Establishing India’s carbon market is a significant step towards addressing climate change and promoting sustainable development. A carbon market allows companies to buy and sell carbon credits, which represent the right to emit a certain amount of carbon dioxide. By putting a price on carbon emissions, this market encourages businesses to reduce their carbon footprint and invest in cleaner technologies. For India, creating a carbon market could help meet its climate goals, reduce pollution, and drive innovation in green industries. It’s a move that not only benefits the environment but also supports economic growth in a more sustainable way.
Tags: GS – 3, Ecology & Environment- Conservation– Renewable Energy– Government Policies & Interventions- Achievements of Indians in Science & Technology
Context:
- India, the world’s third-largest emitter, faces the challenge of balancing climate goals with developmental needs.
- The Finance Minister’s recent policy shift from energy efficiency targets to emission targets for “hard to abate” industries is a key change, addressing the limitations of the Perform, Achieve, and Trade (PAT) scheme.
- This transition towards an Indian Carbon Market signifies India’s commitment to exploring market-based emission reduction solutions, despite not having mandatory reduction obligations under its Nationally Determined Contributions (NDCs).
What is the Carbon Market?
- About:
- Carbon markets are designed to reduce greenhouse gas emissions by providing financial incentives for emission reductions.
- They operate on a cap-and-trade principle, where a regulatory authority sets a cap on the total allowable emissions within a specific jurisdiction.
- Types of Carbon Markets:
- Compliance Markets: Mandatory markets where regulated entities must purchase carbon credits to offset their emissions. These typically involve large industrial polluters.
- Voluntary Markets: Optional markets allowing individuals, businesses, and organisations to buy carbon credits to offset emissions beyond regulatory requirements.
- India’s Role:
- India plays a significant role in the decentralised voluntary carbon market, exporting credits valued between USD 200-300 billion annually and accounting for 17% of the global supply in 2022.
- Carbon Credits:
- Carbon credits represent a reduction or avoidance of one ton of CO2 equivalent emissions and can be traded.
- They are generated through activities such as implementing energy-efficient technologies, reducing waste, transitioning to renewable energy, and promoting reforestation.
- Carbon Taxes:
- Carbon taxes are direct levies on greenhouse gas emissions, requiring polluters to pay based on their emission levels.
- The revenue generated from these taxes can be used for climate mitigation and adaptation projects or to reduce other taxes.
- Global Trends:
- As of August 2023, there are 74 carbon pricing mechanisms worldwide, including carbon taxes and emissions trading schemes.
- In 2023, carbon pricing revenues reached a record USD 104 billion, according to the World Bank’s “State and Trends of Carbon Pricing 2024” report.
Advantages of Implementing a Carbon Tax
- Incentivizing Green Innovation:
- A carbon tax promotes green innovation by financially encouraging businesses to reduce carbon emissions.
- In India, it could advance solar, wind, and energy storage technologies, similar to British Columbia’s 6.1% emission reduction after its carbon tax.
- This could drive India toward a leadership role in clean tech.
- Revenue Generation for Climate Adaptation:
- Carbon taxes can generate significant revenue for climate adaptation efforts. For India, this could be critical given severe climate impacts.
- The IMF estimates a USD 35 per ton tax could raise 1-2% of GDP by 2030, funding flood protection and drought-resistant agriculture.
- Improving Public Health:
- Reducing fossil fuel use through a carbon tax can improve air quality and public health.
- A USD 50 per ton tax in G20 countries could prevent 600,000 premature deaths annually by 2030, offering economic benefits through reduced healthcare costs and increased productivity.
- Consumption Consciousness:
- Carbon taxes can raise awareness about the carbon footprint of products, influencing consumer behaviour.
- In India, this could shift consumers toward sustainable choices by increasing the cost of carbon-intensive goods, thereby accelerating the transition to a low-carbon economy.
Major Challenges Related to Carbon Taxation in India
- Economic Impact on Industries:
- A carbon tax could raise production costs for energy-intensive industries like steel and cement, potentially affecting global competitiveness.
- Careful policy design is needed to balance environmental benefits with economic impacts.
- Regressive Nature – Burden on Lower-Income Groups:
- Carbon taxes can disproportionately impact lower-income groups who spend more on energy.
- With India’s large poor population, a poorly designed tax might increase costs for essential services, exacerbating economic inequality.
