Context

• As per the assessment of Centre for Science and Environment (CSE), India generates one-fifth of the world’s carbon credits and is at the forefront of carbon investment.

Origin of carbon credits

• The idea of carbon credit began in the first decade of the 2000s, after the Kyoto Protocol, set up under the UN Framework Convention on Climate Change (UNFCCC), came into force.
• Countries agreed to set up the Clean Development Mechanism (CDM) for the purchase of carbon credits from developing countries. But with the end of the Kyoto Protocol, this market dried up.
• It was replaced by an unregulated global market of buyers and sellers, called the voluntary carbon market.

Carbon credits

• A carbon credit serves as a permit, granting its owner the authorization to release a specific quantity of CO2 or other greenhouse gases. 
• Each credit corresponds to the emission of one tonne of CO2 or its equivalent in other greenhouse gases.
• The carbon credit is one component of a “cap-and-trade” programme. Polluters are given credits that allow them to continue polluting up to a certain limit. This limit is reduced on a regular basis. In the meantime, the company may sell any unsold credits to another company that requires them.
• This system creates a dual incentive for private companies to mitigate greenhouse gas emissions. Firstly, if their emissions surpass the established cap, they are obliged to invest in additional credits. Secondly, these companies stand to gain financially by reducing their emissions and selling any excess allowances.

Indian Scenario

• India’s lucrative carbon market is worth over $1.2 billion . It will only grow as the crisis of climate change becomes more urgent and companies strive to attain net-zero emission goals.
• The global average price is $4 per credit.
• Carbon credits issued to Indian entities are worth 11% of India’s annual greenhouse gas emissions in 2021.

Prevailing issues

• Accessing international carbon markets and buyers for carbon credits can be challenging for Indian companies. Improving market access could enhance the effectiveness of the carbon credit mechanism.
• The prices of carbon credits in international markets have been relatively low in recent years. This can impact the financial incentives for companies to invest in emission reduction projects, as the returns may not be substantial.
• The process of getting emission reduction projects approved and registered under mechanisms like the Clean Development Mechanism (CDM) can be complex and time-consuming. This bureaucratic challenge may hinder the participation of companies
• Lack of accurate monitoring, reporting, and verification of emission can affect the credibility of carbon credit projects.

Conclusion

• Changes in national and international climate change policies and regulations can create uncertainty for businesses investing in emission reduction projects. A stable and supportive policy environment is crucial for the success of carbon credit mechanisms.