Polluter Pays 2.0: How Carbon Credits Can Mitigate Climate Change and Incentivize Renewable Energy

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The greatest existential threat to humanity today is perhaps climate change.

Unlike theological predictions of an apocalyptic end to the human race, the scientific community purports global warming and pollution as contributors to a manmade catastrophe. As weather patterns turn erratic all over the world, the reality of climate change becomes starker every day.

Experts have issued warnings about the gradual encroachment of global warming and its fatal consequences. Pollution, a significant, contributor to increased greenhouse gas (GHG) emissions, has increased globally and policy makers are scrambling for a solution.

The guidelines of the 1992 Rio Convention identified ‘Polluter Pays’ as a means to penalize polluters and compel them to adopt eco-friendly technologies. While the principle proposed a carbon tax levied on all businesses causing pollution, a more affirmative solution was also incorporated.

This was the idea of carbon credits.

What is a carbon credit?

A carbon credit is an internationally recognized instrument used to mitigate the effects of GHG emissions. Each carbon credit is a tradable permit or certificate secured by an emitter for the right to release one tonne of carbon dioxide or carbon dioxide equivalent gases into the atmosphere.

In effect, the polluter pays a price to pollute.

However, such emissions are permissible to a certain limit that is periodically recalibrated. Any emission by a buyer of carbon credits is offset by the seller. The seller has accrued carbon credits by investing in renewable energy, reducing pollution, and conserving the environment.

A high GHG emitting country can purchase the right to emit more from a country with lower emissions. The process of compensating for emissions by providing funds to green energy projects is referred to as carbon offsetting.

Carbon Trading - The Story Watch
Source: UNEP

Under the Kyoto Protocol, three mechanisms for countries to achieve targets have been enumerated:

  • Emissions Trading: Allows countries with surplus emission units (when emission levels are low) to sell the capacity to counties exceeding their targets. Carbon credits and carbon markets are set up under it.
  • Joint Implementation: Allows a country with emission limitations to earn an emission reduction unit (ERU) from the emission reduction project of another country
  • Clean Development Mechanism: Allows a country exceeding its emission limits to set up a renewable energy project in an emission deficit country, earning a sellable certified emission reduction (CER)

Thus, emitters are financing efforts to combat climate change by paying for the right to pollute themselves.

Carbon Credit as Incentive

The buying and selling of carbon credits on a market similar to conventional stock/commodity markets is known as carbon trading. Carbon trading developed as a result of the ‘clean development mechanism’ (CDM) of the Kyoto Protocol in 1997. The protocol sought a reduction in GHG emissions by thirty-eight nations between 2008 and 2012 to 5.2% or below their 1990 levels.

This set up the expectation that past large-scale emitters would buy credits from developing nations to comply with the protocol. The US and the EU, for example. It could pave way for a ‘compliance market’ to abide by the CDM and also lead to a ‘voluntary market’ for environmentally sound entities participating of their own will.

Carbon Trading 2 -The Story Watch
How does Carbon Trading Work?

At all times the number of credits or permits is capped at the limit to achieve the emission reduction targets. Generally, at the start of a trading period is initiated by the allocation of all credits to businesses for free or through an auction. Since the number of permits are limited, often over time the available credits begin to decrease. This asserts pressure on industrial players and participating corporates to devise a strategy geared towards cleaner production and to reduce carbon dioxide emissions.

The process ultimately lays the ground for technological innovation and making them available at lower costs.

Since the carbon market is fairly global, an emitter in one country is free to purchase carbon credits from another nation. This is done to secure its targets. For instance, a thermal power plant may invest in cleaner projects elsewhere. The company can choose to invest in clean energy in the second country while sustaining its business back at home. Hence, the funds collected through carbon tax and the compliance initiatives under the CDM can jointly help mitigate the destructive impact of global warming.

Different nations and jurisdictions employ one or more methods to animate carbon trading. They also provide energy subsidies, tax breaks, and tariff cuts to incentivize businesses engaged in green energy production.

Carbon Trading in India

As of now, there is no official carbon market regulating carbon trading in India. In the absence of an established market or price policy, it has devised two different modes of trading systems. These are the ‘Perform, Achieve, and Trade’ (PAT) system, which encourages increasing energy intensity at low costs. The second one is the ‘Renewable Energy Credit’ (REC) system, which follows credit transaction between parties with varying emission levels.

COP 25 at Madrid - The Story Watch
COP 25 at Madrid

A balanced trading apparatus incorporating the features of both these domestic systems could become the future mainstream carbon market in India.

In the long-term, the Indian government expects the implementation of a pilot emissions trading system, which will focus on particulate emission reduction.

Certain non-profit organizations like Verra and Gold Standard enable the trade of carbon credits globally. The Verra Registry, established in April 2020, provides a platform for information listing on certified projects, tracks issued and retired units, and facilitates carbon units trading. Similarly, the Gold Standard Impact Registry, follows a wholesome approach to resolve emission issues by tracking environmental assets (e.g. carbon credits) and the related impaction sustainable development projects worldwide.

Both these independent organizations work with businesses and non-corporate stakeholders to streamline the market of carbon credit trading.

India, like some of the other developing nations, has been investing heavily in renewable energy to limit its carbon footprint and preserve the environment. To that effect, we have witnessed an upscaling of low carbon-intensive technologies in recent years in the country. As a result, India has earned several million carbon credits or emission reduction certificates (CERs).

Efforts Besides Carbon Trading

In 2019, keen to sell these credits in the international market, India participated in the UN Climate Change Conference or COP 25 in Madrid. But the conference remained inconclusive about rules for trading carbon credits. Thus, India’s efforts to accelerate its carbon market have not gathered much pace. However, it has achieved significant gain ever since the Kyoto Protocol.

  • In the wake of the coronavirus pandemic, India’s carbon dioxide emissions fell drastically by 30 percent. This is far more than the global average of 17 percent. It is so because of forced lockdown, but there is scope to maintain optimum emission levels through renewable energy development.
  • Solar energy is the cheapest renewable energy source available in India. As a signatory of the Paris Agreement on Climate Change, the government has set several ambitious targets. These targets need to comply with the emission limits specified. The grid relied on inexpensive renewable sources, resulting in a decrease in coal utilization.
  • PM Narendra Modi claims that India has reduced its emission intensity by 21 percent over 2005 levels.

Our renewable energy capacity is the fourth largest in the world. It will reach 175 gigawatts before 2022.

PM Narendra Modi at virtual event commemorating five years of the Paris Agreement
  • The quick-paced scaling up of renewable energy projects makes India one of the front-runners in resolving global warming. This is possible while adhering to its goal of growth and economic development. Our renewable energy capacity is the fourth largest in the world and estimated to reach 175 gigawatts before 2022.
Path Forward

The coronavirus pandemic has severely compromised the clean energy goals of nations worldwide. As we pull ourselves out of a year of sluggish economic growth, it is imperative to get back on track to achieve emission reduction. A globalized and streamlined carbon market can serve to secure clean and sustainable economic development for India.

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