Carbon Credits and Global Trade

PRAMOD DABRASE, MUMBAI, INDIA

CSEDI LLP (Environmental Scientist, Policy maker, trainer, development professional, researcher, social entrepreneur with 23 years+ sector contribution)

1.? What are Carbon Credits?

Carbon credits represent a permit or certificate allowing the holder to emit a specific amount of carbon dioxide (CO?) or other greenhouse gases (GHG). One credit equals one ton of CO?. These credits are part of a cap-and-trade system, where the cap is a limit on emissions set by a regulatory body. Businesses or countries that exceed their emissions cap must purchase credits to offset their excess, while those that emit less than their cap can sell their surplus credits. This market-based approach incentivizes reduction in emissions, thus contributing to environmental goals.

2.? How the Global Carbon Market Works

The carbon credit market has two primary segments:

• Compliance Market: Regulated by policies like the EU Emission Trading System (EU ETS), this market mandates large emitters to offset their emissions by purchasing credits. Governments set caps and fines for non-compliance, creating a strong regulatory framework.
• Voluntary Market: Here, companies or individuals voluntarily offset emissions to meet corporate social responsibility (CSR) goals, enhance reputation, or prepare for future regulations. The voluntary market is less regulated but is growing due to rising climate consciousness.

The demand for carbon credits has surged due to global commitments such as the Paris Agreement, where countries pledge to reduce greenhouse gas emissions to keep global temperature rise well below 2°C.

3.? Sector-Specific Benefits of Carbon Credits

Different sectors can significantly benefit from carbon credits, not only by reducing costs but also by accessing new funding opportunities. Here’s how key sectors benefit:

• Energy: Renewable energy projects like wind, solar, and biomass generate credits by replacing fossil fuels, lowering emissions, and selling surplus credits. Energy companies invest in these projects for compliance and to appeal to climate-conscious investors.
• Agriculture: Carbon credits in agriculture focus on practices that sequester carbon, such as conservation tillage, crop rotation, and afforestation. These methods help farmers earn additional revenue while promoting sustainable agriculture.
• Forestry: Forest conservation and reforestation projects absorb CO?, creating high-value carbon credits. This sector is crucial as trees provide long-term carbon sinks and play a vital role in biodiversity.
• Waste Management: Waste-to-energy projects, recycling, and methane capture reduce landfill emissions, generating credits. Municipalities and waste management companies benefit by making waste management sustainable.
• Transport: Adoption of electric vehicles (EVs), fuel-efficient practices, and cleaner fuels helps lower emissions, generating credits for transport companies while aligning with global emissions standards.

Source: Anna Bergbauer, 2022

4.? Carbon Credits and Net-Zero Goals

Carbon credits are central to achieving net-zero emissions. Countries and companies can reach net zero by reducing emissions and offsetting the remainder through carbon credits. Carbon credits can support technological advancements, green investments, and international collaboration. Carbon Credits are permits representing the reduction, avoidance, or removal of one ton of CO? emissions. These credits facilitate emissions trading, allowing entities to offset their carbon footprint by purchasing credits from projects that reduce or sequester carbon elsewhere. There are two main markets for carbon credits: compliance markets, where credits are traded to meet regulatory limits, and voluntary markets, where entities offset emissions for corporate sustainability goals.

Globally, carbon credits are critical in meeting net-zero goals—where greenhouse gas emissions are balanced by removals—by 2050. Many nations, particularly in the European Union, are leading carbon trading through compliance markets like the EU Emissions Trading Scheme (EU ETS). China, too, has launched the world’s largest carbon market focused on power generation, showing a global push toward reducing emissions. The Paris Agreement's Article 6 encourages international carbon trading, enabling countries to meet their Nationally Determined Contributions (NDCs) through cost-effective emissions reductions abroad.

As industries increasingly commit to net-zero targets, voluntary carbon markets are expanding rapidly. Standards such as Verra and Gold Standard verify carbon projects, ensuring the integrity and quality of traded credits. These markets drive investments in renewable energy, forestry, and carbon capture technologies, supporting both emissions reductions and sustainable development.

