Context: At COP29 in Baku, a landmark agreement was reached to establish a global carbon market, enabling countries to trade carbon credits as per the Paris Agreement’s Article 6.

• This mechanism aims to reduce emissions while directing resources to developing nations. However, unresolved issues around credit ownership and transparency remain.

Global Carbon Budget (GCB) 

• Carbon emissions from fossil fuels are set to rise by 0.8% in 2024 compared to 2023. This is a slower rise than in 2023, when emissions increased by 1.2% over 2022.

• China (31%), the United States (13%), India (8%), and the EU-27 (7%) contribute the largest share of global fossil CO2 emissions. Together, they account for 59% of all global emissions.

Carbon Emissions by Region and Country

• China is the largest emitter, expected to release 12 billion tonnes of CO2 in 2024, followed by India with 3.2 billion tonnes, and the United States with 4.9 billion tonnes.

• India’s emissions are expected to increase by 4.6% by the end of 2024, while China’s are expected to rise by just 0.2%.

• Per-Capita Emissions: Global per-capita emissions (average emissions per person) were 1.3 tonnes of CO2 in 2023. However, there are large differences across countries:

• US: 3.9 tonnes per person

• China: 2.3 tonnes per person

• EU-27: 1.5 tonnes per person

• India: 0.6 tonnes per person

• Impact of Fossil Fuels: The use of coal, oil, and gas is expected to slightly increase in 2024, with coal emissions rising by 0.2%, oil by 0.9%, and gas by 2.4%. The concentration of CO2 in the atmosphere is expected to reach 422.5 ppm (parts per million) in 2024, which is 52% higher than pre-industrial levels.

The 1.5°C Target is in Danger

• The report warns that the remaining carbon budget (the amount of CO2 that can be emitted without exceeding the 1.5°C global temperature rise) is rapidly depleting.

• The global temperature has already crossed the 1.5°C mark (relative to pre-industrial levels) in January 2024.

• There is now a 50% chance that the remaining carbon budget will be exhausted in about six years, making it very difficult to meet the Paris Agreement’s goal of limiting warming to 1.5°C.

Overview of COP29 and the Carbon Market Agreement

• At COP29 in Baku, countries voted to finalise a long-awaited global carbon market agreement, facilitating carbon credit trading among nations.

• This market aligns with Article 6 of the Paris Agreement, enabling countries to trade carbon credits to meet emission reduction targets through bilateral and global markets.

Article 6 Subsections and Carbon Trading Mechanism

• Article 6.2 allows bilateral trade of carbon credits between countries, while Article 6.4 focuses on establishing a global carbon market.

• Operational requirements for this UN-supervised carbon market have largely been in place since 2022, but challenges around transparency and authenticity of credits have delayed full implementation.

Key-Takeaways from COP29

Ratification of Article 6.4 Rules

• The COP29conference saw a consensus on rules for projects to qualify for carbon credits under Article 6.4 of the Paris Agreement.

• Article 6 enables countries to meet their Nationally Determined Contributions (NDCs)—the climate targets each country sets to reduce emissions—through market-based mechanisms, such as carbon credits.

• The approval of these rules ensures that carbon creditscan now be issued, traded, and used under the UNFCCC framework to offset emissions and support national climate commitment.

Global Carbon Market and Integrity

• The ratified rules are designed to ensure that the international carbon market operates with integrity—meaning the emission reductions achieved are real, additional, verified, and measurable.

• This aims to increase demand for carbon credits, facilitating climate action and investment in emission-reduction projects, especially in developing countries.

India’s Delayed Carbon Market Launch

• India had faced delays in setting up its own carbon market due to the non-finalisation of rules under Article 6. Indian officials have projected that India’s carbon marketcould begin operations by late 2025 or 2026, three years after the government authorized the Bureau of Energy Efficiency (BEE) to create the necessary mechanisms.

• India has been keen on using Article 6-compliant markets to channel investments in emission-reduction projects, leveraging cost-effective mitigation strategies.

Article 6: Key Framework for Global Carbon Markets

• Article 6 of the Paris Agreement allows countries to achieve their emission reduction targets through international cooperation, using market-based mechanisms.

