The UN Climate Change Conference or COP26 kicked off in Glasgow on October 31 after being delayed by a year due to the COVID-19 pandemic. And one of the challenges to be resolved is agreement on a market-based mechanism to allow countries to use international carbon offsets to meet goals set under the 2015 Paris climate agreement. Article 6 of the 2015 Paris Agreement tasks world leaders with figuring out a compliance market for carbon credit.
Some experts view carbon markets as an opportunity to lower the cost of reducing greenhouse gas emissions and enable countries to commit to more ambitious targets. In a compliance market, a cap is set by governments on how many tonnes of emissions each sector like oil, transportation, energy or waste management can release. Companies must strive to stay within the cap or purchase carbon credit. A company that has managed to stay well within the range of emissions allowed, is allowed to save or sell the credits. Critics view trading carbon credit as a way to stall more impactful steps to combat emissions. Sometimes, carbon offsetting helps to fund a cut in emissions elsewhere, like preventing deforestation-- it helps countries that struggle to meet their emission reduction target or want to pursue less expensive emissions cuts.
One of the key worries of the European Union is how any emission reductions achieved through carbon markets would be accounted for. The EU and other countries seek to avoid double-counting, in which emission reductions are counted twice: first by the country that purchased the credit and again by the country where the emission reduction occurred. G7 leaders acknowledged the possibility of 'high-integrity' carbon markets in a communiqué issued in June but stopped short of addressing the issue of double counting.
Article 6 aims to establish a central UN-approved mechanism to trade carbon credits from emissions reductions generated from low-carbon projects. It also envisions the international transfer of carbon credit and linking two or more countries through emission trading schemes. For example, one country paying another to build a renewable energy project would reduce emissions, while allowing the second country to benefit from cleaner energy.
Carbon credit is a government permit that allows polluting companies to emit carbon dioxide or other greenhouse gases into the atmosphere. Currently, a single such credit permits emission of one tonne of CO2.
Carbon credits are part of the ambitious ‘cap-and-trade’ programme, a market-based approach to control pollution and ward off climate change. Governments allot companies a certain number of carbon credits every year, beyond which they cannot pollute. And the number of credits is reduced every year, which would force companies to invest in reducing their pollution footprint.
In India, the National Commodity and Derivatives Exchange began trading carbon credits in 2008 at around Rs1,000 apiece. The carbon credit market, however, largely remains shady. There are allegations that companies have been exploiting regulatory loopholes to make money without actually reducing emissions. Also, the global carbon credit market is still nascent; countries have not yet reached a consensus on how to facilitate transparent and efficient trading of credits allocated to each country under the United Nations Framework Convention on Climate Change (UNFCC).
India, in 2020, took a big step towards meeting its climate change obligations under the UNFCC. In his speech at the UN Climate Ambition Summit in December 2020, Prime Minister Narendra Modi said India had reduced its emissions intensity by 21 per cent since 2005. "Our solar capacity has grown from 2.63GW in 2014 to 36GW," he said. "Our renewable energy capacity is the fourth largest in the world. It will reach 175 GW before 2022".
Since the groundbreaking Paris agreement in 2016, governments have been toying and tinkering with various ‘green deals’. For one, fossil fuels remain the cheapest energy source that can drive development. In India, coal meets a lion’s share of power demand, even as 20 crore people live without access to grid-based electricity.
Carbon credits and other eco-friendly, market-driven regulations may solve urgent environmental problems. But in the long term, the cure could become as bad as the disease. Take "non-polluting" electric cars, for instance. They rely on rechargeable lithium batteries, which necessitates a steady supply of the silvery-white alkali metal, even at the cost of ecological ruin.
Currently, the global carbon credit market is on track to be worth $1 billion according to a publication by the environmental finance research nonprofit Forest Trends, Ecosystem Marketplace. A report by the UN Environment Programme states that carbon markets, with defined rules and transparency, could “help slash emissions.”
There's been a push for the globalization of a cap-and-trade market for carbon. Alok Sharma, president of COP16 told NBC News that it is challenging to agree on a common time frame, common price, common measurement and transparency. According to a survey published in June by the International Emissions Trading Association, carbon prices are projected by traders in the European compliance market to touch $67 per metric ton by 2030. It is, however, important that there is some form of regularisation and accountability when it comes to carbon credit trading-- critics of the non-compliance market have pointed out that overall emission of greenhouse gases isn't lowered, especially if a company buys carbon credits from a business outside of a regulated exchange.
Here's why carbon credit trading can be tricky. Carbon credits can be purchased for projects that would have taken place otherwise. Some of the carbon credits obtained through these programmes are temporary. For example, FIFA, the world soccer governing body, purchased credits to help offset emissions from the 2014 World Cup in Brazil. The trees, however, were quickly felled. In 2018, the initiative was halted when more trees were felled than the total number of credits sold. Another fallback, critics point out, is a surge in investments in carbon credit trading, which could lead to an inflation in prices of carbon credit. In February, the Australian carbon offset price closed 3 per cent higher, at $17.15 a tonne, according to carbon market analyst RepuTex. By September, the price had increased to $26 a tonne. This was days after Australia PM Scott Morrison said, “Our goal is to reach net-zero emissions as soon as possible, and preferably by 2050.”
The World Economic Forum, in a report, says Europe’s most energy-intensive industries, including airlines have been using carbon credits to meet mandatory limits on their emissions under the EU Emissions Trading Scheme (EU ETS). In Colombia, companies can pay their carbon taxes using carbon credits, in May 2020 the US Treasury issued new rules that require companies claiming carbon-capture tax credits to verify the amount of carbon captured by the schemes they invest in.