India, as a developing nation with ambitious renewable energy targets, plays a crucial role in the global carbon market. Although it currently lacks a formal domestic compliance market, India participates in international carbon trading through Clean Development Mechanism (CDM) projects and voluntary markets. Key sectors like renewable energy, forestry, and waste management provide substantial potential for generating carbon credits.

India’s policy landscape, including the Perform, Achieve, and Trade (PAT) Scheme and initiatives under the National Action Plan on Climate Change (NAPCC), supports energy efficiency and sustainability, indirectly contributing to carbon reduction. The government has announced plans to establish a National Carbon Market, which will enable regulated carbon trading, aligning India with global net-zero ambitions.

With a target of reaching net-zero emissions by 2070, India is poised to expand its role in the carbon credit market. Developing a robust national carbon market and leveraging international standards for voluntary credits could enable India to attract foreign investments, boost its renewable energy sector, and accelerate progress toward a sustainable, low-carbon economy.

The Role of Carbon Markets in Achieving Net Zero Goals

Through this collaborative structure, the carbon credit market allows stakeholders to achieve goals that would be difficult or cost-prohibitive individually. This market:

• Drives innovation in emissions-reducing technologies.
• Creates cross-border financial flows, channeling resources into climate projects in developing countries.
• Supports developed nations in meeting emissions targets through partnerships with projects in developing nations, promoting a globally coordinated climate action.

5.? Stakeholders in the Global Carbon Credit Market and Their Roles

The global carbon credit market is a complex ecosystem involving multiple stakeholders, each playing distinct roles to ensure the market functions effectively and sustainably. Stakeholders range from government regulators to project developers, private companies, and third-party verifiers. Here’s a breakdown of key players and how they interact within the carbon credit market.

a)????? Governments and Regulatory Bodies

Governments are responsible for creating the legal and policy frameworks for carbon credit markets, setting emissions caps, and enforcing compliance. They also determine whether industries are mandated to participate (compliance markets) or encouraged to participate voluntarily.

Regulatory bodies, such as the European Union Emission Trading Scheme (EU ETS), set emissions caps, implement trading mechanisms, and monitor compliance. They are crucial for maintaining market integrity and setting standards that facilitate international trade.

b)????? International Organizations and Policy Groups

Organizations like the United Nations Framework Convention on Climate Change (UNFCCC), World Bank, and International Emissions Trading Association (IETA) shape global policies and establish guidelines for carbon markets. They promote transparency, equity, and accountability.

These organizations assist countries in designing carbon markets, promote global agreements like the Paris Agreement, and provide platforms (e.g., UN’s Clean Development Mechanism) for credit issuance. They play a coordinating role, aligning national markets and facilitating cross-border carbon trading.

c)????? Carbon Credit Developers and Project Owners

Carbon credit developers and project owners are entities that generate carbon credits through activities that reduce, avoid, or sequester emissions. These include renewable energy projects, afforestation, sustainable agriculture, and waste management initiatives.

They design and implement projects following specific protocols and standards (e.g., Gold Standard, Verified Carbon Standard) to generate credits. Once certified, these credits are sold to businesses or governments to offset emissions. Project developers often partner with governments or private investors to finance and scale up their projects.

d)????? Private Sector Companies (Buyers and Sellers)

Private companies are major buyers in the carbon market, using credits to offset emissions and meet compliance or voluntary sustainability goals. Large corporations often buy credits as part of their corporate social responsibility (CSR) initiatives or to improve their environmental footprint.

Companies that exceed their emissions cap purchase credits on compliance markets, whereas companies participating in the voluntary market buy credits to support sustainability commitments. Companies can also sell credits if they operate within their emissions limit or create projects that produce credits.

e)????? Function: Carbon Market Brokers and Exchanges

Brokers and exchanges facilitate the buying and selling of carbon credits, providing a marketplace for entities to trade credits easily.

