Explained | What are carbon markets and how do they operate? 

The World Bank estimates that carbon trading can reduce the global cost of implementing nationally determined climate goals by more than half

The story so far: The Parliament passed the Energy Conservation (Amendment) Bill, 2022 on Monday, December 12, declining the Opposition’s demands to send it for scrutiny to a parliamentary committee and amid concerns expressed by members over carbon markets. The Bill amends the Energy Conservation Act, 2001, to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.

In order to keep global warming within 2°C, ideally no more than 1.5°C, global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% over this decade. Nearly 170 countries have submitted their nationally determined contributions (NDCs) so far as part of the 2015 Paris Agreement, which they have agreed to update every five years. NDCs are climate commitments by countries setting targets to achieve net-zero emissions. India, for instance, is working on a long-term roadmap to achieve its target of net zero emissions by 2070.

In order to meet their NDCs, one mitigation strategy is becoming popular with several countries— carbon markets. Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs.

Carbon markets are essentially a tool for putting a price on carbon emissions— they establish trading systems where carbon credits or allowances can be bought and sold. 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 allowances or caps, meanwhile, are determined by countries or governments according to their emission reduction targets.

A United Nations Development Program release this year noted that interest in carbon markets is growing globally, i.e, 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce greenhouse gas emissions.

There are broadly two types of carbon markets that exist today— compliance markets and voluntary markets.

Voluntary markets are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO 2 or equivalent greenhouse gases. Such carbon credits are created by activities which reduce CO 2 from the air, such as afforestation. In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions. For Instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate. In voluntary markets, credits are verified by private firms as per popular standards. There are also traders and online registries where climate projects are listed and certified credits can be bought.