The recent 29th edition of the Conference of the Parties (COP29) climate conference talks which is one of the world’s most important climate summits was concluded in Baku, Azerbaijan from 11 to 22 November 2024. This conference resulted in a significant breakthrough in global climate efforts, especially regarding carbon trading. Negotiators after days of discussion reached a landmark agreement on the rules for trading carbon credits.
This agreement establishes a framework under which countries and companies can trade “credits.” These credits can be used to offset individual emissions by providing financial support to projects in other locations that reduce emissions. The agreement on the operationalization of market carbon has great prospects for India since it is in the process of shaping and strengthening its internal carbon market.
What is Carbon Trading?
Carbon trading in simple language is a buy or sell of credits allowing companies or countries to offset their carbon emissions either by reducing their emissions or by purchasing credits from other entities.
A carbon credit represents the reduction of one metric ton of CO2 or other greenhouse gases from the atmosphere. When a company emits carbon, it is required to compensate for its emissions. This is where Carbon Trading comes into play. For example; A company emitting carbon by any kind of activity needs to buy credits from a company that has successfully reduced its emissions and thus meets its emissions reduction targets.
About COP29
At COP29, an agreement on how the carbon markets will function throughout the globe was reached, creating a framework for nations and businesses. This is based on the mechanism of Article 6 of the Paris Agreement, which sets rules for trading carbon credits between countries. It introduces two types of carbon markets:
- Article 6.2: Allows countries to trade carbon credits directly with one another.
- Article 6.4: Sets up a global system for creating and selling carbon credits.
India’s Role in Global Climate Action
With a population of more than a billion, and with an economy industrializing rapidly, India is among the world’s biggest producers of greenhouse gases and is heavily dependent on coal to generate energy. India is among the most vulnerable countries in the world to the impacts of climate change; large swathes of the country are already experiencing increasingly rising temperatures, shifting rainfall patterns, and more frequent extreme weather events.
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India Set to Benefit from a Carbon Market Agreement at COP29
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In the Nationally Determined Contributions (NDCs), India pledged emission intensity (emission per unit of GDP) reduction by 33-35% by 2030 from 2005 levels. Another target was the 50% achievement of energy needs from non-fossil sources by 2030 and achieving net zero emissions by 2070. In this context, the carbon market offers India a unique opportunity to fulfil its climate goals while accompanying it with development and better access to energy and job creation.
How Does India Stand to Benefit?
As we know India is set to start its own domestic Carbon Market any day soon in the coming time which is currently under development. COP29 in light of the new international set rules cleared the path for India to start its carbon market. Below are the potential benefits for India:
Stronger Domestic Carbon Market: As the global rules for carbon markets have been set, it provides an international standard that India can align with. It helps the Indian carbon market to be more credible and competitive. This alignment paves the way for smoother integration into international carbon trading systems, enhancing India’s participation in the global markets.
Increased Investment: India’s carbon credit trading scheme (CCTS), once gets involved in the market, will be trading internationally and also attract financial investments. Since the rules will be transparent and in alignment with international standards, it will generate additional revenue for businesses, helping to accelerate the country’s transition to a low-carbon economy. This helps to accelerate the country’s transition to a low-carbon economy.
Revenue Generation for Indian Companies- Indian companies mainly involved in energy-intensive industries can generate revenue by selling carbon credits earned through emissions reductions. This additionally promotes sustainable practices.
Better Price Discovery and Market Efficiency: When the carbon market has uniform rules, it’s easy to determine the fair price. As a result, it makes the market predictable and stable leading to better work.
Support for India’s Climate Goals: India has some climate goals among which also include reduction of its carbon emissions and increasing renewable energy. The financial resources generated through carbon trading can directly support these goals.
Investment in Renewable Energy: Funds raised through carbon credit sales can be directed toward developing solar, wind, and other green energy projects.
Technology Transfer: By participating in this market, India can get better tools and ideas to make their energy cleaner and more efficient. India can learn and get the best technology to help protect the environment.
Decentralized Carbon Mitigation: Carbon credit trading enables Indian companies to manage emission reduction on their own. This decentralization helps to spread the burden of responsibility across sectors and thus, drives companies to become more responsible and sustainable in their delivery practices – this is the commendable goal of the project.
Job Creation: More jobs will also be created in the sectors of renewable energy, carbon credit accounting, and emissions management as green industries and low-carbon projects are funded through the carbon market.