Exchanges like the European Climate Exchange (ECX), Intercontinental Exchange (ICE), and others provide a transparent platform for trading carbon credits, setting market prices, and ensuring liquidity. Brokers help buyers and sellers find each other and advise on prices and market conditions.

f)??????? Third-Party Verifiers and Auditors

Third-party verifiers ensure that carbon credit projects meet specific standards and accurately represent emissions reductions. This verification process is crucial for the credibility and integrity of the carbon market.

Organizations like Verra and Gold Standard provide certification for projects by evaluating the project’s emissions reductions, monitoring compliance with protocols, and issuing credits. These third parties also conduct regular audits to prevent fraud and ensure credits reflect real, measurable impact.

g)????? Non-Governmental Organizations (NGOs) and Advocacy Groups

NGOs and advocacy groups monitor the market to prevent greenwashing and promote ethical practices. They often campaign for transparency, equitable access, and sustainable development in the carbon market.

NGOs such as WWF and Environmental Défense Fund play a watchdog role, advocating for social and environmental integrity. They push for high standards, ensuring credits contribute to meaningful climate action without negatively impacting local communities.

h)????? Investors and Financial Institutions

Investors and financial institutions fund carbon credit projects, especially in renewable energy, reforestation, and waste management. These stakeholders drive the market by providing essential capital.

Private investors, venture capitalists, and banks offer funding for credit-generating projects, particularly in developing countries. Development banks and funds, like the World Bank’s Carbon Finance Unit, provide loans and grants for project development, ensuring projects have the financial resources to succeed.

i)??????? Standards Organizations and Certification Bodies

Standards organizations develop and enforce protocols for generating high-quality credits. Certification bodies ensure projects adhere to these protocols, which guarantees credibility and market trust.

Standards organizations (e.g., Verra, Gold Standard) set benchmarks for carbon credit projects, defining how emissions reductions should be calculated, verified, and maintained. Their certification enhances credit credibility and ensures buyers that their purchases contribute to real emissions reductions.

j)??????? Local Communities and Indigenous Groups

Local communities and indigenous groups often live near or within areas where carbon credit projects (e.g., reforestation, renewable energy) are implemented. They are key stakeholders in ensuring the social sustainability of these projects.

Community involvement ensures projects are implemented with local benefits in mind. Some projects offer revenue-sharing models or employment opportunities, helping local communities earn an income while supporting environmental goals. This can also lead to better project outcomes, as local communities contribute knowledge and support.

How the Stakeholders Function Together

The carbon credit market operates on interdependencies among these stakeholders:

a)????? Project Development and Certification: Developers initiate projects (e.g., afforestation) and partner with local communities, financial institutions, and NGOs to implement them sustainably. Certification bodies verify emissions reductions and issue credits.

b)????? Market Trading and Compliance: Once verified, credits are traded on exchanges, with companies buying credits to meet regulatory caps or voluntary sustainability targets. Brokers facilitate these trades, ensuring a transparent price discovery process.

c)????? Monitoring and Accountability: NGOs and advocacy groups monitor for integrity, transparency, and compliance, working with governments to ensure that market mechanisms align with environmental goals. Regulatory bodies enforce policies, and third-party verifiers audit projects to prevent fraud and maintain trust.

d)????? Cross-Border Collaboration: International organizations like the UNFCCC promote cross-border trading, allowing developed countries to purchase credits from developing countries where projects may be more cost-effective and impactful.

6.? Global Institutional Structure-Carbon Credit Trade

The global carbon credit market is regulated by an institutional framework that ensures transparency, integrity, and coordination among various stakeholders. This framework is built around international treaties, regulatory bodies, and market standards organizations that help manage compliance, voluntary markets, and project verification. Here’s an overview of the global institutional structure and a detailed look at India’s specific institutional setup within the carbon market.

