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What are carbon markets and how do they operate?

GS Paper 3

Syllabus: Environment and Conservation


Source: TH 

Direction: The article tries to explain carbon markets, their types, significance and challenges to carbon markets. For details about the Energy Conservation (Amendment) Bill, 2022, kindly visit this page.

 Context: The Parliament passed the Energy Conservation (Amendment) Bill, 2022, declining the Opposition’s demands to send it for scrutiny to a parliamentary committee amid concerns expressed by members over carbon markets.



  • The Bill amends the Energy Conservation Act, 2001, to empower the Government to establish carbon markets in India and specify a carbon credit trading scheme.
  • In order to keep global warming within 2°C, global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% by 2030.
  • Nearly 170 countries have submitted their nationally determined contributions (NDCs are targeting to achieve net-zero emissions) under the 2015 Paris Agreement, which have to be updated every 5 years.
  • In order to meet their NDCs, one mitigation strategy is becoming popular with several countries – carbon markets. The Paris Agreement provides for the use of international carbon markets (yet to kick off) by countries to fulfil their NDCs.
  • In the past, developing countries, particularly India, China and Brazil, gained significantly from a similar carbon market under the Clean Development Mechanism (CDM) of the Kyoto Protocol, 1997.


What are carbon markets?



  • They are essentially a tool for putting a price on carbon emissions and establishing trading systems where carbon credits or allowances can be bought and sold.
  • A carbon credit is a kind of tradable permit that equals (as per the UN) one tonne of carbon dioxide removed, reduced or sequestered from the atmosphere.
  • Carbon allowances or caps are determined by countries or governments according to their emission reduction targets.


Types of carbon markets:

  • Voluntary markets: These markets are those in which emitters (corporations, private individuals, etc) buy carbon credits to offset the emission of one tonne of CO2 or equivalent GHGs.
    • Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
  • Compliance markets (cap and trade): These are set up by policies (means officially regulated) at the national, regional, and/or international levels.
    • Entities in this sector are issued annual allowances or permits by governments equal to the emissions they can generate.
    • If companies produce emissions beyond the capped amount, they have to purchase additional permits, either through official auctions or from companies which emit below the limit.
    • Through this kind of carbon trading, companies can decide if it is more cost-efficient to employ clean energy technologies or to purchase additional allowances.
    • Today, compliance markets are most popular in the EU and China launched the world’s largest emission trading system (ETS) in 2021.


Significance of these markets: They may –

  • Promote the reduction of energy use
  • Encourage the shift to cleaner fuels
  • Reduce the cost of implementing NDCs (WB – By $250 billion by 2030)


Challenges to carbon markets:

  • Double counting of GHG reductions
  • Quality and authenticity of climate projects that generate credits
  • Poor market transparency
  • There are also concerns about greenwashing – companies may buy credits to offset their carbon footprints rather than reducing overall emissions or investing in clean technologies.


Conclusion: For carbon markets to be successful, emission reductions and removals must be real and aligned with the country’s NDCs and there must be transparency in the institutional and financial infrastructure for carbon market transactions.


Insta Links:

Bill to amend energy conservation act introduced in RS


Mains Links:

Q. “Access to affordable, reliable, sustainable and modern energy is the sine qua non to achieve Sustainable Development Goals (SDGs)”. Comment on the progress made in India in this regard. (UPSC 2018)