Carbon Market

In order to facilitate the achievement of more ambitious climate change targets and ensure a faster transition to a low-carbon economy, the government is seeking to strengthen a 20-year law, called the Energy Conservation Act of 2001, which has powered the first phase of India’s shift to a more energy-efficient future.

The proposed bill –

The Bill to amend the Energy Conservation Act, 2001, which was introduced in Parliament, has two main objectives.

• First, it seeks to make it compulsory for a select group of industrial, commercial and even residential consumers to use green energy. A prescribed minimum proportion of the energy they use must come from renewable or non-fossil fuel sources.
• And second, it seeks to establish a domestic carbon market and facilitate trade in carbon credits.

What are carbon markets?

• The creation of a domestic carbon market is one of the most significant provisions of the proposed amendment Bill. Carbon markets allow the trade of carbon credits with the overall objective of bringing down emissions. These markets create incentives to reduce emissions or improve energy efficiency.
• Under the Kyoto Protocol, the predecessor to the Paris Agreement, carbon markets have worked at the international level as well. The Kyoto Protocol had prescribed emission reduction targets for a group of developed countries. Other countries did not have such targets, but if they did reduce their emissions, they could earn carbon credits. These carbon credits could then be sold off to those developed countries which had an obligation to reduce emissions but were unable to.

Performance of the ‘carbon market’ –

• The system of carbon credits functioned well for a few years. But the market collapsed because of the lack of demand for carbon credits. As the world negotiated a new climate treaty in place of the Kyoto Protocol, the developed countries no longer felt the need to adhere to their targets under the Kyoto Protocol. A similar carbon market is envisaged to work under the successor Paris Agreement, but its details are still being worked out.
• Domestic or regional carbon markets are already functioning in several places, most notably in Europe, where an emission trading scheme (ETS) works on similar principles. Industrial units in Europe have prescribed emission standards to adhere to, and they buy and sell credits based on their performance. China, too, has a domestic carbon market.

Does India have a ‘carbon market’?

• A similar scheme for incentivising energy efficiency has been running in India for over a decade now. This BEE scheme, called PAT, (or perform, achieve and trade) allows units to earn efficiency certificates if they outperform the prescribed efficiency standards. The laggards can buy these certificates to continue operating.
• However, the new carbon market that is proposed to be created through this amendment to the Energy Conservation Act, would be much wider in scope. Although the details of this carbon market are not yet known, it is likely to be on the lines of the European ETS, facilitating the buying and selling of carbon credits.