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Carbon Markets: Benefits and Challenges

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The Union Government has introduced the Energy Conservation (Amendment) Bill 2022 in the House of Representatives. The aim for this Bill is to enhance existing legislation, the Energy Conservation Act, 2001. The Amendments are expected to help facilitate the attainment of more ambitious climate change goals and to facilitate an earlier transition to an economy that is low carbon. It was the Energy Conservation Act, 2001 was the catalyst for the initial phase of India’s transition to an energy-efficient future. Through the years, India’s energy efficiency (energy consumed per metric gallons of GDP) of the Indian economy has been decreasing consistently. But as India is preparing to take on more ambitious climate actions pledged in the Paris Agreement, there is an urgent need to expand the coverage of the Act to include measures to aid in the achievement of these lofty goals. One of the amendments proposed is to create a national carbon market in order to facilitate trading in carbon credits.

What are the proposed amendments to the Energy Conservation (Amendment) Bill, 2022?

The bill has two primary goals: (a) It seeks to require only a small portion of commercial, industrial and even residential customers to make use of green energy sources. A minimum percentage of their energy consumption must be derived from non-fossil or renewable fuel sources. (b) It aims to create a national carbon market and to facilitate the trade of carbon credits. The aim is to broaden the definition of energy conservation to encompass big residential structures as well. Up to now, energy conservation regulations have been primarily applied for commercial and industrial complexes.

What is what is a Carbon Market?

Carbon Markets and Carbon Credits are both components of emissions trading, which is a market-based method to decrease the amount of Greenhouse gases (GHG) in the atmosphere. It provides economic incentives to reduce the emissions of pollutants that are designated as pollutant. Carbon markets allow companies and investors to trade carbon credits and carbon simultaneously.

Carbon credits (or allowances) are similar to permits for emissions. If a business purchases carbon credits it grants the right to increase their CO2 emissions. A carbon credit that is tradable equals one tonnes of carbon dioxide or the equivalent amount of another greenhouse gas that is reduced to a minimum, sequestered or eliminated.

Credits are compared to benchmarks or permitted GHG emissions. If emissions are less than the limit allowed, the emitter is awarded carbon credits (reducing 1 ton of CO2 equals one carbon credit). If emissions exceed the limit allowed, the emitter has to purchase carbon credits from people who have surplus credits. Therefore, exceeding the emission limit will impose costs (amount that is spent on the purchase of carbon credits) to the emitter. The concept is that this expense will force emitters to become more efficient and less emissions.

There are two kinds market for carbon: (a) The first is one that is regulated, and is governed through “cap-and-trade” rules at both the local and state levels. (b) The second is a market that is voluntary, where people and businesses purchase credits (of their own volition) to offset their carbon emissions.

Carbon Markets were permitted in the year 1997 under the UN Kyoto Protocol. The Kyoto Protocol’s Clean Development Mechanism (CDM) allowed industrialized nations to cut emissions in other countries where it could be less expensive than in their home countries for example, by planting trees in tropical regions.

What can companies do to reduce carbon emissions?

There are a variety of options for businesses to reduce carbon emission. They are broadly classified into (a) Carbon Avoidance/Reduction Projects (i.e., reduce the amount of carbon emitted); (b) Carbon Removal/Sequestration Project (i.e., remove the carbon already emitted from the atmosphere).

In investing in renewable energy through financing hydro, wind, geothermal and solar power generation projects or switching to these sources of power whenever feasible.

Enhancing energy efficiency throughout the globe, for example through the provision of more energy efficient cook stoves for those who live in poorer or rural areas.

Capturing carbon dioxide from the atmosphere to make biofuel creates a carbon neutral fuel source.

Releasing biomass back into the soil for mulching after harvest , instead of taking it away or burning. This reduces the amount of water evaporating from the soil’s surface, which aids in preserving the water. The biomass can also feed earthworms and soil microbes, which allows nutrients to cycle and improve soil structure.

Reforestation of forests through tree planting and reforestation initiatives.

Moving to alternative fuels including biofuels with lower carbon such as corn, biomass-derived ethanol and biodiesel.

What is the current status in Carbon Markets across the world?

National or Regional

Regional or domestic carbon markets exist in a variety of locations, with the most notable being Europe which has the Emission Trading Scheme (ETS) operates with similar principles. Industries within Europe have emission standards that they must adhere to and buy and sell carbon credits based on their performance. China also has an internal carbon market.

An incentive scheme similar to that for promoting efficiency in energy has been operating in India for more than 10 years now. The BEE scheme, known as PAT, (or achieve, perform and trade) permits units to be awarded efficiency certificates if they exceed the required efficiency standards. If they are not performing, they can purchase these certificates to ensure that they continue operating.


In the Kyoto Protocol, carbon markets are operating at an international level too. In the Kyoto Protocol had prescribed emission reduction targets for a set of that included developed countries (Annex I: Developed Countries). Other countries didn’t have these targets, however should they reduce their emissions, they would be able to earn credits for carbon. The carbon credits can then be sold to advanced countries that could not meet their reduction goals. The system worked well for a short period of time. However, the market sank due to the absence of the demand in carbon credits.

While the world was negotiating an agreement on climate change to replace Kyoto Protocol, Kyoto Protocol, the developed nations no longer felt the need to follow their goals under the Kyoto Protocol. A carbon market similar to the Kyoto Protocol is planned to be implemented under the new Paris Agreement, but its specifics are still being determined.

