QUE: What is a carbon market and how does it work? Discuss the advantages and challenges associated with setting up a domestic carbon market in India.

A carbon market is a mechanism for reducing greenhouse gas emissions by placing a price on carbon emissions. Its main principle is that if organizations have a financial incentive to reduce their carbon emissions, they will be more motivated to adopt cleaner and more sustainable practices.

• In a carbon market system, a limit (or cap) is set on the total amount of carbon emitted in a particular industry sector. Companies are allocated permits or allowances within this limit. If a company reduces emissions less than its allocated allowance, it can sell the excess allowance to companies that have emitted more than their limit. Because of this, carbon allowances are traded in the market.

• The Energy Conservation (Amendment) Act, 2022 introduced a carbon market in India.

• Benefits of setting up a domestic carbon market in India:

→ It can help India achieve its climate change targets and commitments under the Paris Agreement, such as reducing emissions intensity by 33-35% below 2005 levels by 2030 and reaching net zero by 2070.

→ It can also help India meet its renewable energy targets of installing 450 GW of capacity by 2030 and increasing the share of non-fossil fuels in power generation to 40% by 2030.

→ This can encourage innovation and investment in clean energy and energy efficiency technologies, which provide new opportunities for economic growth and job creation.

→ This could increase India’s energy security and reduce its dependence on fossil fuels (especially imported coal and oil).

→ It could help improve India’s environmental quality as well as public health by reducing air pollution and related health risks.

→ This could generate additional revenue for the government through carbon credits that could be used for climate finance or other social and environmental purposes.

→ To ensure the credibility of carbon credits, a robust and transparent system needs to be built across all institutions to measure, report and verify emissions and reductions.

→ A robust and independent oversight body is needed to monitor and enforce carbon market rules to prevent emissions fraud, manipulation or leakage.

→ A high level of awareness and participation among potential buyers and sellers of carbon credits is required to create adequate demand and supply in the market.

→ An effective balance is needed to ensure environmental effectiveness and economic efficiency of carbon markets while avoiding adverse impacts on competitiveness, equity or development goals.

→ Companies can purchase credits to offset their carbon footprint instead of reducing their overall emissions or investing in clean technologies. This has the potential to lead to greenwashing.

→ Apart from this, the Energy Conservation (Amendment) Bill, 2022 has empowered the Centre to specify a carbon credit trading scheme which has several shortcomings.

→ The Bill does not provide clarity on the mechanism to be used for trading carbon credit certificates.

     The establishment of a domestic carbon market in India is a powerful tool for reducing greenhouse gas emissions or transitioning to a more sustainable economy. However, it also poses some challenges that need to be carefully considered and planned to ensure that the associated benefits are maximised. Thus, a ‘well-managed carbon market’ can create an important environment in this direction.