Understanding Carbon Credits: A Pathway To Climate Solutions

The term ‘carbon credit’ has become well known in the battle against climate change, in the years. Carbon markets have emerged as a tool as the world addresses the necessity to lower greenhouse gas emissions. This blog delves into how they work and discusses their pros and cons as their growing importance, especially, in India.

In the world of carbon trading lies the carbon market – a place where carbon credits are exchanged to combat greenhouse gas emissions, like carbon dioxide (CO₂). By issuing carbon credits in these markets and investing in projects that mitigate or capture CO₂ emissions can help offset one’s greenhouse gas footprint. A concept embraced by businesses and governments, in both voluntary and mandatory emission reduction programs.

Carbon Credits: The Building Blocks

A carbon credit represents one metric ton of CO₂ or an equivalent amount of other greenhouse gases reduced, sequestered, or avoided. Main ways involve:

• Reafforestation/Afforestation: Plantation to absorb CO₂.
• Renewable Energy: Solar, wind, and hydro projects reduce fossil fuel consumption.
• Energy Efficiency: Saving energy in buildings and industries.
• Methane Capture: Methane not let out to atmosphere from landfills, and agriculture.
• Sustainable Agriculture: Reduced methane emission and improving the health of soils.

These credits form the very basics of carbon markets. Carbon markets encourage emission reductions besides promoting sustainability.

Types Of Carbon Markets

• Compliance Markets: Government-imposed markets, in which firms must purchase credits as a mechanism to achieve legally set emission reduction levels. For example, the European Union Emissions Trading System (EU ETS) is a compliance market, with a global value over $850 billion as of 2023.
• Voluntary Markets: The market for voluntary markets mainly comprises organizations and individuals buying credits to offset their carbon footprint, often as corporate social responsibility or in a quest to achieve carbon neutrality. The voluntary market is still estimated at around $2 billion in 2022 but expected to grow significantly by 2030.

Key Concepts In Carbon Markets

• Additionality: This means that the project should help reduce carbon emissions more than would have happened if the project didn’t exist. It’s like making sure your effort truly adds something extra
• Permanence: Cuts in emissions should be long-lasting, rather than easy reversals. Think of it as planting a tree that will stand tall for years, not one that withers away soon
• Verifiability: In this respect, carbon credits must be verified and validated by a third party. It’s like having an examiner verify whether your homework is correct or not

India’s Role In The Carbon Market

India has been a key player in global carbon markets, primarily through the Clean Development Mechanism (CDM) under the Kyoto Protocol. However, recent developments have seen India move beyond CDM to establish its own robust carbon market framework. The Carbon Credit Trading Scheme (CCTS), introduced in 2022, aims to regulate carbon trading and support India’s ambitious climate goals. The scheme is set to be formally launched in 2026, with the goal of covering 55% of India’s annual emissions under the compliance scheme once fully operational.

India’s private sector has been a significant player in the carbon market, contributing almost two-thirds of climate mitigation investment. The country has also been a major exporter of carbon credits, with corporate retirement data showing that 61 million Indian-generated credits were retired abroad in the past decade. However, domestic demand remains relatively low, and the new CCTS aims to boost this by creating a robust national framework for carbon trading.

The Benefits Of Carbon Markets

Carbon markets present several benefits in addressing climate change:

• Emissions Reduction: Markets can provide financial incentives for companies to implement low-carbon practices by placing a price on carbon.
• Economic Growth: Carbon markets encourage investment in clean technologies, fostering innovation and creating green jobs.
• Technology and Innovation: Markets can drive the development and deployment of technologies to reduce emissions.
• International Cooperation: Carbon markets facilitate collaboration between developed and developing countries in addressing climate change.

Some Thoughts From A Book

In The New Climate War climate scientist Michael Mann highlights the potential of carbon markets but warns against seeing them as a complete solution. He critiques the fossil fuel industry’s tactics to shift responsibility for climate change onto individuals, instead of focusing on systemic change and holding major polluters accountable. Mann argues that individual actions, while important, cannot replace the need for comprehensive governmental policies and corporate responsibility. He warns that if not properly regulated, carbon markets might allow large emitters to continue polluting while paying for cheaper offsets that do not address the root causes of the crisis. A few key points raised include:

• Delay Tactics By Corporations: Fossil fuel companies use tools like carbon footprint calculators to distract the public from the need for stronger climate policies.
• Greenwashing: Some corporations participate in carbon markets without making significant emissions reductions, undermining market effectiveness.
• Role Of Governments: Stronger governmental regulations are necessary to ensure carbon markets complement broader climate strategies.

Carbon Sinks: Nature’s Carbon Absorbers

Certain ecosystems, known as carbon sinks, absorb more carbon than they release. These include:

• Forests: Particularly tropical rainforests, which sequester large amounts of CO₂.
• Oceans: Marine ecosystems absorb significant amounts of CO₂, with phytoplankton playing a crucial role.
• Peatlands and Wetlands: These areas store vast quantities of carbon in their soil and vegetation.

Understanding and preserving these natural carbon sinks is essential for maintaining the balance of greenhouse gases in the atmosphere.

Challenges And Criticisms

Despite their potential, carbon markets face several challenges:

• Hot Air Credits: Some credits represent reductions that would have happened anyway, failing to drive meaningful additional reductions.
• Double Counting: The same emission reduction may be claimed by multiple entities, reducing market credibility.
• Incentivizing Low-Cost Over High-Impact Reductions: Markets may prioritize the cheapest options rather than the most effective long-term measures.
• Lack of Transparency: Ensuring that projects delivering carbon credits are transparent and credible is critical to maintaining trust, and that the community on the ground is getting the benefits of it.

Climate experts recognise the potential of carbon markets to drive innovation and reduce emissions. Dr. Rajendra Pachauri, former chair of the Intergovernmental Panel on Climate Change (IPCC), states, “Carbon markets can be a powerful tool, but they must be part of a broader strategy that includes stringent regulations and technological advancements.” Professor Nicholas Stern, a leading economist, adds, “The success of carbon markets hinges on robust monitoring and verification processes to ensure real and lasting emission reductions.”

The Future Of Carbon Markets

Mann’s argument underscores the importance of carbon markets as part of a larger climate strategy that includes systemic reforms, regulatory changes, and technological advancements. Governments must ensure that carbon markets contribute to genuine emissions reductions and do not serve as a mechanism for polluters to avoid responsibilities.

• Carbon Pricing: Governments should explore higher carbon pricing mechanisms to make polluting more expensive and spur faster innovation in low-carbon technologies.
• Sustainable Development Goals: Well-designed carbon markets can contribute to the United Nations Sustainable Development Goals (SDGs), promoting clean energy and reducing inequality.
• Climate Change Mitigation: Besides carbon markets, expanding renewable energy, improving energy efficiency, and developing sustainable transport are crucial strategies.

* Cover photo is clicked by India Fellow Sreekanth who worked along with the author Rohan in the same organization – Sahjeevan in Kutch region of India