In the last decade, the world has greatly evolved to see climate action as a dire step to restore and rehabilitate the planet. The objective is clearly protection over profit and in this quest mankind has come together like never before with a common goal of net-zero.

Today, businesses increasingly understand climate nuances and the need for urgent climate action and there has been a growing adoption of carbon offsets to neutralize carbon footprints with an aim to restore the planet. This has resulted in an exponential growth of the global carbon credit market.

The emergence of the Carbon Market

Carbon credit is an offset mechanism that is issued for an equivalent reduction or absorption of carbon emissions from the atmosphere as result of a targetted carbon reduction project. These issued credits are then supplied to anyone and everyone aiming to reduce their carbon footprint. So carbon credits are a way to reduce your carbon footprint caused by unavoidable emissions. By purchasing carbon credits, businesses essentially invest in other projects that help reduce greenhouse gas emissions.

Carbon trading started formally in 1997 under the United Nations’ Kyoto Protocol on climate change which had more than 150 nation signatories. Parties with commitments under the agreement agreed to limit or reduce their greenhouse gas emissions between 2008 – 2012 to 5.4% which were well below the levels of 1990. Emissions trading, as set out in the Kyoto Protocol, allowed countries to sell the excess capacity of emission units to countries that had levels well over their targets.

The Kyoto Protocol also laid down the foundation of Market Based Instruments (MBIs) for emission reduction, one of which was the Clean Development Mechanism (CDM) which allowed a country with an emission reduction or limitation commitment to implement or fund a project in the developing world that can earn saleable certified emission reduction (CER) credits to meet Kyoto targets.

The Kyoto Protocol of 2005 played an important role in increasing awareness on emission reductions. It is since then that almost the entire world – both developed and developing countries started formulating carbon emissions standards and guidelines for controlling harmful gas emissions. Carbon credit is today, one of the most efficient and widely offset solutions that businesses globally are increasingly adopting.

Carbon Markets – Compliance & Voluntary Markets

Carbon markets have been successful in controlling GHS emissions by enabling their trading to achieve the emission limits. There are predominantly two types of carbon markets – the compliance market and the voluntary market.

The compliance carbon markets are those developed as part of a nation’s / region’s obligation to cut their emission or bring it under a defined gap, with this limit being set up global accord like Kyoto Protocol or Paris Climate Change accord. European Union Emission Trading System (EU ETS), Western Climate Initiative (WCI) & Regional Greenhouse Gas Initiative (RGGI) – both operating in North America – are some of the major examples of mandatory carbon markets. Under this, countries that are signatory to accords like Kyoto Protocol must take steps to lower their emissions.

This must be done either through imposing carbon tax or setting up a mandatory carbon market. The allowances or permits that form the core of these markets are termed as Compliance Emission Reduction (CER) credits.

On the other hand, voluntary markets are those in which companies / other entities take measures to lower their carbon footprint as part of their own initiatives (CSR/ improving reputation etc). The credits in this markets are termed as Voluntary Emission Reduction (VER) credits.

Compliance markets are created and regulated by mandatory national, regional, or international carbon reduction regimes. Voluntary markets function outside of compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis with no intended use for compliance purposes.

Evolution of the Carbon Markets

The carbon credit market is in fact all set up amp up in the next few years owing to multiple factors including increased implementation of Article 6.4 and 6.2 and increased regulations of the emission trading schemes globally. The improvements in the trade and post-trade infrastructure of the carbon market in addition to the rising demand from end-user industries will lead to greater consolidation and growth of the carbon market.

According to the most recent Carbon Credit report by D&B, the global market for compliance carbon credit is estimated to be worth € 238 Billion, with annual trading volume estimated to be 10.7 billion giga tons (Gt). The global volume of carbon credits traded reached 188 Million tons CO2 eq (tons carbon dioxide equivalent) in 2020, taking the annual traded value to $ 473 Million. During the first eight months of 2021 (January – August), a total of 239 credits were traded, equivalent to trade value of $ 748 Million, touching record highs.

The Indian Carbon Market

CDM projects have helped India in developing projects that qualify for voluntary carbon credits. However, compared to developed markets like the US, the Indian Crabon market is still in its infancy. Key factors that can help establish a transparent and vibrant carbon market in India and facilitate the country’s carbon neutral growth path and attainment of its NDC goal include:

1. A national legislation by Parliament to pave the path for formation of requisite market systems and legitimization of National Carbon Registry & National Carbon Market to meet the country’s commitments under Nationally Determined Contribution (NDC)

2. Respective line ministries, which may include MOEFCC, MoP, MoF, Ministry of Commerce and Industry, etc, to effectively form the national policy for formation of National carbon market.

3. Regulation to be brought in on urgent basis to formulate the rules for operation of such carbon market. The market should be effectively sink with National Carbon Registry.

4. Effective level playing field to support private sector participation in origination of carbon emission reductions (projects) and country endorsement to participate in International Voluntary Carbon trading, bringing the requisite FDIs in India.

5. In recent future, with the advent of operational modalities under Article 6 Supervisory Body of UNFCCC and it’s administered International Carbon Registry, the Indian National Carbon Registry should effectively be linked on real-time basis with International Carbon Registry The Onward Joruney.

Tackling climate change has become a global challenge with COPs expanding the wolrd participation from select nations (in Kyoto Protocol) to over 197 countries (in Paris Accord). As carbon credit continues to emerge as a key instrument in addressing climate change, th ecarbon market is expected to grow at a steady pace in the next few years. Given that carbon credits are generated from targetted carbon reduction projctes, the growth of the market would translate into an effective and structred reduction of emission from the atmosphere enabling to planet to transition to a net-zero future and a greener, safer life on it.

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