THE WORLD OF CARBON MARKETS

Almost every human activity,from traveling and farming to the manufacturing of goods, results in Greenhouse Gas (GHG) emissions, consequently warming up the Earth and causing climate change. Since the industrial revolution, human beings have emitted enough carbon to raise the Earth’s temperature by over 1.9 degrees Fahrenheit already.The good news is that nations,companies, and individuals are becoming increasingly aware of their emissions patterns and their impact on the environment. People and organizations advocating for environmental justice are demanding that emitters must pay the price. Carbon markets, among other options, can help balance the scale. Emitters buy carbon credits from the companies and nations that are earning carbon credits by removing carbon or reducing GHG emissions. This article aims to delve into the realm of carbon markets, their evolution, and relevance

In an age where almost every aspect of human existence, from our daily commutes, using washing machines at home, watching television, to the food on our tables, contributes to greenhouse gas emissions. Despite lofty claims by countries on international platforms, global emissions are not decreasing. With each passing year, they add to the mounting problems. Global carbon dioxide emissions from fossil fuels and industry were 37.12 billion metric tonnes (GtCO2) in 2021. Emissions have risen by 0.9 per cent in 2022 to 37.5 GtCO2- their highest level ever. Since 1990, global CO2 emissions have increased by more than 60 per cent. Since the Industrial Revolution,humanity’s pursuit of progress has pushed the planet’s thermostat to extreme heights. According to an ongoing temperature analysis led by scientists at NASA’s Goddard Institute for Space Studies (GISS), the average global temperature on Earth has increased by at least 1.1° Celsius (1.9°Fahrenheit) since 1880. Most of the warming has occurred since 1975, at a rate of roughly 0.15 to 0.20°C per decade. The numbers tell a sobering story: a northward shift of temperatures by an alarming 1.9 degrees Fahrenheit— an unequivocal testament to humanity’s unwitting role as both the architects and victims of a warming world.

Some may question why an increase in temperature by one or two degrees matters, as we experience much larger temperature fluctuations in local weather every season in cities and towns. A NASA study suggests that global temperature mainly depends on how much energy the planet receives from the Sun and how much it radiates back into space. The energy from the Sun fluctuates very little from year to year, while the amount of energy radiated by Earth is closely tied to the chemical composition of the atmosphere—particularly the amount of heat-trapping greenhouse gases. A one-degree shift in global temperature represents a significant energy shift.It requires an immense heat infusion to warm our vast oceans, atmosphere, and land masses. Historical records reveal the profound consequences of minor temperature alterations: a oneto two-degree drop ushered in the Little Ice Age. Delving further into history, a mere five-degree drop led to a glacial epoch, covering significant portions of North America in ice 20,000 years ago. A five-degree drop was sufficient to bury a large part of North America under a towering mass of ice 20,000 years ago.

It is imperative that the world takes action to curb emissions and keep the rise in temperature from pre-industrial levels below 1.5 degrees. We are well aware that the consequences of these emissions are no longer a distant spectre but a present-day reality, manifested in the form of a warming Earth and the unpredictable negative impacts of climate change, such as the increasing frequency and intensity of natural disasters. That’s why the world is discussing the transition to net-zero emissions, meaning that if our actions result in emissions, there must be conscious efforts to offset the effect. Many nations have established long-term targets to achieve net-zero emissions, but there is an urgent need to take concrete action now.

GENESIS OF CARBON MARKETS

Carbon markets are the places where carbon credits are bought and sold. The concept of carbon markets is not new. The history goes back almost three decades. It was first proposed in Kyoto. Carbon trading, an important pillar of contemporary climate policy, traces its roots to the successful cap-and-trade regulations that effectively curbed sulphur pollution in the 1990s. Unlike traditional regulatory approaches that dictate specific measures, carbon trading harnesses market incentives to encourage emission reduction. Carbon markets, born out of necessity to combat climate change, have undergone a remarkable evolution over the years. These markets, which offer a financial incentive to reduce greenhouse gas emissions, have become a cornerstone of global efforts to address the issue of global warming.

The concept of applying a cap-andtrade mechanism to address carbon emissions found its inception within the Kyoto Protocol, a pivotal United Nations Treaty aimed at mitigating climate change. Officially adopted on December 11, 1997, this landmark agreement didn’t come into force until February 16, 2005, owing to a complex ratification process. At its core, the Kyoto Protocol operationalized the United Nations Framework Convention on Climate Change by compelling industrialised countries and transitioning economies to limit and reduce Green House Gas (GHG) emissions in line with predetermined individual targets. A pivotal aspect of the Kyoto Protocol was the introduction of flexible market mechanisms, predominantly centred on the trade of emissions permits. While nations were primarily tasked with achieving their emissions targets through domestic measures, the Protocol also afforded them additional avenues to meet these goals via three marketbased mechanisms—International Emissions or Carbon Trading, Clean Development Mechanism (CDM), and Joint Implementation (JI).

These mechanisms were strategically designed to stimulate GHG reduction efforts in the most cost-effective locations, even in developing regions. The crucial point was not where emissions were curtailed, but rather their removal from the atmosphere. Every developed region’s emissions were capped, and if they exceeded their emissions, they would have to compensate through carbon credits that they could either earn by investing in emission reduction or buying carbon credits. This approach yielded multiple advantages, including fostering green investments in developing nations and involving the private sector in the collective endeavour to maintain GHG emissions at a safe level. By introducing market-based incentives and flexible mechanisms, it encourages nations to collaboratively address this pressing issue while simultaneously promoting sustainable development and innovation worldwide.

