Carbon Markets: A Pathway to Climate Change Solutions
-by Sakshi Bisht (Research Associate), The Celestial Earth
Greenhouse gas emissions from human activities are the leading cause of climate change, and they are driving global warming at an alarming rate. Carbon dioxide (CO₂) and methane (CH₄) are the primary contributors to this phenomenon. To tackle the rising threat, carbon markets have emerged as a promising solution, incentivizing emission reductions by putting a price on carbon and allowing its trade. Through these markets, nations and companies can pursue their climate targets in a cost-effective manner while minimizing greenhouse gas emissions.
A carbon market is essentially a system that allows for the buying and selling of carbon credits, representing the right to emit a specific amount of greenhouse gases (usually one metric ton of CO₂). The idea is to place a monetary value on emissions, encouraging companies and governments to reduce their carbon footprint through various mechanisms. Carbon markets operate on the principle that greenhouse gas emissions can be priced. In these markets, companies or entities can trade emissions allowances or credits to meet their climate targets, promoting overall emission reductions.
(Source: climatechange.org)
There are two primary types of carbon markets: Compliance Carbon Markets and Voluntary Carbon Markets.
1. Compliance Carbon Markets: These markets are regulated by governments or international agreements. Participants in compliance markets are typically industries that must comply with set emissions limits. The most well-known mechanism within compliance markets is the “cap-and-trade system”. In this system, a government sets a limit (or cap) on emissions and allocates allowances to companies. Each allowance gives the holder the right to emit a specific amount of greenhouse gases. If a company exceeds its limit, it must purchase additional allowances from those who have extra, effectively creating a market for emissions reductions. Examples of this system include the EU Emissions Trading System (EU ETS) and the California Cap and Trade Scheme.
2. Voluntary Carbon Markets: Unlike compliance markets, voluntary carbon markets allow companies or individuals to purchase carbon credits to offset their emissions voluntarily. These credits are typically generated through projects that reduce or sequester emissions, such as afforestation, renewable energy projects, or methane capture from landfills. This market is often used by businesses looking to improve their environmental credentials or meet sustainability goals.
(Source: carbonwise.com)
Two key tools in carbon markets are “carbon credits” and “carbon offsets." While they are often used interchangeably, they serve slightly different purposes: Carbon credits are tradable permits that allow the holder to emit one metric ton of carbon dioxide or equivalent greenhouse gases. Companies use these credits to comply with regulatory requirements or voluntary commitments. While carbon offsets represent the amount of carbon that has been removed or avoided from the atmosphere, typically through investments in green projects that eliminate emissions.
Despite their potential, carbon markets face several challenges. These include issues of transparency and verification, fluctuating prices, limited scope, and market manipulation. The lack of regulation in some voluntary markets, coupled with price volatility, makes it difficult for businesses to engage in long-term planning.
India has been taking steps to develop carbon trading mechanisms. Some of the key initiatives include:
1. PAT (Perform, Achieve, and Trade) Scheme: Focuses on improving energy efficiency in industries and allows trading of energy-saving certificates.
2. Clean Development Mechanism (CDM): A government-led initiative, with India holding the second-largest number of CDM projects globally.
3. Carbon Credit Trading Scheme (CCTS): Launched in 2023, CCTS regulates the buying and selling of carbon credits, with mechanisms for both compliance and voluntary actions. The global carbon market is expanding as nations and industries see its value in reducing emissions and reaching climate goals. Examples like the EU Emissions Trading System show its effectiveness. India is also making contributions with initiatives like the PAT scheme and the new Carbon Credit Trading Scheme. With a growing focus on sustainability, India has the potential for a successful Carbon Market.