- Limited Scope:
- Carbon taxes primarily target CO2 emissions but may not address other greenhouse gases like methane, which has a higher warming potential.
- The Informal Sector Conundrum:
- India’s informal sector poses challenges for carbon tax implementation due to difficulties in tracking and taxing emissions from small, unregistered businesses.
- Inter-State Disparities and Carbon Leakage:
- A national carbon tax might unevenly affect states with different industrialization levels and energy mixes.
- Additionally, carbon leakage could occur if emissions-intensive industries move to regions with looser regulations.
Measures India Can Adopt for Effective Carbon Market Establishment
- Phased Implementation:
- Introduce carbon taxation gradually, starting with a low rate and increasing it over time. This phased approach helps industries adapt and invest in cleaner technologies while developing supporting infrastructure.
- Border Carbon Adjustments:
- Implement border carbon adjustments (BCAs) to impose carbon prices on imports based on their emissions, protecting domestic industries and aligning with WTO regulations.
- Technology Transfer Incentives:
- Use carbon tax revenue to fund a “Clean Tech Adoption Fund” for low-interest loans or grants, supporting SME investments in green technologies.
- Green Lanes for Industries:
- Create a tiered regulatory system offering expedited approvals and incentives for industries with significant carbon reduction efforts, promoting cleaner practices.
- Carbon Credit Cooperative for SMEs:
- Establish a cooperative framework for SMEs to pool emissions reduction efforts, generate carbon credits, and broaden market participation.
- Carbon Tech Incubators:
- Launch incubators to support startups developing indigenous carbon reduction technologies, providing funding, mentorship, and facilities.
- Green Finance Revolution:
- Develop a green finance ecosystem with green bonds and climate risk insurance, and create a national green investment bank to attract private investment.
- Integration with Existing Schemes:
- Integrate the new carbon market with existing schemes like PAT and REC, develop conversion mechanisms, and establish a common trading platform for coherence and liquidity.
Conclusion
India stands at a critical juncture in its journey toward balancing climate goals with economic growth. Establishing a well-designed carbon market, integrating existing schemes, and fostering innovation will enable India to lead in sustainable development. By taking decisive action now, India can drive the transition to a low-carbon future and emerge as a global leader in creating a resilient, climate-conscious economy.
UPSC Civil Services Examination, Previous Year Question (PYQ)
Prelims
Q:1 Consider the following statements (2023)
Statement—I , Carbon markets are likely to be one of the most widespread tools in the fight against climate change.
Statement—II Carbon markets transfer resources from the private sector to the State.
Which one of the following is correct in respect of the above statements?
- Both Statement—I and Statement—II are correct and Statement—II is the correct explanation for Statement—I
- Both Statement—I and Statement—II are correct and Statement—II is not the correct explanation for Statement—I
- Statement—I is correct but Statement—II is incorrect
- Statement—I is incorrect but Statement—II is correct
Ans: B
Q:2 The concept of carbon credit originated from which one of the following? (2009)
- Earth Summit, Rio de Janeiro
- Kyoto Protocol
- Montreal Protocol
- G-8 Summit, Heiligendamm
Ans: B
Source: TH
FAQs
Q: What is a carbon market?
- Answer: A carbon market is a system where companies can buy and sell carbon credits, which represent the right to emit a certain amount of carbon dioxide or other greenhouse gases. It’s a way to control and reduce overall emissions by putting a price on carbon.
Q: Why is India establishing a carbon market?
- Answer: India is establishing a carbon market to help reduce its greenhouse gas emissions and combat climate change. By creating a market where carbon emissions have a financial cost, companies are incentivized to reduce their emissions and invest in cleaner technologies.
Q: How does a carbon market work?
- Answer: In a carbon market, the government sets a limit on how much carbon can be emitted. Companies that emit less than their allowed amount can sell their excess credits to companies that need more. This trading helps to ensure that emissions are reduced in the most cost-effective way.
Q: What benefits can India expect from a carbon market?
- Answer: A carbon market can help India meet its climate goals by reducing emissions in an economically efficient way. It also encourages innovation and investment in green technologies, which can lead to sustainable economic growth and job creation in the clean energy sector.
Q: What challenges might India face in establishing a carbon market?
- Answer: Challenges include setting up the regulatory framework, ensuring transparency, and preventing market manipulation. Additionally, there may be resistance from industries that are heavily reliant on fossil fuels, as they may face higher costs under a carbon market system.
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