6.1????????????? Global Institutional Structure

The global carbon credit market is structured to facilitate both compliance-based and voluntary emissions reductions, coordinated through international and national bodies. Major components of the global institutional structure include:

A. International Agreements and Treaties

• United Nations Framework Convention on Climate Change (UNFCCC): The UNFCCC, established in 1992, is the primary international body governing carbon markets. It facilitates cooperation between countries, sets climate goals, and provides a global framework for emissions trading.
• Kyoto Protocol: This 1997 treaty established the first market mechanisms for carbon trading, including the Clean Development Mechanism (CDM), which allows developed countries to fund emission reduction projects in developing countries to meet their targets.
• Paris Agreement (2015): The Paris Agreement introduced new mechanisms to encourage market-based carbon reduction, allowing countries to meet their Nationally Determined Contributions (NDCs) through international carbon trading. Article 6 of the Paris Agreement enables cross-border carbon trading, setting guidelines for “Internationally Transferred Mitigation Outcomes” (ITMOs).

B. Compliance Markets and Regulatory Bodies

• European Union Emissions Trading Scheme (EU ETS): The EU ETS, the largest compliance market, mandates carbon caps and enables trade within member states. It regulates energy, industrial, and aviation sectors within the EU and helps set prices and trading mechanisms for compliance markets globally.
• China National Emissions Trading Scheme: China’s national ETS, launched in 2021, is the world’s largest single-country carbon market. It covers high-emission sectors, mainly power generation, and aims to expand to other industries.
• Regional Greenhouse Gas Initiative (RGGI): This cap-and-trade program in the U.S. involves several states and serves as a compliance model for carbon trading within a federal structure.

C. Voluntary Carbon Market Standards

• Verified Carbon Standard (VCS): Managed by Verra, this is one of the most widely used standards in the voluntary market, certifying carbon reduction projects globally and verifying credit quality.
• Gold Standard: Established by WWF and other NGOs, the Gold Standard certifies projects that contribute to sustainable development goals (SDGs) in addition to reducing emissions.
• Climate Action Reserve (CAR) and American Carbon Registry (ACR): These organizations create standards and protocols primarily for U.S.-based voluntary markets, focusing on forestry, agriculture, and energy projects.

D. Market Exchanges and Trading Platforms

• European Climate Exchange (ECX), Intercontinental Exchange (ICE), and Climate Impact X (CIX): These platforms facilitate transparent trading of carbon credits, providing access to credits for compliance and voluntary buyers.
• Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA): Overseen by the International Civil Aviation Organization (ICAO), CORSIA is a market-based mechanism designed to offset the aviation sector’s emissions by mandating airlines to buy credits.

6.2????????????? India’s Institutional Structure for Carbon Credit Trade

India is an emerging powerhouse in the carbon market, with a significant focus on renewable energy, forestry, and sustainable agriculture. Although India doesn’t have a national compliance market, it participates actively in voluntary carbon markets and benefits from international frameworks like the UNFCCC. Below is an outline of India’s institutional setup, including the key bodies, mechanisms, and policies supporting carbon trading.

A. Government Bodies and Policy Framework

• Ministry of Environment, Forest and Climate Change (MoEFCC): The MoEFCC is the central government body overseeing climate policy and carbon markets. It formulates policies, coordinates with international bodies, and implements strategies related to carbon trading.
• Bureau of Energy Efficiency (BEE): Under the Ministry of Power, BEE administers the Perform, Achieve, and Trade (PAT) Scheme. The PAT scheme functions like a quasi-carbon market, where industries must achieve specific energy efficiency targets and can trade surplus savings as “Energy Saving Certificates.”
• NITI Aayog: This policy think tank provides strategic direction on sustainable development and climate goals. It recommends policy reforms and supports India’s participation in international climate negotiations.

B. National Climate Policies and Schemes Supporting Carbon Markets

• National Action Plan on Climate Change (NAPCC): The NAPCC outlines India’s climate priorities, including carbon trading initiatives. It includes eight national missions focused on solar energy, enhanced energy efficiency, sustainable agriculture, and forest conservation, all of which are potential sources for carbon credits.
• Perform, Achieve, and Trade (PAT) Scheme: Launched in 2012, this scheme is a domestic market-based mechanism focused on energy efficiency. Large industries are given energy reduction targets and can trade Energy Saving Certificates (ESCerts) if they exceed their goals, similar to a carbon trading framework.
• Green Credit Program (GCP): The GCP, an initiative under India’s Environmental Impact Assessment (EIA) regulations, is designed to create a framework where industries can earn green credits by funding eco-restoration projects, afforestation, and sustainable practices. The GCP is a potential step toward formalizing carbon credits at a national level.

