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Carbon Markets in India

Energy Conservation (Amendment) Bill, 2022

  • Bill amends the Energy Conservation Act, 2001, to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.
  • Central government or an authorised agency will issue carbon credit certificates to companies or even individuals registered and compliant with the scheme.
  • These carbon credit certificates will be tradable in nature.
  • Other persons would be able to buy carbon credit certificates on a voluntary basis.

Tradable Certificates Issued in India

  • Renewable Energy Certificate (REC):
    • It is a market based instrument to promote renewable energy and facilitate compliance of renewable purchase obligations (RPO).
    • It is aimed at addressing the mismatch between availability of renewable energy resources in state and the requirement of the obligated entities to meet the renewable purchase obligation (RPO).
    • One Renewable Energy Certificate (REC) is treated as equivalent to 1 MWh.
  • Energy Saving Certificates (ESCerts): It is issued under Perform, Achieve and Trade (PAT) scheme.
    • They are issued to those plants that have achieved excess energy savings over their targets.
    • Units that are unable to meet the targets either through their own actions or through purchase of ESCerts are liable to financial penalty under the Energy Conservation Act, 2001.


About Carbon Markets

  • Carbon markets are essentially a tool for putting a price on carbon emissions.
  • They establish trading systems where carbon credits or allowances can be bought and sold.
  • Carbon Credit: It is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
  • Carbon Allowances: They are determined by countries or governments according to their emission reduction targets.
  • A United Nations Development Program(UNDP) this year noted that interest in carbon markets is growing globally, i.e., 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce greenhouse gas emissions.


About Nationally Determined Contributions (NDCs)

  • NDCs are climate commitments by countries setting targets to achieve net-zero emissions.
  • Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs.
  • In order to keep global warming within 2°C, ideally no more than 1.5°C, global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% over this decade.
  • Nearly 170 countries have submitted their NDCs so far as part of the 2015 Paris Agreement, which they have agreed to update every five years.
  • India is working on a long-term roadmap to achieve its target of net zero emissions by 2070.


Types of Carbon Markets:

Compliance Markets

  • Under it, policies set up at the national, regional, and/or international level— are officially regulated.
  • Entities in this sector are issued annual allowances or permits by governments equal to the emissions they can generate.
  • If companies produce emissions beyond the capped amount, they have to purchase additional permit.
    • This makes up the ‘trade’ part of cap-and-trade.
  • The market price of carbon gets determined by market forces when purchasers and sellers trade in emissions allowances.
  • Companies can also save up excess permits to use later.
  • These markets may promote the reduction of energy use and encourage the shift to cleaner fuels.

Voluntary Markets

  • They are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO2 or equivalent greenhouse gases.
  • Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
  • In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.


Global Efforts Towards Climate Market

  • U.N. international carbon market envisioned in Article 6 of the Paris Agreement:
    • Countries would be able to offset their emissions by buying credits generated by greenhouse gas-reducing projects in other countries.
    • In the past, developing countries, particularly India, China and Brazil, gained significantly from a similar carbon market under the Clean Development Mechanism (CDM) of the Kyoto Protocol, 1997.
    • India registered 1,703 projects under the CDM which is the second highest in the world.
  • EU’s emissions trading system (ETS):
    • It was launched in 2005, member countries set a cap or limit for emissions in different sectors, such as power, oil, manufacturing, agriculture, and waste management.
    • This cap is determined as per the climate targets of countries and is lowered successively to reduce emissions.
  • China launched the world’s largest ETS in 2021, estimated to cover around one-seventh of the global carbon emissions from the burning of fossil fuels.
  • Markets also operate or are under development in North America, Australia, Japan, South Korea, Switzerland, and New Zealand.


Challenges to Carbon Markets

  • Double counting of greenhouse gas reductions and quality and authenticity of climate projects that generate credits to poor market transparency.
  • Greenwashing: Companies may buy credits, simply offsetting carbon footprints instead of reducing their overall emissions or investing in clean technologies.
  • ETSs may not automatically reinforce climate mitigation instruments.


Way Forward

  • For successful carbon markets, emission reductions and removals must be real and aligned with the country’s NDCs.
  • There must be transparency in the institutional and financial infrastructure for carbon market transactions.


PAT Scheme

  • It is a market-based mechanism, under National Mission for Enhanced Energy Efficiency (NMEEE), to enhance cost effectiveness through certification of excess energy savings in energy intensive industries that can be traded.
  • The scheme seeks to reduce the specific energy consumption (SEC), i.e. energy used per unit of production in energy intensive large industries.
  • Under this scheme, an Energy Audit is done to verify the baseline data (current level of efficiency) and thereafter energy saving targets are given.


Bureau of Energy Efficiency (BEE)

  • BEE was set up under the provision of the Energy Conservation Act, 2001.
  • Mission: To assist in developing policies and strategies with a thrust on self-regulation and market principles with the primary objective of reducing energy intensity of the Indian economy within the overall framework of the Energy Conservation Act, 2001.


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