[Answered] What is Carbon trading and what are the rules released by the government for it? How does carbon trading operate?

Introduction: Explain Carbon trading.
Body: Explain some rules released by the government for Carbon trading. Also explain how carbon trading operates.
Conclusion: Write a way forward.

Carbon trade is the buying and selling of credits that permits a company or other entity to emit a certain amount of carbon dioxide or other greenhouse gases. It is authorized by the government with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change. It is mentioned under the Clean Development Mechanism.

The objective of carbon markets is to incentivise investments in renewable energy sources. The carbon trading mechanism will mobilise domestic finance and accelerate the shift away from fossil fuels.

Rules released by the government for Carbon trading:

  • Two types of tradeable certificates are already issued in India- Renewable Energy Certificates (RECs) and Energy Savings Certificates (ESCs). These are issued when companies use renewable energy or save energy, which is also activities which reduces carbon emissions.
  • Parliament passed the Energy Conservation (Amendment) Bill, 2022 which amends the Energy Conservation Act, 2001 to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.
  • Under the Bill, the central government or an authorized agency will issue carbon credit certificates to companies or even individuals registered and compliant with the scheme. These carbon credit certificates will be tradeable in nature. Other persons would be able to buy carbon credit certificates on a voluntary basis.
  • A similar trading mechanism is implemented in Perform, Achieve and Trade (PAT) scheme. There are around 1,000 industries have been involved in procuring and trading energy-saving certificates (ESCerts).

How does carbon trading operate? 

  • Carbon Markets and Carbon Credits are a market-based approach to reduce the concentration of Greenhouse gases (GHG) in the atmosphere. It works by providing economic incentivesfor reducing the emissions of the designated pollutants.
  • A carbon market allows investors and corporations to trade both carbon credits and carbon offsets simultaneously.
  • When a company buys a carbon credit, they gain permission to generate more CO2 emissions.One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided.
  • If emissions are below the allowed limit, the emitter earns carbon credits. If emissions are above the allowed limit, the emitter must buy carbon credits from those who have excess credits.
  • The idea is that this cost will force the emitters to be more efficient and reduce emission.
  • There are two types of carbon markets: (a) One is a compliance market, set by “cap-and-trade” regulations at the regional and state levels; (b) The other is a voluntary market where businesses and individuals voluntarily buy credits (of their own accord) to offset their carbon emissions.

The government must intervene to bring pressure on the industry to participate in the market and also ignore proven non-market initiatives to achieve greenhouse gas reductions.

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