As the changing climate is gripping the world, countries and institutions are rushing to help people adapt to it and mitigate the damages done because of it. Like any other disaster, it has also brought to the world’s attention the inequalities among countries in various ways, some are better placed for a renewable energy transition while others are still developing their economy with fossil fuels, some are protected against rising sea levels and others are losing land every year.
Economics seeps in whenever there is a scarcity of a resource which is important enough that a reasonable price and accessibility need to be ensured. In 2020 after the American west coast was ravaged by wildfires and heat waves, the water became scarce. In a response to that, Nasdaq started trading water futures. Bringing a scarce commodity to market helps gauge demand and put a price on it that everyone can mutually agree upon.
Commodities such as oil, gas and coal have been and still are of great use, and have ruled the markets for half a century. As the world tightens its grip on carbon emissions through restrictions and penalties, carbon emissions are becoming a commodity. Countries and institutions have a limited amount of allowed emissions, this has given rise to the carbon trading market. It restricts emissions and allows developing countries to trade carbon credits at mutually agreed prices.
The scope of carbon trade was introduced by the Kyoto Protocol. Parties to the protocol which had committed to cutting emissions(Annex B parties) each had some amount of emission units; they were also allowed to sell their spare units. The carbon market works on a ‘cap-and-trade’ mechanism. The amount of emissions that one emitter can generate is capped, if the emitter doesn’t consume all of its allowed emission shares, it can sell it in the market to a willing buyer. It incentivises low emissions. One carbon credit is equal to 1 ton of carbon dioxide. To earn one carbon credit, one has to either prevent or offset 1 ton of carbon emission.
India is one of the hottest markets for carbon credits. India ratified the Kyoto Protocol in 2005, and last year it produced 30 million carbon credits, which is about 31% of world trade and the second largest in the world. In 2021, for the first time the global carbon market crossed $1 billion annual trade and lots of Indian firms are gearing up to sell more carbon credits as the voluntary emission reduction trend is increasing. Indian Agricultural Research Institute(IARI) is teaming up with private firms to allow farmers to sell carbon credits so that they can benefit from the market. Many companies like Mahindra & Mahindra, Reliance Industries, ITC and Adani Group have set targets to go carbon neutral and some even negative in coming years, which will further drive the carbon credit market upwards. The Bureau of Efficiency(BEE) also started a program called Perform, Achieve and Trade (PAT) which enabled the trading of energy-saving certificates and renewable energy certificates. These are traded as ESCerts(Energy Saving Certificates) on the Indian Energy Exchange(IEX) and Power Exchange of India(PXIL). India also trades RECs (Renewable Energy Credits) in the domestic market, which are aimed at encouraging the use of renewable energy, 1 REC is equal to 1MWh of power generated from renewable sources, RECs are also traded on Indian Energy Exchange(IEX) and Power Exchange of India(PXIL). India is the only country that trades certificates of energy efficiency.
India also implemented the ‘cap-and-trade’ mechanism on particulate matter pollution for the first time in the world; Gujarat, Tamil Nadu and Maharashtra implemented this system in 2011 as a two-year pilot project. Later in 2019, Gujarat Pollution Control Board(GPCB) sought permission to implement an Emission Trading System(ETS) for particulate matter to curb pollution, and the first ETS for particulate matter(PM) was set up in Surat. After seven months the program showed promising results, the report stated “Our preliminary estimates show that the introduction of emissions trading reduced pollution by 24%, relative to a control group of plants that remained in the command-and-control regime”.
Penalties and restrictions are important, but they are unnatural interventions in a world where carbon emissions are just a byproduct of other products and services. The carbon reduction mechanism through pricing carbon and allowing trade in the open market is perhaps the only way to solve the emission crisis in a free market. Whether it is Certified Emission Reduction(CER) credits under Clean Development Mechanism(CDM) or ESCerts(Energy Saving Certificates) devised by BEE in India or RECs( Renewable Energy Credits), all help mobilize voluntary efforts of minimizing carbon emissions through incentives. Although these mechanisms don’t immediately cut down overall emissions, they take emissions from one place to another. But it incentivises voluntary reduction in emissions while allowing room for emissions where it can’t be stopped immediately.
India doesn’t yet have a single carbon trading mechanism like the Emission Trading Scheme(ETS) in the European Union. The ETS is a ‘cap-and-trade’ type system that has regulatory bodies which decide the cap on emission, it has a registry for transparent trading, bodies ensuring the market is not abused and other features that ensure stability and reliability of the market making it the biggest in the world. The government is working on a system that will work for the Indian carbon market and integrate RECs and ESCerts.
Vivek is a writer who writes to explore. His interests include philosopy, psychology, poetry, cinema, mythology and international relations. Above all he’s interested in making sense of complex systems-how they work and influence each other. An alumnus of Calcutta University, he has a bachelor's degree in Physics.
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Technology is a useful servant, but a dangerous master, it was rightly said. Electronic devices have grown into an inevitable part of our daily lives.
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