The Union Government has introduced the Energy Conservation (Amendment) Bill 2022 in the House of Representatives. The purpose to this Bill is to increase the effectiveness of and strengthen the Energy Conservation Act, 2001. The Amendments are expected to help facilitate the attainment of more ambitious climate goals and guarantee the faster transition towards a low-carbon economy. The Energy Conservation Act, 2001 has been the catalyst that started the first phase of India’s shift to an energy-efficient future. In the past, the energy intensity (energy consumed per unit of GDP) of the Indian economy has declined consistently. But it is now the time to increase this as India begins to implement more ambitious climate actions pledged in the Paris Agreement, there is an need to expand the scope of Act to include tools that can aid in the accomplishment of these lofty goals. One of the changes proposed is to create a national carbon market, which will facilitate trading in carbon credits.
What are the proposed amendments under the Energy Conservation (Amendment) Bill 2022?
The bill has two main goals: (a) It seeks to make it compulsory for an elite group of commercial, industrial and even residential consumers to utilize green energy sources. A specified minimum amount of the energy they consume is to come from renewable or non-fossil fuel sources; (b) It is aimed at helping create a carbon market in the United States and facilitate trade in carbon credits. The goal is to broaden the range of energy conservation to encompass big residential structures as well. In the past, energy conservation rules applied mainly on commercial and industrial complexes.
What is an Carbon Market?
Carbon Markets and Carbon Credits are components of emissions trading, which is a market-based method for reducing the amount of Greenhouse gases (GHG) in the atmosphere. It is a method of providing financial incentives to cut down on the emissions of pollutants that are designated as pollutant. Carbon markets allow corporate and investor to trade carbon credits and carbon offsets simultaneously.
Carbon credits (or allowances) serve as permission slips for emissions. When a business purchases a carbon credit they are granted the right to increase their CO2 emissions. A carbon credit that can be traded is one ton of carbon dioxide or the equivalent of a different greenhouse gas reduced in quantity, stored or eliminated.
Credits are assessed against benchmarks or permitted GHG emissions. If emissions are lower than the permitted limit, the emitter is awarded carbon credits (reducing 1 ton of CO2 will earn one carbon credit). If emissions exceed the limit allowed, the emitter is required to purchase carbon credits from the people who have more credits. So, exceeding the emissions limit will impose a cost (amount spent on purchase of carbon credits) to the emitter. The concept is that this cost will force the emitters to improve their efficiency and reduce emissions.
There are two types of markets for carbon emissions: (a) one is an unregulated market, governed with “cap-and-trade” regulations at both the level of the state and regional levels. (b) The second type is a free market where businesses and individuals buy credits (of themselves) to offset their carbon emissions.
Carbon Markets were granted in the year 1997 under the UN Kyoto Protocol. Its Clean Development Mechanism (CDM) allowed industrialized countries to lower emissions outside of their borders, where it would be less expensive than in their home countries through planting trees in tropical regions.
How can companies offset carbon emissions?
There are a variety of options for businesses to mitigate carbon dioxide emissions. They are broadly classified into (a) Carbon Avoidance/Reduction Projects (i.e., reduce the amount of carbon emitted); (b) Carbon Removal/Sequestration Project (i.e., remove the carbon already emitted from the atmosphere).
In investing in renewable energy through funding wind, hydro, solar and geothermal generation projects and switching to these energy sources as often as possible.
Enhancing efficiency of energy use across all over the world, for example through the provision of more energy efficient cook stoves for people living in more rural or less affluent regions.
Removing carbon from the atmosphere and using it for biofuel production, which creates a carbon neutral fuel source.
Redistributing biomass back to the soil to be used as mulch following harvest , instead of taking it away or burning. This reduces the amount of water evaporating from the soil’s surface, which helps preserve water. The biomass can also feed earthworms and soil microbes, helping nutrients cycle and improve soil structure.
Promoting forest regrowth through tree-planting and reforestation initiatives.
Alternating to other fuel types using biofuels with lower carbon levels such as corn and biomass-derived ethanol and biodiesel.
What’s the state of Carbon Markets across the world?
National or Regional
Carbon markets in the region or at home exist in a variety of places, most notably in Europe, where there is an Emission Trading Scheme (ETS) operates on similar principles. Industrial units in Europe are required to meet emission standards that they have to comply with as well as buy and sell credits on the basis of their performance. China, too, has a carbon market in its domestic market.
A similar incentive scheme to encourage efficiency in energy has been operating in India for over a decade now. In this BEE scheme, dubbed PAT (or perform, achieve and trade) lets units receive efficiency certificates when they exceed the required efficiency standards. They can also purchase certificates to ensure that they continue operating.
International
Under the Kyoto Protocol, carbon markets were implemented at the international level too. In the Kyoto Protocol had prescribed emission reduction targets for a certain group consisting of developed nations (Annex I developed countries). Others did not have specific targets, but in the event that they reduced their emissions, they would be able to earn credits for carbon. These carbon credits could then be sold off to those developed countries which were unable to meet their targets for reduction. The system worked well for a few years. But the market collapsed due to the absence of demands for carbon credits.
