What’s in Today’s Article?

• About Carbon Market (Meaning, Mechanism, Benefits, Criticism, Industry/Govt. Perspectives etc.)

What is a Carbon Market?

• A carbon market is a system that allows the buying and selling of the right to emit carbon dioxide (CO2) into the atmosphere.
• Governments issue carbon credits, where one credit equals 1,000 kilograms of CO2 emissions.
• The idea is to control the total carbon released by limiting the number of carbon credits issued.
• Firms or individuals exceeding their emission quotas must buy additional credits from those who emit less than their allowance. This trading creates a financial incentive to reduce emissions.
• The concept first emerged in the 1990s in the U.S., using a cap-and-trade model to regulate sulphur dioxide emissions.
• Now, carbon markets are expanding to include carbon offsets, where businesses pay for environmental projects like tree planting to compensate for their emissions.

Benefits of Carbon Markets:

• Internalizing Externalities: Emissions are a classic externality, where businesses do not bear the cost of the pollution they cause. Carbon markets impose a price on emissions, motivating companies to reduce their carbon footprint.
• Market Efficiency: Allowing the trading of credits ensures that firms with lower costs of reducing emissions take more action, optimizing resource allocation.
• Improved Monitoring: Technological advancements have enhanced the tracking and reporting of emissions, making the system more reliable.

Criticism and Challenges:

• Manipulation of Supply: Governments might issue excessive credits, reducing their price and failing to curb emissions effectively.
• Lack of Incentives: Firms may engage in virtue signalling by purchasing offsets without ensuring real emission reductions.
• Voluntary Systems: Large corporations often resist government-imposed budgets, preferring voluntary frameworks like the Carbon Disclosure Project.
• Economic Impacts: Critics argue that restricting carbon credits might slow economic growth.

How Carbon Markets Work?

• Cap-and-Trade: Governments set a cap on total emissions and issue credits accordingly. Companies that emit less can sell their unused credits to others.
• Carbon Offsets: Businesses pay for environmental initiatives, such as afforestation, to offset their emissions.
• Price Determination: Market forces of supply and demand decide the price of carbon credits.

Global Perspective and the Role of COP29:

• The ongoing COP29 Climate Conference in Baku has approved standards to establish an international carbon market, potentially operational next year.
  • COP stands for Conference of the Parties and it often refers to the United Nations Framework Convention on Climate Change (UNFCCC) international meeting focusing on climate.
• This move aims to harmonize global efforts to curb emissions and align with the Paris Agreement

Criticisms of Carbon Offsets:

• Efficacy Concerns: Some argue offsets are more about public image than actual impact.
• Lack of Verification: Ensuring that projects genuinely offset emissions remains a challenge.

Industry and Government Perspectives:

• Large corporations like ExxonMobil support market-based mechanisms over government controls, arguing for flexibility and cost-efficiency.
• Governments must balance environmental objectives with economic growth, navigating complexities in regulating and monitoring emissions.

Conclusion:

• Carbon markets offer a promising tool for mitigating climate change by assigning economic value to carbon emissions.
• However, their success depends on robust regulation, transparency, and genuine commitment from all stakeholders.
• By addressing the criticisms and refining the system, carbon markets can significantly contribute to achieving global climate goals.