Carbon Markets

2023 OCT 25

Mains   > Environment & Ecology   >   Global warming   >   Climate change


  • Recently, a report by the Centre for Science and Environment and an investigation by Down to Earth magazine found issues associated with the current carbon markets around the world.


  • Carbon markets are trading systems in which carbon credits are sold and bought.
  • As per United Nations standards, one tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered, or avoided.
  • The main international carbon market scheme existing today was set up under the U.N.’s 1997 Kyoto protocol on climate change.
  • Under that agreement, developed countries had targets to reduce their greenhouse gas emissions, but developing countries did not. So if a developing country reduced its emissions by building a solar panel plant or planting trees for example, they could sell a “credit” to a developed country, which could count that emission reduction in its own target.


  • There are broadly two types of carbon markets: compliance and voluntary.
  • Voluntary carbon markets:
    • Voluntary carbon markets refer to the issuance, buying and selling of carbon credits, on a voluntary basis
    • 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.
  • Compliance carbon markets:
    • Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement.
    • Emissions trading systems (ETS) are one type of compliance market that many people are familiar with.
    • In the case of the European Union’s ETS, operating on a “cap-and-trade” principle, member countries set a cap or limit for emissions in different sectors, such as power, oil, manufacturing, agriculture, and waste management.
    • Polluters that exceed their permitted emissions must buy permits from others with permits available for sale (i.e., trade).




  • In India, the clean development mechanism under the Kyoto Protocol provided a primary carbon market for the players.
  • The secondary carbon market is covered by the Perform Achieve and Trade (PAT) scheme and the Renewable Energy Certificate (REC).
    • Perform Achieve and Trade (PAT) scheme is a flagship programme of Bureau of Energy Efficiency under the National Mission for Enhanced Energy Efficiency (NMEEE).
    • Renewable Energy Certificate (REC) mechanism is a market based instrument to promote renewable energy and facilitate compliance of renewable purchase obligations (RPO). It is aimed at addressing the mismatch between availability of RE resources in state and the requirement of the obligated entities to meet the renewable purchase obligation (RPO).
  • The Energy Conservation (Amendment) Act 2022 empowers the government to establish carbon markets in India and specify a carbon credit trading scheme.


  • Key to meet Nationally Determined Contributions (NDCs):
    • Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs, so the carbon market will be key to the implementation of the NDCs.
    • For instance, as per the United Nations Development Program, around 83% of NDCs submitted by countries mention their intent to make use of international carbon market mechanisms to reduce greenhouse gas emissions.
  • Putting a price on carbon emissions:
    • Carbon markets are essentially a tool for putting a price on carbon emissions.
    • They punish businesses that emit more than the limit while rewarding those who emit less.
    • The World Bank estimates that trading in carbon credits could reduce the cost of implementing NDCs by more than half, by as much as $250 billion by 2030.
  • Reduce energy use and encourage the use of cleaner fuels:
    • Carbon markets may promote the reduction of energy use and encourage the shift to cleaner fuels because government-regulated trading schemes would provide tighter emission limits.
    • Also, the high cost of purchasing carbon credits may prompt companies to innovate, invest in, and adopt cost-efficient low-carbon technologies.
  • Emission reductions without compromising economic growth:
    • Carbon credits will help developing countries like India carry out economic activities, while keeping the country’s carbon goals in perspective.
    • Enabling the carbon market at the domestic level will help organisations in the country trade in their carbon credits effectively. This, in turn, will speed up the energy transition objectives of the country for climate change mitigation.
  • Enormous potential of the evolving carbon market:
    • In 2021, the global carbon credits market rose by 164 per cent and is expected to cross $100 billion by 2030.
    • Carbon markets will open up new avenues for organisations that are engaged in developing, trading and consulting carbon credits.
    • Carbon credits offer a way to reward the industries and other sectors that have developed practices involving technological innovations to reduce emissions and achieve climate targets.


  • Double counting:
    • Double-counting has been a thorny issue in the world of carbon markets since their inception.
    • Double counting comes in because there’s no single organization overseeing all carbon trading. As a result, different markets can run in different ways, causing a lot of confusion between the developers and buyers of carbon credits.

Double counting refers to the situation where two countries, or more generally speaking, two parties, claim the same carbon removal or emission reduction

  • Greenwashing:
    • There are also concerns about "greenwashing," as companies may buy credits to offset their carbon footprints instead of reducing their overall emissions or investing in clean technologies.
    • For instance, the buyers of the carbon credit—say, an airline that has assured its customers to offset their carbon footprint or a food company that has declared itself net-zero—have continued to emit; they have even increased their emissions, saying that they have bought credits. But as these credits are overestimated or do not really exist, the reductions are notional.

Greenwashing is a term used to describe a false, misleading or untrue action or set of claims made by an organization about the positive impact that a company, product or service has on the environment.

  • Overestimation of emission reductions:
    • There is a rampant overestimation of emission reductions by project developers, despite the presence of a large number of verifiers, auditors, registries, and project developers.
  • May result in increased net emissions:
    • According to the International Monetary Fund, putting high-emitting sectors into trading schemes to offset their emissions by purchasing allowances may increase net emissions. 


  • Digital infrastructure:
    • A digital infrastructure that keeps verified data secure and ensures that reductions are accurately accounted for and tracked would be key to successfully reducing global GHG emissions through carbon markets.
    • This digital infrastructure should comprise monitoring, reporting, and verification systems with GHG emissions and emission reductions data linked to national or international registries.
  • Technology to ensure transparency and to avoid double counting:
    • New and fast-evolving technologies, such as blockchain technology, can further help ensure transparency and that carbon credits can only be claimed by one country: either the country that avoided or removed the GHG emissions or the country that bought it in the form of a carbon credit for different uses.
    • Also, keep the project design simple and keep control of the projects with public institutions and people to avoid widespread overestimation of emission reductions by project developers.
  • Emission reductions must be aligned with the country’s NDCs:
    • The UNDP emphasises that for carbon markets to be successful, emission reductions and removals must be real and aligned with the country’s NDCs.


Q. “The carbon market is potentially an important instrument for mitigating climate change”. Discuss the significance of the carbon market as an instrument to mitigate climate change. Also examine the challenges associated with the carbon market.