C. Certification and Standards Organizations

• Indian Council of Forestry Research and Education (ICFRE): The ICFRE oversees afforestation and forestry projects, providing certification for carbon sequestration projects and ensuring compliance with forest conservation norms.
• National Standards for Voluntary Carbon Market Projects: Indian carbon credit projects often use international standards like Verra’s VCS and the Gold Standard for certification. However, India is exploring a domestic standard that would certify projects, especially those focused on renewable energy and sustainable agriculture, for voluntary carbon credits.

D. Private Sector and Project Developers

• Renewable Energy Companies: Indian companies like Tata Power, ReNew Power, and Adani Green Energy are actively involved in generating carbon credits through solar, wind, and hydropower projects. They sell credits internationally, mainly to companies in the EU and North America.
• Forestry and Sustainable Agriculture Projects: Projects focused on agroforestry, soil carbon sequestration, and organic farming practices have high potential for generating carbon credits, helping local communities while contributing to India’s climate goals.
• Waste Management and Biofuel Companies: Waste-to-energy projects and biofuel production companies contribute to carbon reductions and participate in carbon markets by selling credits or leveraging international funding.

E. NGOs, Research Institutions, and Financial Institutions

• Centre for Science and Environment (CSE) and TERI: These organizations provide research, policy advocacy, and capacity building for sustainable development projects. They are instrumental in promoting best practices for carbon credit projects and ensuring that social and environmental safeguards are met.
• Banks and Development Financial Institutions: The State Bank of India (SBI), along with development banks, offer financing solutions for carbon credit projects, particularly in renewable energy and waste management sectors, allowing these projects to scale up and participate in international markets.

F. National Market Platform for Carbon Trading (Proposed)

India has announced plans to develop a National Carbon Market, which will focus on trading carbon credits across industries, with initial emphasis on large-scale energy efficiency projects. The market is expected to be based on the experience gained from the PAT scheme, creating a standardized and regulated platform for trading credits within India and potentially with international buyers in the future.

6.3????????????? How India Participates in the Global Carbon Credit Market

India’s participation in the carbon credit market is currently centred around the Clean Development Mechanism (CDM), renewable energy projects, and voluntary market standards like the Gold Standard and VCS. India’s structure allows it to generate credits domestically while selling to international buyers, especially from developed nations seeking offsets.

• Renewable Energy Export: India is a major exporter of renewable energy credits, given its large-scale solar and wind power projects. These credits are sold in the voluntary market to corporations and countries looking to offset emissions.
• Forest Carbon Sequestration Projects: India’s forest projects are a growing area in the carbon market. These projects receive certification through the ICFRE and often use international standards for added credibility, attracting international funding.
• Voluntary Commitments: Many Indian corporates, especially those with global footprints, purchase carbon credits voluntarily to align with international sustainability standards, bolstering India’s domestic carbon credit demand.

7.? Global Landscape: How Different Countries Benefit

The carbon credit market offers different benefits and growth potential based on the economic profile, emissions levels, and environmental policies of each country. Here is a global snapshot:

• United States: With a robust voluntary market and emerging regional compliance markets, the U.S. has an evolving landscape. The private sector is a significant player, with companies investing in carbon credits for CSR and aligning with environmental policies.
• European Union: The EU ETS is one of the largest carbon markets globally, setting stringent limits on emissions. EU countries benefit from a well-regulated compliance market, driving innovation in renewable energy and industrial efficiency.
• China: China recently launched its national carbon market, aimed at reducing emissions from high-emission sectors. This market provides Chinese industries with a structured path to decarbonization, while international investors find opportunities in clean energy projects.
• India: India has emerging opportunities in carbon credits through renewable energy, forestry, and agriculture. As a developing nation with a large population, India’s potential lies in both selling carbon credits and investing in low-carbon projects, benefiting from domestic policies and international funding.
• Brazil: With vast forests, Brazil has high potential in forestry-based carbon credits. Efforts to protect the Amazon rainforest have attracted international funding, though regulatory challenges exist.