• Article 6.4, approved at COP29, establishes a carbon crediting mechanismwhere emission reductions can be traded internationally.

• These credits will be used by countries to meet their climate goals under the Paris Agreement, while also allowing companies to comply with their national regulations.

Key Challenges in Carbon Market Development

• Accounting Concerns: Clarification is needed on credit ownership, especially for cross-border projects like afforestation in developing countries financed by developed nations.

• Project Eligibility: Determining the point in a project’s lifecycle when credits are valid for trade is another critical issue.

• There are also unresolved questions on whether countries can claim credits from projects within their borders funded by foreign entities for their Nationally Determined Contributions (NDCs).

Economic and Climate Benefits of the Agreement

• If implemented, Article 6 could cut climate plan costs by $250 billion annually by promoting global cooperation.

• The COP29 President emphasised the potential of this carbon market to direct much-needed resources to developing nations.

Next Steps and Broader Climate Goals

• Experts note that while the Article 6 decision is a significant achievement, attention should also remain on the New Collective Quantified Goal (NCQG) to ensure comprehensive climate action.

New Collective Quantified Goal (NCQG)

• The New Collective Quantified Goal (NCQG) is a global financial target aimed at enhancing climate action in developing nations.

• It is designed to replace the previous $100 billion annual commitment for climate financing.

• Expected to be established by 2025, the NCQG will focus on supporting climate adaptation, mitigation, and resilience in vulnerable countries.

• This goal aligns with the Paris Agreement’s objectives and NCQG will provide a more ambitious and realistic financial framework to address climate change challenges in developing countries.

What is Carbon Market?

• Carbon markets, also known as emissions trading mechanisms, are trading systems in which carbon creditsare sold and bought.

• It is a mechanism that internalises the cost of greenhouse gas (GHG) emissionsin goods and services.

• Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.

There are broadly two types of carbon markets

• Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement.

• Voluntary carbon markets (national and international) refer to the issuance, buying and selling of carbon credits, on a voluntary basis.

• Compliance Procedure: In August 2024, the Bureau of Energy Efficiency (BEE),responsible for implementing CCTS, released the scheme’s compliance procedures. However, specific emission targets are still to be announced.

Purpose of a Carbon Market in India

• The goal is to move towards a more efficient use of energy, switching from fossil fuels to renewable energy as power generation increases.

• Nationally Determined Contributions (NDCs):This scheme is part of India's commitment under the Paris Agreement to reduce emissions intensity by 45% from 2005 levels by 2030.

• Net-Zero Target: India has also pledged to become a net-zero emitter by 2070.

• India is the world’s third-largest carbon emitter, contributing 3%to the global greenhouse gas emissions in 2021.

Current State of Carbon Markets in India

• Globally, there are over 28 emission trading systemsin existence, and plans are in place for more than 21 additional national and sub-national emission trading markets. Meanwhile, India is actively developing a framework for its domestic carbon market.

• India currently operates two market-based emission reduction schemes: the Perform, Achieve and Trade (PAT) scheme and the Renewable Energy Certificates (REC) system.

• PAT schemetargets energy-intensive industries such as aluminium, cement, chlor-alkali, fertiliser, iron and steel, paper and pulp, railways, thermal power and textile. Under this scheme, the government sets energy reduction goals, known as specific energy consumption (SEC), for companies in particular sectors. If a company uses less energy per unit of production than the established targets, it can earn certificates (ESCerts) as a reward for saving energy. The earned ESCerts can be traded on Power Exchanges and purchased by other units participating in the PAT scheme to fulfill their compliance needs.

• REC systemoperates under the Renewable Purchase Obligation (RPO), which mandates electricity generators to produce a certain percentage of their total power from renewable sources like solar and wind, etc. These certificatescan be traded and are intended to promote the use of renewable energy sources.

Carbon Credit Market and India's Role

• India is expected to benefit from carbon markets by attracting climate finance, especially in sectors like energy, industry, and clean technology.

• India is hoping to reduce emissions while promoting economic growth through the trade of carbon credits in the international market.

• As per the UN Climate Change, the climate finance needs of 98 nationsare estimated at $500 billion annually, with Article 6 potentially providing $250 billion of that amount, mainly through cross-border cooperation and investments.