Introduction
The companies in the developed world are required to meet certain carbon emission target set by their respective government. However, if these companies are not able to meet their emission targets, they have an alternative of purchasing these carbon credits from the market i.e. from someone who is successful in meeting these targets and who has a surplus of these credits.
This process is known as carbon trading.
Carbon trading is also very advantageous for the companies of the developing world as it provides monetary gains in exchange of carbon credits which help these companies to purchase or change their technology.
This change in technology eventually helps the companies to reduce carbon emission. The need for carbon trading was felt when it was realized that the industries have been the biggest polluter of greenhouse gases (GHGs) which has resulted in global warming. A lot of effort was put in by the NGOs and other institutions to bring the attention of the world towards the problem of global warming. But this issue was not taken very seriously as a result of which nothing much was done in this regard. Thus it was realized that the only way to get the attention of the world towards these problems was by attaching some financial incentive to it. As a result, the concept of Carbon trading was introduced.
Carbon Trading in India
Indian industries were able to cash in on the sudden boom in the carbon market making it a preferred location for carbon credit buyers. It is expected that India will gain at least $5 billion to $10 billion from carbon trading (Rs 22,500 crore to Rs 45,000 crore) over a period of time. Also India is one of the largest beneficiaries of the total world carbon trade through the Clean Development Mechanism claiming about 31 per cent (CDM).
India’s carbon market is one of the fastest growing markets in the world and has already generated approximately 30 million carbon credits, the second highest transacted volumes in the world. The carbon trading market in India is growing faster than even information technology, bio technology and BPO sectors. Nearly 850 projects with an investment of Rs 650,000 million are in the pipeline.
Carbon is also now being traded on India’s Multi Commodity Exchange. It is the first exchange in Asia to trade carbon credits.
Examples of Carbon trading in India:
- Jindal Vijaynagar Steel:
The Jindal Vijaynagar Steel has recently declared that by the next ten years it will be ready to sell $225 million worth of saved carbon. This was made possible since their steel plant uses the Corex furnace technology which prevents 15 million tonnes of carbon from being discharged into the atmosphere.
2. Powerguda in Andhra Pradesh:
The village in Andhra Pradesh was selling 147 tonnes equivalent of saved carbon dioxide credits. The company has made a claim of having saved 147 MT of CO2. This was done by extracting bio-diesel from 4500 Pongamia trees in their village.
3. Handia Forest in Madhya Pradesh:
In Madhya Pradesh, it is estimated that 95 very poor rural villages would jointly earn at least US$300,000 every year from carbon payments by restoring 10,000 hectares of degraded community forests.
Global Carbon Trading
Several international treaties and conventions have refined and adjusted carbon trading since, including the Paris Agreement in 2015. Significantly, the Paris Agreement included a carbon trading ‘rulebook’ in Article 6, but the details and mechanics were in negotiation.
A critical breakthrough came in 2021 at the 26th UN Climate Change Conference in Glasgow (COP26). After years of stalemates, COP26 delivered crucial progress on the Article 6 ‘rulebook’ including:
- setting new rules for regulating carbon accounting
- creating a mechanism for countries to transfer carbon reductions
- the establishment of a global carbon market overseen by a United Nations entity.
Broadly, carbon markets fall into two categories: those introduced via regulatory compliance schemes and those that are voluntary.
‘Regulated’ or ‘Compliance’ Markets are created and regulated by mandatory national, regional, or international carbon reduction regimes, and are currently the main method used to obtain carbon reductions across corporate entities and industry emitters. Regulated markets can be split into two categories:
- cap and trade schemes — are the most common and work by setting a fixed limit on emissions through a set of permits released into the market via auction or distribution according to certain criteria.
- baseline and credit mechanisms — do not have a fixed limit on emissions, and companies trade offsets which are granted to companies that reduce their emissions more than they are otherwise obliged to. In this system, the items being traded are for past reduction in emissions as opposed to future pollution as seen in a cap and trade system.
Features of cap and trade schemes include…
- Market participants are usually identified by governments based on sector, carbon emission intensity or size.
- Governments set an emissions limit (cap) on market participants and issue either by free allocation or auction a quantity of emission allowances consistent with that cap.
- An auctioning system is the preferred approach because it requires companies to purchase allowances and therefore further incentivises companies to reduce their emissions.
- Overtime this cap is reduced so that GHG emissions decline. To avoid heavy penalties at the end of each compliance period companies must surrender an allowance for every ton of GHG emitted.
- Companies that have reduced their emissions can either retain the spare allowances to cover future emissions or can sell their spare allowances to companies that will exceed their cap. By purchasing the spare allowances, the emitter is allowed to exceed their cap because they are effectively paying someone else to reduce their emissions on behalf of them.
Examples of regulated markets include…
- The world’s first ETS, the European Union’s (EU) introduced in early 2005. The EU ETS is a ‘cap and trade’ scheme.
- National ETSs including in the United Kingdom and sub-national ETSs such as that in California.
- The world’s largest ETS, China’s national ETS, introduced in 2001.
Voluntary’ Markets function outside of regulated markets and enable companies, government entities and individuals to purchase carbon offsets on a voluntary basis with no intended or possible use for compliance purposes. Permits or credits are often purchased under voluntary schemes to achieve internal CSR or public relations purposes or corporate initiatives.
Features of Voluntary’ Markets inclue,
- They cover a wider variety of sectors than compliance markets which typically deal with high emitting industries such as energy production.
- An overarching aim of incentivising private actors to finance projects that remove GHG emissions from the atmosphere.
- Regulation is often outsourced to non-governmental organisations (NGOs). These NGOs have created their own methodologies to certify emission reduction projects.
- Voluntary carbon markets are independent of regulatory markets and therefore companies under an emissions cap cannot purchase voluntary carbon credits to meet their legal obligations.
