14 December 2022 – The Indian Express

Carbon Credit Trading Scheme

• The goal of carbon credits is to lower greenhouse gas emissions. Any tradable certificates or licences that represent the right to emit a certain quantity of carbon dioxide or an equivalent quantity of another greenhouse gas are known as carbon credits. Initiatives at the national and international levels to lower greenhouse gas (GHG) concentrations involve carbon markets and carbon credits.

 About Carbon Credit:

• An authorization to emit a certain quantity of CO2 or other greenhouse gases is known as a carbon credit.
• An element of a “cap-and-trade” system are carbon credits. Credits are given to polluters, allowing them to continue polluting up to a particular point. This maximum is typically lowered. In the interim, any unsold credits may be transferred to another company that needs them.
• The incentive for private businesses to cut greenhouse gas emissions is therefore two times as strong.
• In the event that their emissions go over the limit, they must first purchase more credits.
• They can also make money by reducing their emissions and then selling any extra credits.

Various carbon credits:

Voluntary decrease of emissions (VER)

• This carbon offset is exchanged for credits on the unrestricted or voluntary market.
• Certified Emissions Reduction is a method for proving that a project has reduced its emissions (CER). It is based on a legal system that permits the development of emission units (or credits).

Carbon credit programmes:

• The Intergovernmental Panel on Climate Change (IPCC) of the United Nations promoted the use of carbon credits in a 1997 accord known as the Kyoto Protocol to lower global carbon emissions.
• For the nations that accepted it, the pact established legally obligatory emission reduction targets.
• The Marrakesh Accords, another agreement, included instructions on how the system would function.
• According to the Kyoto Protocol, economies are either industrialised or developing. Each of the wealthy nations has a system in place for trading carbon.
• Through an Emission Reduction Purchase Agreement, a nation that emits fewer hydrocarbons than its target level may sell its extra credits to other nations who fell short of their Kyoto obligations (ERPA).
• Carbon credits were given to developing nations using a distinct Clean Development Mechanism called Certified Emission Reductions (CER).
• These credits could be granted to a developing nation in return for aiding in the funding of sustainable development initiatives. Trading in CER was place on a specific market.

 Paris Agreement:

• By October 2020, 147 of the signatory countries to the Kyoto Protocol had ratified the Doha Amendment, a 2012 agreement that amended the Kyoto Protocol.
• The 2015 Paris Agreement, which also establishes carbon norms and permits emissions trading, was signed by more than 190 countries.
• The US initially left the pact in 2017, but did so once more in January 2020.

The COP26 Climate Change Summit in Glasgow:

• The implementation of Article 6 of the 2015 Paris Agreement, which allows countries to work toward their climate targets by acquiring offset certificates representing carbon reductions by other countries, was agreed upon by negotiators during the November 2021 conference.
• In order to reduce global warming, the pact aims to persuade nations to spend money on initiatives and tools that safeguard forests and create a foundation for renewable energy sources.
• In order to reduce overall world emissions, further provisions of the agreement cancel 2% of all credits and exclude bilateral offset trades between governments from taxation.
• A fund for the adaptation to climate change in disadvantaged nations will also receive 5% of the offset income.
• In order to facilitate the entry of 320 million credits into the new market, negotiators also agreed to carry over 2013 offsets.

Credits exchanged:

• On both public and private markets, carbon credits can be sold. International credit transfers are allowed by current trading legislation.
• The dynamics of supply and demand on the market have the biggest impact on credit prices. Due to regional variances in supply and demand, credit costs change.
• Although carbon credits are good for society, the average investor finds them challenging to employ as investment vehicles.
• Only approved emissions reduction products may be used to purchase credits (CERs).
• On the other hand, CERs are sold through unique carbon funds that big financial institutions have set up. The market is open to small investors because of carbon funds.
• Credits can be exchanged on specialised markets such as the European Energy Exchange, NASDAQ OMX Commodities Europe, and the European Climate Exchange.

