“No nation was ever ruined by trade, even seemingly the most disadvantageous”.

When Benjamin Franklin said these lines in a pro-trade pamphlet in 1774, Carbon was the last thing that could have struck people’s mind as a commodity with the capability of being traded.

Carbon is a naturally abundant element that is found in all known forms of life. Carbon in the form of carbon dioxide is essential as plants absorb carbon dioxide during photosynthesis and much of it is then stored in roots, permafrost, grasslands, and forests, which is released when plants decay. Humans and other complex organisms process air and release carbon dioxide throughout their life journey.

Excess release of carbon dioxide and other gases into the atmosphere leads to the phenomenon known as the “Greenhouse Effect” on Earth. In this process, earth’s atmosphere acts like the glass roof of a greenhouse, trapping heat with gases such as carbon dioxide, methane, ozone, nitrous oxide, and chlorofluorocarbons. This trapping of heat contributes to global warming and climate change.

Carbon credits, Carbon Markets – An Introduction

How did carbon become a tradable commodity? It was acknowledged that industries generating Scope 1 emissions were the primary sources of greenhouse gas emissions, thereby fueling global warming. Despite considerable efforts by scientists and NGOs to raise awareness around this, it couldn’t be sufficiently addressed. Consequently, it was evident that attaching a financial incentive was crucial to capture global attention as well as potential of Carbon that has the power to regulate the economies.

Let’s understand what Carbon credits are- These are permits that allow an entity to emit a certain amount of carbon dioxide or other greenhouse gases. One tradable carbon credit equals one tonne of carbon dioxide or its equivalent in other greenhouse gases.

Carbon markets are platforms or systems where carbon credits are bought, sold, and traded. Companies that emit less than their allotted amount of carbon can sell their excess credits to those who exceed their limit. Broadly, two types of carbon markets exist, compliance markets and voluntary carbon offset markets.

In compliance or regulatory markets, each company operates under a cap-and-trade program, in which the government sets an overall cap on emissions and then issues a corresponding number of permits or credits. Companies can then buy and sell these permits based on their emission needs. Some of these companies produce less emissions than the number of credits they’re allotted, giving them a surplus of carbon credits.

Voluntary Carbon Markets, on the other hand, operate outside of regulatory requirements and are driven by voluntary efforts by companies, organizations, or individuals to offset their emissions. These entities purchase carbon credits to compensate for their carbon footprint.

Global scenario of Carbon Trading

At the international level, agreements like the Kyoto Protocol and the Paris Agreement have laid the groundwork for carbon trading by setting emission reduction targets and providing mechanisms for countries to collaborate on climate action. These agreements have spurred the development of carbon markets, facilitating the exchange of emission allowances and credits among participating nations.

Regionally, many countries have implemented carbon pricing mechanisms to incentivize emission reductions. The European Union’s Emissions Trading System (EU ETS) is the world’s largest carbon market, covering a wide range of industries and sectors across member states.

In addition to the EU ETS, emissions trading systems at the national or sub-national level are currently in operation or in various stages of development in Canada, China, Japan, New Zealand, South Korea, Switzerland, and the United States.

India’s response to the Carbon Markets

India ratified the Kyoto Protocol in 2002 and the Paris Agreement in 2016 and became a part of the Non-Annex Category-I. Since then, India has been actively pursuing its ambitious Nationally Determined Contributions (NDC) to align with global climate goals. As part of this effort, the Government launched the Indian Carbon Market (ICM), as a key instrument in achieving emission reduction goals.

ICM was established under the purview of the Energy Conservation Act, 2001, and the Environment (Protection) Act, 1986. Ministry of Power recently notified the Carbon Credit Trading Scheme (CCTS) in June 2023, to develop the Indian Carbon Market framework, under the Energy Conservation Act, of 2001. The CCTS seeks to streamline the exchange of carbon credits, offering incentives to domestic industries and entities to curtail their carbon emissions.

Before the CCTS, other trading schemes existed under the Energy Conservation Act, 2001. The National Action Plan on Climate Change (NAPCC), launched in 2008, outlines a comprehensive strategy to mitigate GHG emissions across sectors. Within this framework, the Perform, Achieve, and Trade (PAT) scheme stands out as a flagship initiative, aiming to improve energy efficiency in energy-intensive industries through tradable energy-saving certificates. Under PAT, industries with energy consumption above a specified threshold were given targets to reduce their energy intensity. Those who exceed targets can earn Energy Savings Certificates (ESCerts), providing a market-based incentive for efficiency improvements.

Although India does not yet have a fully operational government-regulated carbon market, it ranks among the leading producers and exporters of carbon credits worldwide and has issued approximately 278 million units of carbon credits between 2010-2022, constituting nearly 17% of all voluntary carbon credits issued globally. Additionally, projections suggest that by 2030, the worldwide carbon credits market could surge to over $50 billion, compared to its current valuation of $2 billion.

Carbon Trading Market – how can you participate?

Participating in the carbon trading market involves various avenues for individuals, businesses, and organizations to engage in emissions reduction efforts and contribute to the fight against climate change. These credits, as a general practice, undergo verification by independent, third-party standard organizations such as Verra. Here are ways to get involved in this exciting space:

1. Carbon Offsetting: Individuals and companies can participate in carbon trading by purchasing carbon offsets. These offsets represent investments in projects that reduce or remove greenhouse gas emissions, such as renewable energy projects, reforestation initiatives, or methane capture programs.
2. Trade in Voluntary Carbon Market: Companies can choose to engage in carbon trading as part of their corporate social responsibility (CSR) initiatives by investing in carbon offset projects, acquired from project developers or brokers.
3. Investing in Emission Reduction Projects: Another way is to invest directly in emission reduction projects like funding in renewable energy installations, energy efficiency upgrades, or sustainable land-use practices such as regenerative agriculture.

Conclusion

As India continues its journey towards sustainable development, carbon markets play a pivotal role in aligning economic growth with environmental stewardship. The ongoing initiatives, including CCTS, PAT, and the use of RECs, reflect a commitment to creating a market-driven approach that will help regulate carbon emissions. While challenges such as market volatility, integrity concerns, and the need for broader participation persist, the growth and evolution of carbon trading is important in addressing the urgent climate crisis. Robust regulatory frameworks, coupled with innovative financial mechanisms and continuous refinement of carbon pricing mechanisms, will be essential to unlock the full potential of carbon trading to address climate change and promote sustainable development in India.

¹S&P Global Commodity Insights analytics

²Decarbonising India: Charting a pathway for sustainable growth