In the process of negotiating the new climate treaty that would replace Kyoto Protocol, Kyoto Protocol, the developed nations did not feel the need to follow their targets set under the Kyoto Protocol. Similar carbon markets are being planned for implementation under the new Paris Agreement, but its specifics are still being determined.
What are the advantages of having a Carbon Market?
First, it aids in mitigating the adverse impacts of climate change by reducing the GHG emissions.
There are a variety of benefits of offset projects, including the management of ecosystems, preservation of forests, sustainable agriculture, and renewable energy generation in third-world countries, etc.
Third, the marketplace to trade carbon credits is smaller than the compliance market however, it is expected to become more extensive in the years ahead. It is open to individuals as well as companies and organizations who want to decrease or eliminate their carbon footprint but are not obliged to comply with the law.
Fourth, people are becoming conscious of the significance of carbon emissions. Therefore, they’re becoming increasingly dissatisfied with companies that don’t take Climate change very seriously. By contributing to carbon offset projects, businesses signal to consumers and investors that they’re not paying simply lip service in order to tackle climate change.
Fifth, it opens another revenue stream for eco-friendly companies. For instance, Tesla, the electric automaker has sold carbon credits to older automakers to the tune of $518 million just in the first quarter of 2021.
What are the biggest challenges facing running Carbon Markets?
First, there are concerns concerning the effectiveness of carbon markets in reducing emissions. Some companies simply buy credits, without making an effort to reduce emissions themselves. It’s cheaper to purchase carbon credits than to invest in emission reduction technology e.g., an analysis conducted by the Center for Science and Environment of the PAT scheme used for thermal power plants discovered that the cost of one ESCert* is a lot less than INR 700 — compared to the actual investment of INR 4,020 to be made for reducing energy equal to one tonne equivalent. If the cost of the carbon credits are greater than the cost of the reduction of emissions, there’s no incentive for emitters who are high to try to cut their emissions (i.e., companies are required to spend more buying credits rather than investing in emission reduction technologies).
*(ESCerts are similar to carbon certificates that will be sold and purchased under the carbon market scheme).
In the second, environmentalists claim that only high-quality carbon offsets are efficient in reducing emissions. High-quality carbon offsets possess certain features like (a) Additionality that means emissions reductions have to be added i.e., they would be ineffective without the market for offset credits e.g., a renewable project might be established solely because a major emitter paid for it; (b) Certifiable: There need to be audits that are able to ensure that monitoring, reporting and verification of emission reductions (c) Permanence: The emission reduction should not reverse.
However, many credits available in the marketplaces are of poor quality i.e., they do not fulfill the above requirements. The majority of credits are not ‘additional’ i.e. emissions reduction projects would have been completed even without carbon offset credits (without any chance of project managers to sell carbon offset credits). It is also very difficult to establish ‘additionality’. According to a US-based environmental group more than 60% of credits on the market are from projects that have “questionable claims of additionality”.
In certain cases, the emission reduction is not permanent. There are instances when afforestation projects were undertaken to purchase carbon credits. Later, however, the trees planted were removed, thus reversing the reduction.
Thirdly, the purchase of carbon credits could divert wealthy nations from the goal of reducing their emissions. They could keep emitting and buy inexpensive carbon credits from the developing countries.
Fourth, there has been huge surplus of carbon credits on the market for voluntary carbon credits. According to estimates that credits worth around 1 billion tons of CO2 have been put up to be sold in the market for voluntary sales. But there have been more buyers than sellers. Demand exceeding supply reduces carbon credits’ cost and makes it more easy for emitters offset even as they continue to emit high levels of carbon.
Fifth, it’s difficult to calculate the amount carbon that offset projects reduce (like afforestation or wind energy project). The difficulty is in establishing baseline emissions (Emissions baseline represents what would happen if the project did not occur i.e. that is, what would happen in the absence of this project). This makes it difficult to confirm emission reductions as well as assigning credits for carbon.
India’s PAT (Perform Achieve, Trade) Scheme has failed to result in significant reductions in emissions. According to an analysis conducted by the Center for Science and Environment the reduction in emissions achieved under the scheme has been only 1.57 percent and 1.44% over the two cycles.
What should be done going forward?
The first is the need to establish a nation regulatory body for the environment on the models of SEBi (Stock Market Regulator), RBI (Banking Regulator) in order to ensure carbon markets operate efficiently.
Second, there must be robust regulatory safeguards to guarantee that emission offsets that are traded are of high-quality. Otherwise, as experts say an ineffective carbon market could result in more harm.
The third is the necessity to raise awareness about environmental issues for the public at large so as to make them realize their environmental responsibilities. For example, they can buy offsets to reduce emissions from an activity that is high in emissions, such as a long flight, or buy offsets on a regular basis to reduce their carbon footprint.
Fourthly, it’s vital that cap-and-trade doesn’t be a check-and-extort regime in India. In this regard, a technology-enabled open verification model could be implemented by the government.
Conclusion
The development of a national carbon market is a gradual step. However, the actual benefit depends on the efficacy that the marketplace can provide. For this, the Government must ensure that the right regulations are established. Additionally, there should be a periodic reviews of the operation and corrective steps its necessary. Climate Change is real and is imminent. Government must take all possible measures to reduce the risks.
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