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Ecology & Environment
Mahesh

18/12/24 11:17 AM IST

Carbon Market

In News
  • COP29, the ongoing climate conference in Azerbaijan’s capital Baku, has given a fillip to the idea of using carbon markets to curb carbon emissions.
Carbon Market
  • A carbon market is a market that allows the buying and selling of the right to emit carbon into the atmosphere.
  • Suppose a government wants to limit the amount of carbon emitted into the atmosphere.
  • It can issue certificates called carbon credits that allow the holder of the certificate to emit a certain amount of carbon into the atmosphere.
  • One carbon credit is equivalent to 1,000 kilograms of carbon dioxide.
  • By limiting the number of carbon credits that are issued, governments can control how much carbon is released into the environment.
  • It should be noted that anyone who doesn’t hold carbon credits to their name would not be allowed to emit any carbon into the atmosphere.
  • Carbon credits were first used in the 1990s in the U.S., which introduced the cap-and-trade model to control the emission of sulphur dioxide.
  • Individuals and firms that hold carbon credits but don’t actually need them for any reason can sell their credits to interested buyers.
  • The price at which these carbon credits are traded is determined by market forces, which in this case are the supply of carbon credits and the demand for these certificates.
  • A carbon market can also include the trading of carbon offsets.
  • In this case, a business that pollutes the environment for example, can purchase carbon offsets sold by an environmental NGO that promises to plant trees that suck a certain amount of carbon emissions out of the atmosphere for each offset that it sells. 
Advantage of Carbon market
  • Pollution of the environment and climate change caused by carbon emissions is a classic case of what economists call an externality.
  • An externality is caused when the cost of an economic activity is not properly accounted for (or internalised) by the market price system due to the absence of well-defined property rights. For example, a business that uses raw materials such as iron will have to pay the supplier who owns the iron to be able to procure and use it, thus incurring a certain cost.
  • But when the same firm emits carbon into the atmosphere, it doesn’t usually have to pay any money to anyone.
  • In other words, firms are generally able to emit their waste into the atmosphere for free.
  • This of course leads to unhindered pollution of the atmosphere as firms in this case have no financial incentive to curb their carbon emissions.
  • Carbon markets in which the right to pollute is traded for a price can solve the problem by imposing a certain cost on firms for polluting the atmosphere, helping to curb emissions in the process. 
  • The intersection of standardised accounting frameworks and technological advancements has improved the ability of corporations to monitor and report their carbon emissions.
  • While, this is difficult for the vast majority of small businesses in the developing world, particularly in accurately capturing supply chain emissions, ongoing developments, like real-time data tracking of the energy sector, continue to enhance the granularity and reliability of corporate carbon accounting.
  • However, corporations have preferred a voluntary reporting system, like the Carbon Disclosure Project.
  • They have been loathe to government interventions limiting carbon emissions, arguing that such budgeting may lead to output restrictions or rise in costs.
  • They also point to varied production processes, some that might have diverse supply chains that might make it difficult to find the optimal carbon budget for their facilities.
  • Large multinational corporations such as ExxonMobil and General Motors have advocated for carbon markets that allows free trading of carbon credits among firms at a price determined by market forces, that would allow these firms to purchase carbon credits from other firms, which don’t need them as much.
  • This they say, helps allocate carbon credits more efficiently than government diktat. 
Source- The Hindu

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