• Recently, the Intergovernmental Panel on Climate Change (IPCC) released a fresh report card on the world’s progress towards slowing climate change. The bad news: Greenhouse gas (GHG) emissions are still rising across all major sectors globally, albeit at a slower pace. Among the good news: renewables are now cheap – cheaper often than coal, oil, and gas.
• Despite some progress, the world faces a formidable challenge. Scientists warn 2°C of warming will be exceeded during the 21st century unless we achieve deep reductions in GHG emissions now. 
• Effective action will require concerted and sufficient investment, knowing also that the costs of inaction will be far higher. Developing countries will need up to US$6 trillion by 2030 to finance not even half of their climate action goals (as listed in their Nationally Determined Contributions, or NDCs).   
• The latest IPCC report finds all countries are falling way short, with financial flows three to six times lower than levels needed by 2030 – and even starker differences in some regions of the world.
• Many countries are looking to carbon markets as part of the answer. 

What are carbon markets?

• In a nutshell, carbon markets are trading systems in which carbon credits are sold and bought. 
• One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. 

How many types of carbon markets are there? 

• There are broadly two types of carbon markets: compliance and voluntary. 
• Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement.
• Voluntary carbon markets – national and international – refer to the issuance, buying and selling of carbon credits, on a voluntary basis.
• The current supply of voluntary carbon credits comes mostly from private entities that develop carbon projects, or governments that develop programs certified by carbon standards that generate emission reductions and/or removals. 
• Demand comes from private individuals that want to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at a higher price to make a profit.
• One type of compliance market that many people will have heard of are emissions trading systems (ETS). Operating on a “cap-and-trade” principle, regulated businesses – or countries, as in the case of the European Union’s ETS – are issued emission/pollution permits, or allowances by governments (which add up to a total maximum, or capped, amount). Polluters that exceed their permitted emissions must buy permits from others with permits available for sale (i.e., trade).
            The European Union launched the world''s first international ETS in 2005. Last year, China launched the world’s largest ETS, estimated to cover around one-seventh of global carbon emissions from the burning of fossil-fuels. Many more national and subnational ETS are now operating or under development.
• The Clean Development Mechanism (CDM), adopted under the Kyoto Protocol in 1997, is another well-known example of an international compliance market. Under the CDM, emission-reduction projects in developing countries have generated carbon credits used by industrialized countries to meet part of their emission reduction targets.

Carbon markets in News

• Carbon finance will be key for the implementation of the NDCs, and the Paris Agreement enables the use of such market mechanisms through Article 6.
• That’s why, around the world, interest in carbon markets is growing – 83 percent of NDCs state the intent to make use of international market mechanisms to reduce greenhouse gas emissions. 
• Negotiations related to the operation of the Article 6 mechanisms under the Paris Agreement were at the center of COP26 in Glasgow. With the decisions taken there, the “Paris Rulebook” to implement the Agreement was considered complete. However, there are remaining details to be resolved, and so discussion is set to continue at the upcoming UNFCCC meetings taking place in Bonn, Germany in June 2022 and then at COP27 in Sharm El-Sheikh, Egypt. 

Challenges

• Progress has been made towards agreeing on the processes and methodologies that countries need to follow to access the carbon markets. And there are many opportunities – not least the benefits that will accrue by diverting a share of the proceeds to support the most vulnerable countries to adapt to climate change. 
• However, there are also serious concerns including issues related to double-counting of GHG emission reductions, human rights abuses, and greenwashing (in which companies falsely market their green credentials, for example, misrepresentations of climate-neutral products or services). Which is why the Paris Agreement negotiations on this topic have been so complex and protracted.
• For carbon markets to be successful, these issues must be addressed. Emission reductions and removals must be real and aligned with the country’s NDC. There must be transparency in the institutional and financial infrastructure for carbon market transactions. And there must be adequate social and environmental safeguards to mitigate against any adverse project impacts – and to promote positive ones. 
• Human rights must also be respected, including those of Indigenous peoples’ and local communities.
• Building integrity into carbon markets is key.

Amending the Energy Conservation Act, 2001 in India

• 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 Bill to amend the Energy Conservation Act, 2001, which was introduced in Parliament on 3 August 2022, 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.
• Importantly, the amendment Bill seeks to widen the scope of energy conservation to include large residential buildings as well. Till now, the energy conservation rules applied mainly on industrial and commercial complexes.

Energy Conservation

• The 2001 law defined standards for energy conservation and efficiency to be followed by a select group of industries and commercial complexes. Efficiency standards were also prescribed for equipment and appliances like air conditioners or refrigerators. This law set up the Bureau of Energy Efficiency (BEE) to promote the use of more efficient processes and equipment in order to save energy. The star ratings on various household appliances and the largescale shift to LED bulbs were some of the successful initiatives of BEE that have resulted in massive energy savings over a period of time.
• The overall objective has been to improve energy efficiency across sectors, so that much more productivity can be obtained from the same amount of energy. Over the years, India’s energy intensity, or the amount of energy consumption per unit of GDP, has declined significantly.

New provisions

• The amendment Bill seeks to build upon the progress made so far. For example, just like the standards for appliances and equipment, energy consumption standards would be specified for motor vehicles, ships and other water vessels, industrial units, and buildings. In the case of vehicles and water vessels, fuel consumption norms would be defined. And just like it is for appliances and equipment, the new provisions would empower the government to prohibit the manufacture or import of any vehicles or water vessels if it does not conform to the prescribed energy standards.
• New sustainable building codes are to be defined which every building with a certain threshold of energy consumption, whether industrial, commercial or residential, would have to adhere to. Every such building would have to ensure that at least a part of its total energy consumption comes from renewable or non-fossil fuel sources. This would help in reducing the proportion of fossil-fuel based energy being used in the economy and push the demand for renewable or other non-fossil fuels.

Looking ahead

• UN Secretary-General Antonio Guterres urged the world to “put the pedal to the metal” in addressing the climate crisis.
• If held to high standards of integrity and transparency, carbon markets can help accelerate the transformation needed, by effectively putting a price on pollution and creating an economic incentive for reducing emissions. They can also help generate some of the vast sums needed to build resilience.
• With the Paris Rulebook finalized, and the global community engaged in discussion around Article 6 as well as how to ensure integrity, momentum is growing.