CARBON TRADING AND INDIA'S ROAD MAP
INTERNATIONAL JOURNAL OF ENVIRONMENT,AGRICULTURE AND BIO-TECHNOLOGY
CARBON TRADING AND INDIA’S ROAD MAP
Dr.Debesh Bhowmik(Retired principal and Former Associate Editor-Arthabeekshan-the journal of Bengal Economic Association)
In this article, the author describes the concept of carbon trading , its global market ,mechanism of global trading, international organization, EUETS, relationship between REDD and carbon market in relation with agreements of Paris convention. The 10 myths of REDD+ and carbon market are additional features which can explore future research. The paper highlighted India’s roadmap for carbon market potentiality in 2020.
Key words – carbon trading, global carbon market, REDD, India’s road map
I.What is Carbon Trading
Carbon trading is the buying and selling of a new, artificially-created commodity – the right to emit carbon dioxide. Unlike trading in other commodities like crude oil or bananas, carbon trading is not a voluntary exchange between producers and those who want to consume or sell on the goods. Instead, it results from action by governments to create this new commodity – the right to emit carbon – and then to limit the availability of this right in order to create scarcity and therefore a market for it.
Carbon trading is one of a number of different approaches that have been developed and adopted by governments as a means of controlling the amount of carbon dioxide that is emitted into the atmosphere and reducing this amount over time. It is based on the broader approach, purportedly to control the emission of pollutants, known as ‘cap and trade’.
Cap and trade is often referred to as a market-based mechanism and contrasted with a different set of tools available to governments to influence behaviours, those which come under the umbrella of direct regulation or standard setting. However, this contrasting of market-based and non-market-based approach is sometimes unhelpful. It ignores the fact that market mechanisms do not operate in a vacuum. Instead, they always take place in a social and economic environment underpinned by various government laws and regulations and often require these laws in order to be effective. Carbon trading is a case in point. Carbon markets are directly created by government regulation.
Perhaps a more useful distinction for the purposes of this report is that between direct and indirect mechanisms. Carbon trading can be classed as an indirect tool as it is supposed to achieve its purpose of reducing emissions indirectly by affecting the price of those emissions. This in turn affects the behaviour of ‘actors’ in the market, i.e. those responsible for producing the emissions, by creating an incentive for them to save money by reducing their emissions and hence change their behaviour. In contrast, government regulation and standard setting are direct interventions to change behaviour, not reliant on intermediate mechanisms such as prices. Taxation is an indirect mechanism as it aims to change behaviour through affecting the price of a good, service or activity. However, it is arguably less indirect than trading as governments fix the price with a tax whereas with trading the price is determined by the market.
The carbon trade is an idea that came about in response to the Kyoto Protocol. The Kyoto Protocol is an agreement under which industrialized countries will reduce their greenhouse gas emissions between the years 2008 to 2012 to levels that are 5.2% lower than those of 1990.
The idea behind carbon trading is quite similar to the trading of securities or commodities in a market place. Carbon would be given an economic value, allowing people, companies or nations to trade it. If a nation bought carbon, it would be buying the rights to burn it, and a nation selling carbon would be giving up its rights to burn it. The value of the carbon would be based on the ability of the country owning the carbon to store it or to prevent it from being released into the atmosphere. A market would be created to facilitate the buying and selling of the rights to emit greenhouse gases. The industrialized nations for which reducing emissions is a daunting task could buy the emission rights from another nation whose industries do not produce as much of these gases. The market for carbon is possible because the goal of the Kyoto Protocol is to reduce emissions as a collective.
On the one hand, the idea of carbon trade seems like a win-win situation: greenhouse gas emissions may be reduced while some countries reap economic benefit. On the other hand, critics of the idea suspect that some countries will exploit the trading system and the consequences will be negative. While the proposal of carbon trade does have its merits, debate over this type of market is inevitable since it involves finding a compromise between profit, equality and ecological concerns.
The carbon market is one of the most effective policies for tackling climate change. It inspires operational excellence and incentivizes business investments in low-carbon technologies. Not only is the market expected to save over 2 billion tones of CO2 emissions by the end of 2012, but the development of the current global carbon market, now worth over US$140 billion, has catapulted climate change to the forefront of business decisions. But while it exhibits real environmental and economic impact, and helps achieve climate change goals, it remains vulnerable to external factors.