Developing nations and carbon credits:

• According to projections, Europe would be the biggest consumer of carbon credits, while developing countries like China and India will be the main producers.
• India contributes about $1 billion to the global carbon credit market’s projected $5 billion worth.
• With over 70% of the market, China is currently the biggest seller of carbon credits.
• At the moment, carbon is traded with other commodities on the Multi Commodity Exchange of India (MCX).
• The first Asian marketplace to offer carbon credits is MCX.

 How does the Cap and Trade system work?

• Cap and trade is a type of government legislation that tries to “cap” or restrict the overall level of emissions of specific chemicals, most notably carbon dioxide, as a result of industrial activity.
• Supporters of cap and trade claim that their approach is superior to a carbon tax. Both programmes aim to lessen environmental harm without placing an excessive financial burden on business.
• Energy cap-and-trade programmes encourage companies to invest in cleaner alternatives in an effort to progressively reduce pollution.
• Companies whose permissible carbon dioxide emissions are restricted receive a predetermined number of permits from the government.
• Businesses that cut their emissions may exchange or sell any unused credits, but those that exceed the cap are subject to taxation.
• The pollution credits’ total aggregate cap (or restriction) steadily declines, prompting businesses to look into less expensive options.
• According to some, the high caps may cause corporations to put off investing in greener choices.

Trading of carbon emissions:

• Through a market-based system called carbon trading, also referred to as carbon emissions trading, the primary greenhouse gas responsible for global warming, carbon dioxide, is being reduced.
• Making it possible for market forces to direct commercial and industrial activities toward less-emissions- or carbon-intensive substitutes to those utilised when releasing carbon dioxide and other GHGs into the atmosphere for free is the goal.
• This method can be used to fund international carbon reduction initiatives because GHG mitigation projects produce credits.
• Carbon trading is currently the key element of emission trading, a strategy that offers financial incentives for lowering pollutant emissions.
• This strategy is most frequently used by countries to fulfil their obligations under the Kyoto Protocol, such as lowering carbon emissions to lessen the effects of climate change.

Market for carbon:

• With the aim of reducing global greenhouse gas emissions, carbon markets make it possible to sell and buy carbon emissions.
• Emissions can be reduced by carbon markets in ways that go beyond what is possible for a single government to do.
• For instance, in India, there are two ways for a corporation to emit greenhouse gases. A nation that hasn’t been able to cut emissions may provide technological or financial support to the Indian company, allowing that nation to take credit for the reduction in emissions.
• On the other hand, the Indian factory has the ability to purchase and sell carbon credits, which are a subset of emission reduction credits. Thus, other parties who are having trouble meeting their goals can purchase these Carbon Credits and gain from them.

Emissions exchanged and covered by the Kyoto Protocol:

• In accordance with Article 17 of the Kyoto Protocol, nations that have exceeded their target emission levels may purchase surplus capacity, or authorised but unutilized, emissions.
• As a result, a new commodity known as emission removals or reductions was created.
• Since carbon dioxide is the main greenhouse gas, carbon trading is commonly used.
• Nowadays, carbon is managed and exchanged like other commodities. The “Carbon Market” is what is known as this.
• More than real emission units may be purchased and sold under the Kyoto Protocol’s emissions trading scheme.

Also transferable are the following units, each of which is equal to one tonne of CO2:

• Based on land usage, land use change, and forestry activities, including reforestation, a removal unit (RMU) is created.
• The project’s cooperative implementation’s emission reduction component (ERU).
• a certified emission reduction (CER) that can be connected to a project activity in line with the clean development methodology (CDM). A nation that has a Kyoto Protocol emission reduction goal may carry out an emission reduction project in a developing nation.
• The registration system keeps track of these units and keeps track of their purchases and transfers.
• The safe transfer of emission reduction units between nations is guaranteed by an international transaction record.