Context:- India launched the Carbon Credit Trading Scheme (CCTS) with a focus on high-quality credits in the voluntary carbon market. India's CCTS, established under the Energy Conservation (Amendment) Act, 2022, focuses on a rate-based Emissions Trading System (ETS) for nine energy-intensive industries, aiming to reduce emissions intensity. The voluntary carbon market is seeing increased demand for removal credits and higher-rated credits, while concerns about quality and overestimation of mitigation impact persist.
What are Carbon Credits?
Carbon credits are tradable certificates or permits that represent the right to emit one tonne of carbon dioxide (CO₂) or an equivalent amount of another greenhouse gas (GHG). They are a key tool in market-based mechanisms to reduce global emissions by incentivizing businesses and countries to limit their carbon footprint.
- 1 Carbon Credit = 1 Tonne of CO₂ (or equivalent GHG) not emitted/removed.
- Companies/Countries that reduce emissions below their cap can sell excess credits to those exceeding their limits.
How Carbon Credits Function
Carbon credits operate under two main mechanisms:
A. Cap-and-Trade (Regulatory Compliance Market)
- Governments set a cap (maximum limit) on emissions for industries.
- Companies that emit less than their cap earn credits (which they can sell).
- Those exceeding their limit must buy credits or pay penalties.
- Example: European Union Emissions Trading System (EU ETS).
B. Voluntary Carbon Market (VCM)
- Companies/Individuals voluntarily buy credits to offset their emissions.
- Projects include reforestation, renewable energy, methane capture, etc.
- Example: Microsoft, Google buying offsets for carbon neutrality.
Genesis of Carbon Credits & Key Conventions
1992: United Nations Framework Convention on Climate Change (UNFCCC)
- Established to stabilize GHG emissions.
1997: Kyoto Protocol (COP-3)
- Introduced carbon trading mechanisms:
- Clean Development Mechanism (CDM) – Developed nations fund emission reduction projects in developing countries.
- Joint Implementation (JI) – Developed nations collaborate on emission reduction projects.
- Emissions Trading (ET) – Countries trade excess credits.
2015: Paris Agreement (COP-21)
- Replaced Kyoto Protocol, introduced Nationally Determined Contributions (NDCs).
- Encouraged global carbon markets (Article 6) for cooperative approaches.
Evolution & Recent Updates in Carbon Credits
A. Recent COP Developments
- COP-26 (Glasgow, 2021): Finalized Article 6 rules for international carbon markets.
- Allows countries to trade emission reductions under NDCs.
- Introduced 2% cancellation of credits to ensure net emission cuts.
- COP-27 (Egypt, 2022): Focused on scaling voluntary carbon markets & transparency.
- COP-28 (Dubai, 2023): Discussions on carbon credit integrity, fraud prevention, and nature-based solutions.
- COP-29 (Baku, 2024): saw significant discussions and agreements on carbon markets and carbon credits, particularly concerning Article 6 of the Paris Agreement. Key outcomes include the approval of UN standards for international carbon markets, paving the way for countries to trade credits to meet climate targets. There was also emphasis on ensuring environmental integrity and transparency in these markets, with discussions around safeguards for human rights and indigenous peoples.
B. Paris Agreement & Carbon Markets (Article 6)
- Article 6.2: Bilateral credit trading between countries.
- Article 6.4: A new global carbon market (successor to CDM).
- Article 6.8: Non-market approaches (e.g., climate finance).
Major Disputes & Challenges in Carbon Credits
- Greenwashing: Companies buying cheap credits without real emission cuts.
- Double Counting: Same credit claimed by both buyer and seller country.
- Low-Quality Credits: Some projects (e.g., forest protection) lack permanence.
- Human Rights Violations: Indigenous land disputes in offset projects.
- Market Fragmentation: Lack of uniform global standards.
Relevance of Carbon Credits
- Economic Incentive: Encourages industries to adopt cleaner tech.
- Climate Finance: Funds sustainable projects in developing nations.
- Corporate Responsibility: Helps companies achieve net-zero targets.
- Global Cooperation: Facilitates emission cuts under Paris Agreement.
Recent Updates (2023-24)
- India’s Carbon Market: Launched Carbon Credit Trading Scheme (CCTS) 2023 under Energy Conservation Act.
- ICVCM’s Core Carbon Principles (CCPs): New standards to ensure high-quality credits.
- Africa Carbon Markets Initiative (ACMI): Boosting carbon projects in Africa.
- EU’s CBAM (Carbon Border Adjustment Mechanism): May impact global carbon trade.
India’s Stand: Supports Article 6, wants fair carbon market mechanisms.
National Initiatives:
- PAT Scheme (Perform, Achieve, Trade) – Energy efficiency certificates.
- Green Hydrogen Mission – May generate carbon credits.
- Global South Concerns: Fear of developed nations outsourcing emission cuts.
Conclusion
Carbon credits are a critical but debated tool in climate action. While they drive investments in green projects, concerns over integrity, transparency, and equity persist. The Paris Agreement’s Article 6 seeks to address these issues, but implementation remains a challenge. For UPSC, focus on Kyoto Protocol, Paris Agreement, Article 6, India’s carbon market, and recent COP decisions.
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