The Harnessing demand for Indian projects post-2012 are :
1. Supporting projects through domestic emission trading scheme –
2. Supporting projects through NCEF and CSR funds of large companies
3. Developing standardized baselines
4. Developing sustainable development impact reporting
5.Evaluating and highlighting the benefits of CDM projects focusing on sustainable development Impacts
6. Constituting a high level Multi Stakeholder Advisory Group for Climate Change issues
like Loss and Damage, Equity, Sustainable Development, Gender etc
7. Developing NAMAs
8. Developing the capacity for national emission reduction reporting and develop credible
and robust reporting frameworks for corporate carbon reporting–
But there are several causes of delays of maturing projects which are as follows:
[i] One of the major reasons for delays in registration of CDM projects is on account of lack of acceptable guidelines for setting benchmark, lack of institutional capacity, frequent revisions to CDM EB guidelines and lengthy validation cycle
[ii] The delay in registration of CDM projects was due to the increase in CDM projects from India and limited increase in the number of DOEs
[iii] The cement and energy efficiency project-types have higher rejection rate than hydro and wind project-types
[iv]Projects in reforestation, EE household, EE in SME, off-grid solar and agriculture project-types face MRV, organizational and financial barriers.
[v] HFC 23, N2O and landfill gas(where these is no energy generation) projects risk closure post the withdrawal of market support and fall in CER prices
[vi] Goa, Bihar, Jharkhand, Kerala, Jammu & Kashmir, Haryana and North Eastern states have very limited development of CDM projects
The promotion and development of the emission reduction projects will require a combination of the following measures:
[i] Demand-side measures: Given the weak demand for CERs and the uncertain time frame for new market mechanisms, all attempts should be made to revive demand in the existing regulatory framework, particularly for projects registered post 2012.
[ii] Improving sustainable development impacts: Improving the sustainable development impacts
as well as improving communication on the outcomes / impacts of CDM project activities is required for stimulating demand of quality CDM projects and addressing international concerns.
[iii] Efficiency of registration: Once there is a revival of demand, measures should be undertaken
to remove the barriers in CDM project registration while also improving sustainable development impacts.
[iv] Future regulatory mechanisms: Recognizing that CDM is likely to be transitory in nature
and new market mechanisms are likely to be more prominent particularly in the post 2020
carbon markets, measures should be undertaken to develop synergies between CDM, NAMAs
and other market mechanisms.
[v] Supply side measures: Once there is regulatory certainty and robust demand, supply side
measures should be undertaken that encourage larger participation of industry in emerging
global carbon / CDM market.
Therefore, the recommendations below are targeted towards:
A. Harnessing demand for Indian projects post 2012;
B. Achieving better sustainable development for CDM projects;
C. Developing synergies between CDM, NAMAs and other market mechanisms; and
D. Encouraging larger participation of industry in carbon market.
The international carbon market currently faces considerable uncertainties regarding its future architecture. There are a number of options for further development,including a global trading approach building on Kyoto, formal linkages of domestic ETS leading to a global CO2 market, and indirect linkages through credits if domestic ETS remain otherwise unconnected. Also, a mixed approach is conceivable. Regions should share a common understanding on the overall
climate policy goal (e.g., the 2°C target) as well as a burden-sharing rule translating into ETS caps. These two fundamental issues will crucially determine the level of ambition of an ETS as expressed in (a) the emission cap, which in combination with amount and costs of available abatement options of a region crucially determines the allowance price level; and (b) ETS design features also exerting influence on the allowance price level and environmental outcome. For a player with ambitious environmental targets it should be preferable to announce that it will link only under the condition that another system displays a similar level of ambition, thus using the
efficiency and potential reputational benefits from linking as a bargaining chip. Linking to less ambitious regions would undermine the credibility of such announcements. Harmonization of trading systems should start as early as possible in order to enable the option of linking ETS post-2012. For this purpose, ICAP could be a nucleus for such an international clearinghouse.
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