A clean gamble – Understanding the Carbon Trading | 23rd February 2023 | UPSC Daily Editorial Analysis

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What's the article about?

  • It talks about how India can leverage carbon trading to accelerate the shift away from fossil fuels.


  • GS3: Environment- Climate change;
  • Prelims


  • After the passing of the Energy Conservation (Amendment) Bill last December, the Centre is now in the final stages of notifying an Emissions Trading Scheme (ETS).
  • The Union government has also finalised a list of activities to be considered for trading of carbon credits under Article 6.2 mechanism to facilitate transfer of emerging technologies and mobilise international finance in India.
  • In this article the writer explains how India can leverage carbon trading to accelerate the shift away from fossil fuels.

What are carbon markets?

  • They are simply a technique for placing a price on carbon emissions by creating trading systems where carbon credits or permits can be purchased and sold.
  • A carbon credit is a trading permit that, according to the UN standards, equals one tonne of CO2 eliminated, decreased, or sequestered from the atmosphere.
  • Countries or governments set carbon allowances or caps based on their emission reduction goals.

History of carbon market:

  • A decade or more ago, they meant stock-market-like exchanges that traded in ‘carbon offsets’ made legitimate under the Clean Development Mechanism.
  • Here, industrial projects in developing countries that avoided greenhouse gas emissions were eligible for credits that, after verification, could be sold to European companies that could buy them in lieu of cutting emissions themselves.
  • Alongside are the EU-Emissions Trading Systems (ETS) where government-mandated emission limits on industrial sectors such as aluminium or steel plants require industries to either cut emissions or buy government-certified permits from companies that cut more emissions than required or were auctioned by governments.
  • Carbon credits became valuable because they could be used as permits in EU-ETS exchanges.
  • Such permits are a ‘right to pollute’ and being tradeable on an exchange, akin to shares, are expected to fluctuate in value depending on a company’s need to balance profitability and comply with pollution norms.

Why do we need to develop carbon markets?

  • In order to keep global warming within 2°C (ideally within 1.5°C), global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% over this decade.
  • The objective of such markets is to incentivise investments in renewable energy sources.
  • The European Union, which runs the oldest emission trading scheme since 2005, had cut emissions by 35% from 2005-2019 and 9% in 2009, over the previous years.

India and Carbon Market?

  • While India has maintained its right to grow its carbon emissions in the near future, it has committed to cutting the emissions intensity (emissions per unit of GDP) of its growth by 45% (of 2005 levels) by 2030.
  • It has been doing this, partly, via the Perform, Achieve and Trade (PAT) scheme, where around 1,000 industries have been involved in procuring and trading energy saving certificates (ESCerts).
  • Since 2015, various cycles of the PAT have shown emission reductions of around 3%-5%.

What is the PAT scheme?

  • The PAT scheme was introduced to improve energy efficiency in Indian industries and consequently reduce greenhouse gas.
  • It is a part of National Mission for Enhanced Energy Efficiency of National Action Plan on Climate Change (NAPCC).
  • PAT Mechanism is a market-based mechanism to further accelerate as well as incentivize energy efficiency in the large energy-intensive industries.
  • The scheme provides the option to trade any additional certified energy savings with other designated consumers to comply with the Specific Energy Consumption reduction targets.
  • The Energy Savings Certificates (ESCerts) issued will be tradable on special trading platforms to be created in the two power exchanges — Indian Energy Exchange and Power Exchange India.

Way Forward:

  • Whether carbon trading can meaningfully lead to emissions reductions in the Indian context is a question that can be answered only decades later.
  • It would, however, be a victory in itself, if it is able to mobilise domestic finance and accelerate the shift away from fossil fuel.
  • With that end in mind, the government must intervene to bring in the right amount of pressure on industry to participate in the market but not ignore proven non-market initiatives to achieve greenhouse gas reductions.

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