Carbon Credits Market

Description

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Context

The Government of India is taking steps to establish a carbon credit market to help the country meet its nationally determined contributions (NDC).

Carbon Credits

Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gases.
Carbon credits and carbon markets are a component of national and international attempt to mitigate the growth in concentrations of greenhouse gases (GHGs).
Carbon credits are based on the "cap-and-trade" model. Companies get a fixed number of credits (permit to emit CO2/GHGs). These credits also decline over time gradually. They can choose to reduce emission further and sell any excess credit (permitted to them) to another company. Thus, Carbon credits create a monetary incentive for companies to reduce their carbon emissions. Those that cannot easily reduce emissions can still operate, at a higher financial cost.

Clean Development Mechanism

The CDM allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol.

The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets.

The CDM is the main source of income for the UNFCCC Adaptation Fund. The Fund was established to finance adaptation projects and programmes in developing country Parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change. The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.

Kyoto Protocol

The Kyoto Protocol was an international treaty which extended the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that commits state parties to reduce greenhouse gas emissions. The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. The Kyoto Protocol implemented the objective of the UNFCCC to reduce the onset of global warming by reducing greenhouse gas concentrations in the atmosphere to "a level that would prevent dangerous anthropogenic interference with the climate system".

The Kyoto Protocol applied to the seven greenhouse gases listed in Annex A: carbon dioxide (CO₂), Methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF₆), nitrogen trifluoride (NF₃). Nitrogen trifluoride was added for the second compliance period during the Doha Round. The Protocol was based on the principle of common but differentiated responsibilities: it acknowledged that individual countries have different capabilities in combating climate change, owing to economic development, and therefore placed the obligation to reduce current emissions on developed countries on the basis that they are historically responsible for the current levels of greenhouse gases in the atmosphere. The Protocol's first commitment period started in 2008 and ended in 2012. A second commitment period was agreed to in 2012 to extend the agreement to 2020, known as the Doha Amendment to the Kyoto Protocol. The Doha negotiations failed due to lack of consensus among countries.

Importance

Carbon credits offer a way to reward the industries and other sectors that have developed practices involving technological innovations to reduce emissions. These also help achieve climate targets.
Last year, the global carbon credits market rose by 164 per cent and is expected to cross $100 billion by 2030.

Need to develop Carbon Credit Market in India

India is planning to focus on carbon credit since the central government declared its objectives to achieve Net Zero by 2070.
Under the updated NDCs, India is committed to reducing the emissions intensity of its gross domestic products by 45 per cent from 2005 levels by 2030. India has also pledged to achieve 50 per cent of its cumulative electric power installed capacity from non-fossil fuel sources of energy by 2030.
The Lok Sabha rightly passed the Energy Conservation Amendment bill in August 2022, paving the way for the formation of a carbon credit market.
India is on the path to establishing a carbon market at the national level beginning with the voluntary carbon market and then moving on to a compliance-based market.

Significance

Enabling the carbon market at the domestic level will help organisations in the country trade in their carbon credits effectively. This, in turn, will speed up the energy transition objectives of the country for climate change mitigation.
Carbon markets will open up new avenues for organisations that are engaged in developing, trading and consulting carbon credits, while stunting the growth of fossil-fuel generation capacities.
Carbon credits will help developing countries like India carry out economic activities, while keeping the country’s carbon goals in perspective.
Carbon markets will play a key role in the drive towards decarbonisation, encouraging the reduction of emissions through various schemes in the short term with an ultimate goal of achieving Net Zero in the long term. The effects of climate change reduction should be favorable to sectors such as renewable energy, energy efficiency, transportation, waste, afforestation and reforestation.
The carbon credits market favoured by appropriate regulations and policy will help in the creation of suitable opportunities.

PAT SCHEME

In India, the clean development mechanism under the Kyoto Protocol provided a primary carbon market for the players. The secondary carbon market is covered by the perform-achieve-trade scheme (which falls under the energy efficiency category) and the renewable energy certificate. The insight gained from each of the schemes will prove to be instrumental in the creation of a national carbon market.

The Perform, Achieve and Trade (PAT) Scheme is a programme launched by the Bureau of Energy Efficiency (BEE) to reduce energy consumption and promote enhanced energy efficiency among specific energy intensive industries in the country.

Under this scheme, reductions in specific energy saving targets are assigned to Designated Consumers (DCs) for a three-year cycle. The target reduction for each DC is based on their current levels of energy efficiency, so that energy efficient DCs will have lower target of percentage reduction, as compared to less energy efficient DCs which will have higher targets. While calculating the specific energy consumption “gate-to-gate” approach is adopted, thereby including all energy consumption against the total production.

Paris Agreement

The Paris Agreement is the first legally-binding global treaty on climate change agreed in COP21 in Paris in 2015. Since 2015, under the Paris Agreement, almost all countries in the world have committed to:
Keep the rise in global average temperature to ‘well below’ 2°C, and ideally 1.5°C, above pre-industrial levels.
Strengthen the ability to adapt to climate change and build resilience.
Align finance flows with ‘a pathway towards low greenhouse gas emissions and climate-resilient development’.
The Paris Agreement has a ‘bottom-up’ approach where countries individually decide by how much they will reduce their national emissions each year.

Nationally Determined Contribution (NDCs)

The Paris Agreement requests each country to outline and communicate their post-2020 climate actions, known as their NDCs.
In these countries set targets for mitigating the greenhouse gas emissions that cause climate change and for adapting to climate impacts. NDCs are submitted every five years to the UNFCCC secretariat. This five-year cycle of increasing ambition is known as the ‘ratchet mechanism’.
NDCs embody efforts by each country to reduce national emissions and adapt to the impacts of climate change.
It is basically a climate action plan to cut emissions and adapt to climate impacts. Together, these climate actions determine whether the world achieves the long-term goals of the Paris Agreement.

India’s Updated NDCs