CARBON CREDITS-BALANCING THE SCALE

Carbon credits are like special tokens. When someone does something good for the environment, like planting trees or using clean energy, they earn these tokens. Okay, think of it this way: Imagine you have a cookie, but you’re trying to eat healthier. You can still have that cookie, but you promise to eat an extra apple later to make up for it. Carbon credits work like that promise. If a company or a person produces pollution, they can buy carbon credits from others who are doing good things. Imagine you have a balance scale that represents your actions on Earth. Every time you do something that releases carbon into the air – like traveling by car or using energy – you put a little weight on one side of the scale. This weight can upset the balance of nature. In the grand canvas of life, carbon offsetting is akin to offering gratitude to the Earth for its generosity. Just as we seek to maintain harmony in the universe through our deeds, carbon offsetting is our way of restoring balance to the environment. A carbon credit is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.

Carbon markets provide a mechanism through which emitters can begin to atone for their carbon emissions. This system allows them to purchase carbon credits from those entities—be they nations or corporations—that have, through their environmentally virtuous endeavours, earned the right to sell these coveted credits of environmental stewardship.

Take the analogy of an imaginary video game—Carbon Trading Quest. Players are tasked with a noble mission: to combat the rising threat of climate change and save the planet from environmental doom. The game’s concept is simple: players needed to reduce their carbon emissions, and they would use eco-friendly practices and innovative technologies to achieve their goals. The virtual world, akin to ours, is divided into regions, each with its own carbon cap, represented by a numeric value. This cap was the maximum amount of carbon emissions allowed in that region.

You, as a player in the game, are the mayor of city A, where emissions are high, and the air is thick with smog. To succeed, you need to reduce the emissions to meet the city’s cap. But how? The game has a trading system, much like the bustling marketplaces in medieval towns. Players could trade carbon credits—valuable tokens that represented reduced emissions. By employing cleaner technologies, such as windmills and solar panels, and by adopting eco-friendly practices, like riding bicycles instead of fossil-fuelguzzling cars, players could earn these carbon credits.

You installed solar panels in urban homes, reduced energy consumption by upgrading streetlights, powerguzzling electric water supply systems, appliances in city buildings, and even encouraged citizens to use public transport. All these actions not just helped you reduce your city’s emissions but also helped you earn carbon credits that you can trade for gold coins in the virtual marketplace, and eventually use them to upgrade your city’s infrastructure and facilities for citizens. Players from regions that had exceeded their carbon cap were eager buyers, willing to pay handsomely for these precious credits. They expanded their influence by funding reforestation projects, which acted as powerful spells to remove carbon from the atmosphere, further increasing their carbon credit reserves.

And so, the tale serves as a metaphor for the real-world endeavour to reduce carbon emissions and create a more sustainable future—a quest that all cities and nations could embark upon to save our world from the impending threat of climate change. More than two decades have passed, but there are challenges of double counting of emission reduction and a lack of transparency in overall reporting. The countries in advanced stages are working collectively to bring transparency to the system.

INDIA AND CARBON MARKET

The nation is at a nascent stage in this domain, but it is leapfrogging in its efforts to reduce emissions. India has embarked on a momentous journey with the launch of the Carbon Credit Trading Scheme (CCTS). This groundbreaking initiative, set in motion by the Energy Conservation (Amendment) Bill of 2022, places the central government at the vanguard of establishing a robust carbon trading framework. The Carbon Credit and Trading Scheme (CCTS), notified on June 28, 2023, effectively creates a whole system of mechanisms that will govern the Indian carbon and GHG emissions scenario in the coming years.

On the global stage, tradable carbon credits and permits have witnessed a staggering surge, experiencing a remarkable 164 per cent growth to reach an unprecedented USD$ 851 billion in 2021. The European Union’s Emissions Trading System (ETS) played a key role, contributing a substantial 90 per cent to this remarkable feat. While the voluntary carbon markets may appear relatively modest in comparison, with a current global value of USD$ 2 billion, they are steadily gaining momentum. The World Bank foresees a future where carbon credit trading could potentially slash the cost of implementing Nationally Determined Contributions (NDCs) by as much as USD$ 250 billion by the year 2030.

This audacious move by India in embracing carbon trading promises to reshape the environmental landscape and signifies a pivotal moment in the global fight against climate change. Cities in India are also taking steps to leverage the opportunity and utilize their efforts in earning carbon credits for advancing their civic services and green infrastructure, leading to longterm environmental benefits.

Some may question why an increase in temperature by one or two degrees matters, as we experience much larger temperature fluctuations in local weather every season in cities and towns. A NASA study suggests that global temperature mainly depends on how much energy the planet receives from the Sun and how much it radiates back into space. The energy from the Sun fluctuates very little from year to year, while the amount of energy radiated by Earth is closely tied to the chemical composition of the atmosphere—particularly the amount of heat-trapping greenhouse gases. A one-degree shift in global temperature represents a significant energy shift

Carbon markets provide a mechanism through which emitters can begin to atone for their carbon emissions. This system allows them to purchase carbon credits from those entities—be they nations or corporations— that have, through their environmentally virtuous endeavours, earned the right to sell these coveted credits of environmental stewardship.