed the Energy Conservation (Amendment) Bill to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme by amending Energy Conservation Act, 2001.

Key features of the bill

• Carbon credit trading:  The Bill empowers the central government to specify a carbon credit trading scheme.   Carbon credit implies a tradeable permit to produce a specified amount of carbon dioxide or other greenhouse emissions.  

• The central government or any authorized agency may issue carbon credit certificates to entities registered and compliant with the scheme.  The entities will be entitled to trade the certificates.   Any other person may also purchase a carbon credit certificate on a voluntary basis.

• Obligation to use non-fossil sources of energy:  The Act empowers the central government to specify energy consumption standards.  The Bill adds that the government may require designated consumers to meet a minimum share of energy consumption from non-fossil sources.  

• • Different consumption thresholds may be specified for different non-fossil sources and consumer categories.

• Designated consumers include: 

(i) industries such as mining, steel, cement, textile, chemicals, and petrochemicals, (ii) transport sector including Railways, and 

(iii) commercial buildings, as specified in the schedule.

• Failure to meet this obligation will be punishable with a penalty of up to Rs 10 lakh.  It will also attract an additional penalty of up to twice the price of oil equivalent of energy consumed above the prescribed norm.

• Energy conservation code for buildings:  The Act empowers the central government to specify Energy Conservation Code for buildings.   The code prescribes energy consumption standards in terms of area. The Bill amends this to provide for an ‘Energy Conservation and Sustainable Building Code’.   

• This new code will provide norms for energy efficiency and conservation, use of renewable energy, and other requirements for green buildings. 
• The Bill empowers the state governments to lower the load thresholds.

• Standards for vehicles and vessels:  Under the Act, the energy consumption standards may be specified for equipment and appliances which consume, generate, transmit, or supply energy.  The Bill expands the scope to include vehicles (as defined under the Motor Vehicles Act, 1988), and vessels (includes ships and boats).

Concerns raised by opposition

• 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.
• Currently, two types of tradable 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 are also activities which reduce carbon emissions. The question, thus, is whether all these certificates could be exchanged with each other.

Conclusion 

• 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.

reference:

https://prsindia.org/billtrack/the-energy-conservation-amendment-bill-2022