Carbon Market, Key Challenges & Wayforward

The Union Government has introduced the Energy Conservation (Amendment) Bill, 2022 in the Parliament. The purpose of the Bill is to strengthen the Energy Conservation Act, 2001. The Amendments are expected to facilitate the achievement of more ambitious climate change targets and ensure a faster transition to a low-carbon economy. The Energy Conservation Act, 2001 had powered the first phase of India’s shift to a more energy-efficient future. Over the years, the energy intensity (energy consumed per unit of GDP) of India’s economy has declined consistently. However, as India embarks on more ambitious climate action pledged under the Paris Agreement, there is a need to widen the scope of Act to include instruments that will aid the achievements of these ambitious goals. One of the proposed amendment is to establish domestic carbon market to facilitate trade in carbon credits.

What are the advantages of a Carbon Market? This is a question every common person is interested to know. Well, there are several benefits linked with Carbon Market:

• It will help in mitigating the adverse impacts of climate change by reducing the #ghg emissions.
• There are multiple co-benefits of carbon offset projects such as: #ecosystem management, #forest preservation, sustainable #agriculture, #renewableenergy generation in third-world countries, etc.
• The voluntary #carbon market for offsets is smaller than the #compliance market, but expected to grow much bigger in the coming years. It’s open to #individuals, #companies, and other #organizations that want to reduce or eliminate their carbon footprint, but are not necessarily required to by #law.
• #consumers are increasingly aware of the importance of #carbonemissions. Consequently, they’re increasingly critical of #companies that don’t take #climatechange seriously. By contributing to carbon offset projects, companies signal to consumers and investors that they’re paying more than just lip service to combat climate change.
• It opens an additional #revenue stream for #environmentally beneficial businesses. For instance, #tesla , the electric car maker, sold carbon credits to legacy car manufacturers to the tune of $518 million in just the first quarter of 2021.

What are the challenges in the functioning of Carbon Markets?

There are concerns regarding the effectiveness of carbon markets in curbing #emissions. Some companies simply buy credits without making any effort to reduce emissions themselves. It is cheaper for them to buy carbon credit than to invest in emission reducing technologies e.g., an analysis by the Center for Science and Environment of the PAT scheme for thermal power plants found that the value of one ESCert* is very less — INR 700 — compared to the actual #investment of INR 4,020 that has to be made for reducing energy equal to one tonne equivalent. Unless, the price of carbon credits is higher than the cost of #reducing emissions, there is no #incentive for high emitters to make efforts to reduce their emissions (i.e., companies have to invest more in purchasing credits than investing in emission reduction technologies). *(ESCerts are similar to carbon certificates that will be sold and purchased under the carbon market scheme).

Environmental activists argue that only high-quality carbon offsets are effective in reducing emissions. High quality carbon offsets have certain features like (a) Additionality: Emission reductions must be additional i.e., they would not have occurred in the absence of a market for offset credits e.g., a renewable project could be set up only because a high emitter paid for it; (b) Verifiable: There must be proper audits to ensure monitoring, reporting and verification of emission cuts; (c) Permanence: The emission reduction should not be reversed. However, many credits available in markets are of poor quality i.e., they do not meet the above criteria. Most of the credits are not ‘additional’ i.e., the emission reduction projects would have happened even in absence of carbon credits (without any prospect for project owners to sell carbon offset credits). Also it is very difficult to establish ‘additionality’. According to a US-based environmental group more than 60% percent of credits on the market are from projects that have ‘questionable additionality claims’.

In some cases, the emission reduction is not permanent. There have been instances where #afforestation projects were undertaken to buy carbon credits. However, later on the planted trees were cut-off, thus reversing the reduction.

Buying carbon credits can deviate the rich nations from the path of reducing emissions. They can simply continue to emit and buy cheap carbon credits from developing countries.

There has been huge surplus of #carboncredits in the #voluntarycarbonmarket . According to an estimate, credits for about a billion tons of CO2 have been put up for sale on the voluntary market. But there have been more sellers than buyers. Supply exceeding demand suppresses the price of carbon credits and it become easier for emitters to offset, while continuing high emissions.

It is difficult to establish the amount of carbon reduced by offset projects (like afforestation or #windenergy project). The complexity is in establishing baseline emissions (Emissions baseline represents what would happen if your project did not occur i.e., the emissions in the absence of the project). This makes it difficult to verify emission reductions and assigning carbon credits.

#india ’s own PAT (Perform, Achieve, Trade) Scheme has failed to achieve meaningful emissions reduction. According to an analysis by the Center for Science and Environment, the emission reduction under the scheme has been only 1.57% and 1.44% over the two cycles.

Recommendation & Way forward

What should be done going ahead? First, there is a need to create a #national level environment regulator on the lines of #sebi (Stock Market Regulator), #rbi (Banking Regulator) in order to ensure carbon markets work efficiently.

Second, there must be strong #regulatory safeguards to ensure that the emission offsets traded are of #highquality . Else, as experts contend, an ineffective carbon market can end up doing more damage.

Third, there is a need to develop #environmental consciousness in the general public so as to make them understand their environmental responsibilities. For instance, consumers can purchase offsets for emissions from a specific high-emission activity, such as a long flight, or buy offsets on a regular basis to eliminate their ongoing carbon footprint.

Fourth, it’s crucial that cap-and-trade does not end up as an inspect-and-extort regime in India. For this, a tech-enabled model of open verification can be adopted by the government.

The establishment of a domestic carbon market is a progressive step. However, the actual benefit will depend upon the effectiveness of the market. For this, the Government must ensure that proper regulations are established. Moreover, there must be periodic assessment of its functioning and corrective steps its necessary. #climatechange is real and imminent, #Government must take all possible steps to mitigate the challenges.

If you’re interested to know more about carbon offsets, send an enquiry to [email protected]

Author: Manoj Kumar Singh (Founder & CEO- Net Zero Think Private Limited)