Context: COP 29 in Baku, Azerbaijan has given a fillip to the idea of using carbon markets to curb the carbon emissions by approving standards that can help in the setting up of an international carbon market in near future.
Relevance of the topic:
Prelims: Key understanding of bonds and Carbon Market.
Mains: Analytical question on Carbon market, its benefits and its lacunae.
Major Highlights:
- Carbon Market is a market that allows the trade of the right to emit carbon in the atmosphere.
- Illustration- A government focusing on controlling emission will issue limited carbon credits to firms. Each carbon credit is equivalent to 1,000 Kgs of carbon dioxide. Firms/individuals who do not need carbon credit can trade them with interested buyers.
- Price of carbon credit will be market based i.e., will work on the principle of demand and supply.
- Carbon Offset: These are the alternatives to carbon credit, sold by environmental NGO to bridge the gap of credit and actual emission.
- In case a business pollutes more than carbon credit and fails to secure them from other firms they can opt for this option.
- For example, Firm A breaches the credit limit and can buy carbon offsets from NGO planting trees.
Benefits of Carbon Market:
- Cost effective emission reduction by limiting the emission with the help of imposing cost on polluters.
- Promotes polluter pay principle by enhancing compliance burden on individuals and firms.
- Incentivise the compliance- The Cap and trade system enforces limits on emissions, motivating organisations to stay within their allowances or invest in credit.
- Pushes green funding for environmental NGO and organisations by the mechanism of carbon offset mechanism.
Issues in Carbon Market System:
- Discriminatory in nature- As carbon credit and carbon market mechanism paves way for the excess emission by wealthy developed nations.
- Greenwashing risk is associated with it as the polluter pay principle will provide unrestrained right to pollute.
- Overestimation of the impact, as the projects may exaggerate their carbon reduction impact.
- Risk of market saturation- The oversupply of the carbon credits and offset clause combined, can reduce the value of carbon credits that can hamper the reduction targets.
Conclusion: Carbon credits and markets are valuable tools for reducing emissions and promoting sustainability, but they face challenges like regulation gaps and potential misuse. To maximise their impact, strong oversight, transparent standards, and a focus on real emission reductions are essential, ensuring they complement broader efforts toward a low-carbon, equitable future.