What are the benefits of the benefits of a Carbon Market?

In the beginning, it can assist in reducing the negative effects of climate change through decreasing GHG emissions.

There are a variety of benefits of offset projects, like conservation of forests, ecosystem management, sustainable agriculture, and renewable energy generation in third-world nations, etc.

Thirdly, the voluntary marketplace for carbon offsets in the form of offsets is less that the market for compliance, however, it is expected to become larger in the next few years. It is open to individuals as well as companies and organisations that wish to reduce or completely eliminate their carbon footprint however, they aren’t legally required to do so.

Fourth, consumers are becoming conscious of the significance of carbon emissions. Therefore, they’re becoming increasingly concerned about companies that do not consider the climate crisis seriously. In donating to carbon offset projects, businesses signal to investors and consumers that they’re doing more than mere lip service to fight climate change.

Fifth, it creates another revenue stream for companies that are environmentally friendly. For example, Tesla, the electric automobile maker has sold carbon credits to traditional automobile manufacturers for a total of $518 million just in the first quarter of 2021.

What are the main challenges to how the carbon markets function? Carbon Markets?

There are some concerns about the efficacy of carbon markets to reduce emissions. Certain companies buy carbon credits, without making an effort to cut emissions by themselves. It’s cheaper to purchase carbon credits instead of investing in emission reduction technologies e.g. An study by the Center for Science and Environment of the PAT scheme used for thermal power plants revealed that the cost of one ESCert* is much smaller than INR 700 — when compared to the actual cost of INR 4,020 to be made to reduce energy equivalent to one tonne. If the cost for carbon credit is greater than the price of cutting emissions, there is no incentive for emitters who are high to take steps to cut their carbon emissions (i.e. businesses must invest more money in buying credits rather than investing in emission reduction technology).

*(ESCerts are like carbon certificates, which will be offered for sale and purchase in the scheme of carbon markets).

Environmentalists argue that only carbon offsets of high quality can be effective in reducing emissions. Carbon offsets that are of high quality have specific characteristics like (a) Additionality that means emissions reductions have to be added i.e. they could not have been achieved without an offset credit market e.g. A renewable project might be established solely because a major emitter was able to pay for it. (b) verifiable: There need to be audits that are able to ensure that monitoring and reporting of emissions reductions; (c) Permanence the reduction in emissions should never be reversed.

However, a lot of the credits that are available on the market are of poor quality i.e., they don’t satisfy the criteria above. The majority of credits are not considered to be ‘additional’ i.e. they are not part of the emission reduction projects would have occurred even without carbon offset credits (without any possibility of project managers to market carbon offset credits). It is also very difficult to determine if there is a ‘dditional’. According to an American-based environmental group, more than 60% percent of the credits available come from projects with “questionable claims of additionality”.

In certain instances the reduction in emissions is not always permanent. There are instances when projects for afforestation were initiated to purchase carbon credits. But, afterward, the trees planted were removed and the reduction was reversed.

Thirdly, purchasing carbon credits could divert wealthy nations from the goal of reducing their emissions. They could continue to emit , and then purchase low-cost carbon credits in countries in the developing world.

Fourth, there is a massive surplus of carbon credits on the market for voluntary carbon credits. According to estimates that credits worth around one billion tons of CO2 have been offered to be sold on the market for voluntary carbon credits. However, there were more buyers than sellers. Demand exceeding supply reduces carbon credits’ prices and makes it easier for emitters to offsettheir emissions, and despite the continuing high emissions.

Fifth, it is challenging to determine the amount of carbon reductions caused by offset projects (like wind energy or afforestation project). The difficulty is in establishing the baseline emissions (Emissions baseline is what would occur if your project didn’t happen i.e. the emissions without this project). This makes it hard to determine the extent of emission reductions and the assignment of carbon credit.

India’s own PAT (Perform Achieve, Trade, Perform) scheme has not been able to produce significant reductions in emissions. According to an analysis conducted by the Center for Science and Environment the reduction in emissions as a result of the scheme was just 1.57 percent and 1.44 percent over two years.

What can be done to prepare forward?

The first is the necessity to establish a national environmental regulator at the national level, similar to model of SEBi (Stock Market Regulator), RBI (Banking Regulator) to ensure that the carbon markets function effectively.

The second requirement is strict regulatory safeguards in place to ensure that emission offsets sold are of high-quality. Otherwise, as experts say an unreliable carbon market could cause more harm than good.

Thirdly, there is a need to increase awareness of the environment among the population in order to help them aware of their environmental responsibilities. For example, they can buy offsets to reduce emissions from an activity that is high in emissions like a long flight, or purchase offsets regularly to reduce their carbon footprint.

Fourth, it is crucial that cap-and-trade doesn’t become an inspect-and-extort system in India. To achieve this, a technology-enabled model of open verification could be implemented from the government.


The creation of a national carbon market is a gradual step. But, the real benefit will be contingent on the efficiency that the marketplace can provide. To achieve this, the government must ensure that appropriate regulations are in place. Additionally, there should be a regular evaluation of the effectiveness and the corrective measures it is required. Climate change is real and imminent. government must take every possible measures to reduce the risks.