Why in the News?

India and Japan plan to sign a Memorandum of Cooperation for setting up a Joint Crediting Mechanism (JCM) with emission reduction credits being shared.

What’s in Today’s Article?

• Background (Need for Carbon Credit Mechanism)
• About Carbon Markets (Meaning, Utility, Types, India’s Scene, Legislative Push in India)
• News Summary (Key Highlights of JCM Between India-Japan)

Background:

• In order to keep global warming within 2°C, ideally no more than 1.5°C, global greenhouse gas (GHG) emissions need to be reduced by 25 to 50% over this decade.
• Nearly 170 countries have submitted their nationally determined contributions (NDCs) so far as part of the 2015 Paris Agreement, which they have agreed to update every five years.
  • NDCs are climate commitments by countries setting targets to achieve net-zero emissions.
  • India, for instance, is working on a long-term roadmap to achieve its target of net zero emissions by 2070.
• In order to meet their NDCs, one mitigation strategy is becoming popular with several countries i.e. carbon markets.
• Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfil their NDCs.

What are Carbon Markets?

• Carbon markets are essentially a tool for putting a price on carbon emissions— they establish trading systems where carbon credits or allowances can be bought and sold.
• A carbon credit is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
• Carbon allowances or caps, meanwhile, are determined by countries or governments according to their emission reduction targets.
• A United Nations Development Program release this year noted that interest in carbon markets is growing globally, i.e., 83% of NDCs submitted by countries mention their intent to make use of international market mechanisms to reduce greenhouse gas emissions.

Two types of Carbon Markets:

• Compliance Market:
  • These are set up by policies at the national, regional, and/or international level— are officially regulated.
  • 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 permit, either through official auctions or from companies which kept their emissions below the limit, leaving them with surplus allowances.
  • The market price of carbon gets determined by market forces when purchasers and sellers trade in emissions allowances.
• Voluntary Market:
  • These are markets in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO2 or equivalent greenhouse gases.
  • Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
  • In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.

Carbon Market in India:

• In the past, India has made investments in producing carbon credits and exporting them to international enterprises.
• Between 2010 and June 2022, India issued 35.94 million carbon credits or nearly 17% of all voluntary carbon market credits issued globally.
• However, the government now intends to forbid its exports, guarantee the expansion of a local domestic market for carbon credits, and increase its internal trade.
• Currently, India’s carbon market is a voluntary carbon market where private parties voluntarily exchange certified reductions of GHGs from the atmosphere for carbon credits.

Legislative Push:

• The Parliament passed the Energy Conservation (Amendment) Act, 2022 aimed at putting in place provisions to make the use of clean energy mandatory and paving the way for the setting of carbon markets in the country.
  • Through the amendment of the Energy Conservation Act, the Central government aims to develop India’s Carbon market and boost the adoption of clean technology.
• The Act empowers the central government to specify a carbon credit trading scheme.
• The central government or any authorized agency may issue carbon credit certificates to entities registered under and compliant with the scheme.
• The entities will be entitled to purchase or sell the certificate.

Challenges of Domestic Carbon Trading Mechanism:

• The most significant challenge is monitoring carbon credits and maintaining oversight.
  • Carbon credit projects are often widespread and located in remote areas, making it difficult for the governing body to oversee without relying on potentially biased information from project developers or third-party verification agencies that may not always be trustworthy.
• Another major issue is additionality, which international markets also struggle with.
  • Ideally, carbon credits should be issued for emission reductions that wouldn't have happened otherwise.
  • However, this is hard to determine.
  • For instance, if solar power is cheaper than coal in India, should a company switching from coal to solar be awarded carbon credits for emissions avoidance if the switch was motivated by commercial benefits rather than environmental reasons?

 India, Japan Plan Joint Carbon Crediting Mechanism:

• India is looking to enter into a carbon trading and carbon credit adjustment mechanism with Japan.
• The two countries plan to sign a Memorandum of Cooperation for setting up a Joint Crediting Mechanism (JCM) with emission reduction credits being shared
• The JCM will be formed under Article 6.2 of the Paris Agreement.

Key Features of the JCM:

• A joint committee will be established to develop rules and guidelines for the JCM, covering project cycle procedures, methodologies, project design documents, monitoring, and designation of third-party entities.
• Decisions on project registration, crediting periods, credit sharing, and issuance will be made with prior confirmation from both the Japanese and Indian governments.
• The governments recognize that JCM credits from emission reductions and removals will contribute to the nationally determined contributions (NDCs) of both countries, ensuring no double counting occurs.
• Part of the JCM credits can also be authorized for international mitigation purposes.
• The two countries will confirm project registration before the joint committee makes a decision, and they will determine the percentage of credit allocation.
• Additionally, Japan will support technology transfer, finance, and capacity building for the JCM.