Context: Union Minister for Power, New & Renewable Energy recently iterated that the Government of India is taking steps to establish a carbon credit market to meet its nationally determined contributions (NDC).

Carbon Trading and Carbon Credit

• Carbon trade is the buying and selling of credits that permit a company or other entity to emit a certain amount of carbon dioxide.

• Carbon trading follows the principle of an emissions trading or cap and trade approach.

• It is a market-based approach in which economic incentives are given to encourage reductions in the emissions of pollutants.

• One of the positive aspects of this approach is that organisations can decide to use the emissions trading schemes flexibly, finding the best option to meet policy targets.

• A carbon credit is a permit allowing the holder to emit a limited amount of carbon dioxide or other greenhouse gases.

• The carbon credits and the carbon trade are authorized by governments to gradually reduce overall carbon emissions and mitigate their contribution to climate change.

• Carbon trading is also referred to as carbon emissions trading.

• The carbon trade originated with the Kyoto Protocol, while the mechanisms that regulate the Carbon Credits market were established in the Marrakesh Accords.

Who Issues Carbon Credit?

• The Kyoto Protocol establishes the quotas of greenhouse gases (denominated in individual units) that each developed country can emit.

• These so-called Assigned Amount Units (AAUs) correspond to an allowance to emit one metric tonne of CO2 or equivalent greenhouse gas.

• Each country then divides its quotas assigning them to local businesses and organizations, setting in this way a limit on the emissions of CO2 for each of them.

• Any government or other regulating body willing to limit carbon dioxide emissions can issue Carbon Credits.

Who Buys Carbon Credits?

• Carbon Credits are bought, voluntarily, by any country or company interested in lowering its carbon footprint.

• The Kyoto Protocol establishes the quotas of greenhouse gases (denominated in individual units) that each developed country can emit.

How does it work?

• The Kyoto Protocol divides countries into two groups according to the level of their economy: industrialised and developing economies.

• Each nation is awarded a certain number of permits to emit carbon dioxide up to a certain level.

• If it does not use up all of its permits it can sell the unused permits to another nation that wants to emit more carbon dioxide than its permits allow.

• Every year, a slightly smaller number of new permits is awarded to each nation.

• The notion is to incentivize each nation to cut back on its carbon emissions to have leftover permits to sell.

• This buying and selling of Carbon Credits are regulated by Emission Reduction Purchase Agreement (ERPA).

• An ERPA is a legal document that records the agreement between parties who buy and sell carbon credits.

How Much is a Carbon Credit?

• Carbon Credits do not have the same value.

• This is mainly because the Carbon Credits market, like any other voluntary market, doesn’t have a central authority that dictates the rules or the approach to pricing them.

Carbon Credits price can be determined by

• The market dynamics (primarily driven by supply and demand)

• The costs of a specific project

• The sponsor supporting the carbon project (i.e., a business initiative that receives funding because of the cut the emission of greenhouse gases).

Significance

• Carbon credits offer a way to reward the industries and other sectors that have developed practices involving technological innovations to reduce emissions and achieve climate targets.

• The required $10 trillion investment in areas such as power and hydrogen can be generated through carbon credit trading.

• 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 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.

• 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.

• In 2021, the global carbon credits market rose by 164 per cent and is expected to cross $100 billion by 2030.