8.? India's Potential in the Carbon Credit Market

India, as a rapidly developing country with significant emissions from energy, industry, and agriculture, has a dual role in the carbon market. It can develop projects that generate carbon credits while reducing its emissions intensity.

• Renewable Energy: India has one of the largest renewable energy capacities in the world. Projects in solar, wind, and hydro power are set to generate substantial carbon credits. The national target to reach 500 GW of renewable energy capacity by 2030 will create vast opportunities for carbon trading.
• Agriculture and Forestry: Given India’s agrarian economy, carbon credits in sustainable agriculture and forestry have high potential. Programs encouraging farmers to adopt sustainable practices can reduce emissions and contribute to India’s decarbonization.
• Waste Management: India’s growing urban population produces significant waste. Initiatives in waste-to-energy, recycling, and methane capture can generate credits, and municipal governments can benefit by monetizing sustainable practices.
• Industry and Transport: Industries with high emissions, such as cement and steel, can invest in energy efficiency and cleaner technologies, generating credits. Transport sector shifts toward EVs and sustainable fuels are key opportunities for reducing emissions.

India’s policy frameworks—such as the National Action Plan on Climate Change and the Perform, Achieve and Trade (PAT) scheme—are aligned with global standards and can facilitate greater participation in the carbon market. These frameworks allow industries to set sustainability goals, earn credits, and contribute to national net-zero commitments.

9.? Scope and Potential for Different Countries

• Developed Countries: Generally, developed nations have well-regulated carbon markets, and their focus is on compliance-based systems. They benefit from a structured approach to emissions reduction and support for clean technology industries.
• Developing Countries: Many developing nations like India, Brazil, and Indonesia can leverage carbon credits to fund sustainable projects. As these countries grow economically, carbon credits provide financial support for low-carbon development pathways.
• Least Developed Countries: Carbon credits offer financial inflows for least developed countries (LDCs) to combat deforestation, promote renewables, and build resilience against climate change. International funds and partnerships drive these initiatives, creating a win-win scenario for global emissions reduction.

10.????? Challenges and Considerations in the Global Carbon Market

• Market Integrity: Ensuring that carbon credits represent real, measurable reductions is critical. “Greenwashing” and unverified credits undermine the market’s credibility.
• Price Volatility: Carbon prices fluctuate, making it challenging for companies to rely on credits as a stable source of income or cost.
• Regulatory Differences: Countries vary in their approach to regulation, which can limit the effectiveness of cross-border carbon trading.

11.????? Remarks

The carbon credit market represents a powerful tool for reducing global emissions, mobilizing climate finance, and achieving net-zero targets. With the right regulatory support, technological advancement, and global cooperation, this market can significantly contribute to a sustainable future. India and other emerging economies, with their high potential for sustainable projects and growing climate commitments, are well-positioned to play a pivotal role in the global carbon market, accelerating their own development while supporting the global climate agenda.

About Author: With over two decades of experience in several cross-cutting environmental issues, Pramod Dabrase has become a prominent voice in sustainable development, guiding policies, research, and corporate strategies for more sustainable practices. He has been work working nationally, internationally with a number of agencies, Government, local bodies, CSRs & foundations. He is a founder, Chief of CSEDI, an environmental Consulting & Advisory think tank, providing all kinds of services in both urban and Rural India.?

As India grapples with challenges ranging from climate change to rapid urbanization, waste management to weak program implementation, companies face heightened pressure to fulfil their sustainability commitments. This article sheds light on the complexities, frameworks, and actionable strategies for achieving sustainability in India, providing insights into the critical role companies can play in shaping a sustainable future.

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