Approach:

Introduction-Explain the concept of carbon markets.

Body: State their significance and mention challenges.

Conclusion: Steps taken by the Government of India.

Answer:

To keep global warming within 2 degrees Celsius, multiple steps are being promoted to limit carbon emissions like NDCs (Nationally Determined Contributions). To meet NDCs, Carbon Markets are used as a tool for putting a price on carbon emissions by establishing a trading system where carbon credits (a tradable permit, equal to one tonne of CO2 removed, reduced or sequestered from the atmosphere) can be bought and sold.

They broadly are of two types:

1. a) Compliance Markets: officially regulated - set up by policies at the national, regional and International Levels. For example, the EU's emissions trading system (ETS) – operates under a principle of cap-and-trade.
2. b) Voluntary Markets: corporations and private individuals buy and sell carbon credits. For instance, airlines may purchase carbon credits from an entity in projects that reduce, remove, capture, or avoid emissions to offset their carbon footprints.

Significance:

• Limit industrial emissions and reduce carbon intensity in the economy.
• Will promote energy efficiency to sell credits by trading.
• Will help encourage a shift to cleaner fuels like achieving 500 GW of renewable energy capacity by 2030.
• Less fiscal burden on the government to implement reduction Goals.
• Will lead to better environmental accounting while calculating economic growth.
• Move towards the achievement of net zero emissions by 2070.

Challenges:

• The problem of double counting of reductions.
• Lack of transparency in markets as alleged under the Clean Development Mechanism of Kyoto leads to trust issues.
• Questions on the quality and authenticity of climate projects that generate carbon credits lead to concerns of greenwashing (false labelling just for marketing purposes).

Government of India has come up with a stabilisation fund to decrease volatility in prices and bolster the carbon trading market. Aligning the market with our Nationally Determined Contributions along with ensuring transparency in institutional and financial infrastructure for transactions can help us move towards Net zero targets to stand as an example( Vishwaguru) for the world to follow