Carbon Trading and Market: What is Carbon Market? Types, Importance, and Key Issues

• Carbon trading and markets have become an important tool of modern climate policy and sustainable development.
• This system serves as an effective means to reduce greenhouse gas (GHG) emissions and economically incentivize industries.

What is a Carbon Market ?

• A carbon market is a trading system where companies purchase carbon credits to offset their GHG emissions.
• These credits are obtained from projects that reduce, prevent, or absorb emissions such as CO₂ into the earth’s surface or vegetation.
• One carbon credit generally represents a reduction of one metric ton of CO₂ or its equivalent in other GHG emissions.

Types of Carbon Trading

1. Emission Trading System (ETS)
   • Cap-and-Trade System
   • Baseline-and-Credit System
2. Carbon Tax
3. Controls emissions economically through direct taxation.

Major Types of Carbon Trading

1. Emission Trading System (ETS)

It is a market-based mechanism, meaning companies are given the option to trade in order to reduce emissions.
The objective of ETS is to regulate GHG emissions without imposing excessive economic burden on industries.
There are two main models under ETS:

(a) Cap-and-Trade System

• The government or regulatory body sets a limit (cap) on total emissions allowed for companies.
• Example: Suppose 10 companies in a city are allowed a total of 100,000 tons of CO₂ emissions annually.
• Companies are given emission allowances (credits) according to this limit.
• If a company emits less than its allowance, it can sell its extra credits to another company that emits more.
• This incentivizes firms to adopt cleaner technologies and meet environmental goals.

Key Features:

• Market-based incentive.
• Total emission quantity (cap) is predetermined.
• Credit price is determined by market demand and supply.

(b) Baseline-and-Credit System

• In this system, there is no fixed emission cap.
• Instead, a baseline or standard emission level is set.
• Companies emitting less than this baseline earn credits.
• Companies emitting more must buy credits.

Key Features:

• Rewards firms that reduce emissions.
• Encourages industries to adopt technological improvements.
• Offers greater flexibility since there is no fixed cap.

2. Carbon Tax

• A direct tax imposed by the government on companies or industries for every ton of CO₂ emitted.
• Example: If the carbon tax is ₹1000 per ton of CO₂, and a factory emits 1000 tons, it must pay ₹10 lakh as tax.
• The aim is to economically control emissions.

Key Features:

• Provides a clear economic incentive to cut emissions.
• Not market-based like trading; it’s a fixed fee.
• Easy to predict — companies know the cost per ton of CO₂ emitted.

Difference between ETS and Carbon Tax

Importance of Carbon Trading

• Support for Developing Countries: Carbon markets help developing nations mobilize financial resources to strengthen their climate mitigation efforts.
  
• Revenue Generation: Globally, in 2024, more than USD 100 billion in revenue was generated through ETS and carbon taxes.
  
• Emission Reduction: Through global carbon markets, up to 5 gigatons of CO₂ per year can be reduced by 2030 at no additional cost.

Key Issues Related to Carbon Markets

1. Carbon Colonialism: Adverse impacts on the rights of local and indigenous communities.
2. Lack of Global Standards: Absence of clear guidelines for transparency and MRV (Monitoring, Reporting, and Verification).
3. Integrity and Quality: Need for regulatory bodies and third-party verification to ensure the quality of carbon credits and prevent greenwashing.
4. Use of Technology: Technologies such as blockchain can make transactions transparent and secure.

Article 6 and the Paris Agreement

Article 6 of the Paris Agreement finalized the rules for carbon trading at COP-29. It enables countries to cooperate in achieving their Nationally Determined Contributions (NDCs). It includes three major systems:

1. Market-Based Mechanisms
   • Article 6.2: Bilateral agreements between countries.
   • Article 6.4: A new global offset market (PACM).
2. Non-Market-Based Mechanism (Article 6.8): Promotes mitigation and adaptation through capacity building, finance, and technology transfer.

Significance:

According to the World Bank, carbon trading under Article 6 can reduce the cost of achieving NDCs by up to 50%, resulting in annual savings of USD 250 billion by 2030.

Difference Between Article 6 and the Kyoto Protocol

Problems:

• Inadequate measurement standards
• Risk of double counting
• Limited coverage (only about 24% of global emissions covered)

India’s Perspective: Carbon Credit Trading Scheme (CCTS), 2023

The Ministry of Environment has launched CCTS 2023 to set GHG Emission Intensity (GEI) targets for energy-intensive industries.

Key Points:

1. GEI Targets: Set according to the methodology of the Bureau of Energy Efficiency (BEE).
2. Compliance: Obligated entities must achieve annual targets; in case of shortfall, they can buy carbon credit certificates from ICM.
3. Environmental Compensation: Violations attract compensation by CPCB.
4. Legal Basis: Environment Protection Act, 1986, and Energy Conservation (Amendment) Act, 2022.

CCTS Challenges:

• Lack of experience among industries
• Complex institutional framework
• Rising carbon credit prices
• Lack of transparency

Conclusion

To make India’s carbon market transparent, efficient, and globally attractive, it is essential to ensure:

• Clear methodologies for emission targets
• Analysis of existing market mechanisms
• Inter-tradability among trading entities
• Strengthening of the institutional framework