Support for National Climate Policy: By 2020, India has committed to reduce its greenhouse gas emissions intensity to 33-35 per cent below 2005 levels. A carbon market will generate revenue to support the NDC implementation. This comprises financing large-scale infrastructure projects that ultimately support the long-term decarbonization goals of the country.
Key Challenges for India
Along with the potential benefit for India, there are also challenges to overcome. They are as follows:
Defining Rules and Structures: India, to start a carbon market, would need to establish a clear rule on how the carbon market would work. The challenge is to make the rules simple, clear, and strong enough so that everyone follows them and that the pollution cuts are real. This also includes how emissions reductions will be tracked and verified. For example, how do you prove that a company is cutting pollution? What is the way to measure it?
Adopting Global Standards: To enhance the international value and trust in its carbon credits, India must align its practices with rigorous global standards. This alignment will require upgrading its systems, technologies, and knowledge to meet international levels, which requires significant resources, time, and effort.
Public-Private Collaboration: By engaging the government, private enterprises, and financial institutions, there is still a challenge in public-private collaboration for India. The government needs to formulate rules; businesses need help adopting cleaner technologies, and financial institutions need to fund these green projects. All this requires good communication and cooperation, which have always been difficult to manage.
Key Criticisms of the COP29 Agreement
While the agreement at COP29 presents opportunities for India, it has been met with significant criticism:
Double Counting: Double Counting is one of the most risk-involved flaws in the new rules. When two parties claim credit for the same emission, it causes double-counting. This makes it look like more progress has been made but the reality is different and also reduces the overall impact of the carbon market on global emissions.
Temporary Carbon Removal: Reliance on temporary carbon removal methods such as forest-based offsets is a problem as they store carbon for a very short period. This being temporary gets released into the air through wildfires, droughts, or deforestation. Using temporary methods doesn’t solve the long-term problems. The COP29 deal does not clarify how long carbon must be stored to be counted as a valid reduction.
Harm to Communities: Some carbon offset projects involve harm to certain communities; Indigenous people being one. There is a high risk that these people would lose their homes and resources. This causes concerns about equity and fairness in the carbon trading system.
Overreliance on Natural Systems: The use of natural systems like forests and soils to absorb carbon is increasingly raising concerns. Because of the extreme weather events like droughts and wildfires, driven by climate change, it is risky to rely on them to meet the target of emission reduction as their ability is uncertain.
What can be Done?
To carefully navigate the carbon market, the following steps can be taken:
Adopt Stronger Standards for Carbon Removal: India should stop relying on temporary solutions that don’t provide long-term benefits. It is advisable to look for only permanent carbon storage solutions for carbon removal.
Ensure Fairness and Transparency: To prevent double-counting, the push for clarity in rules is required. It is important to protect the rights of local communities affected by carbon offset projects. Transparent monitoring and verification systems will ensure that the carbon market works as intended.
Strengthen the Domestic Carbon Market: India can enhance its credibility in the international market by securing more investment and taking stronger measures in dealing with climate change through a properly organized transparent carbon credit system in alignment with global standards.
Diversify Carbon Removal Projects: It is important to apply a balanced and reliable approach to emissions reduction. India should invest in a diverse range of projects, including renewable energy, carbon capture technology, and soil-based carbon sequestration.
In a Nutshell
The carbon market negotiation in COP29 is an excellent opportunity for India to move forward the economy towards a low-carbon muscle while also addressing climate change problems.
By aligning with global standards such as those defining the carbon market for India, sustainable development will be driven, and national climate goals will be supported. However, challenges such as double counting must also be prevented, implying that there has to be fairness followed by an effective market.
The international framework under Article 6 will guide India in integrating its domestic market with the global system, helping attract investment and promoting growth. In summary, COP29 marks an important step for India, enabling it to play a key role in global climate action and secure a greener future.
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Frequently Asked Questions
What is carbon trading?
Carbon trading enables countries and corporations to sell and buy carbon credits to offset their greenhouse gas emissions. One metric ton reduced represents one carbon credit. This motivates companies to cut back on emissions and help nations meet their targets in combating climate change.
How does carbon trading work?
Companies that reduce their emissions can sell carbon credits to others that exceed their emission limits. This creates a financial incentive to lower emissions. The system is governed by international rules to ensure fairness and transparency.
What is the COP29 agreement?
COP29 was a climate summit where global leaders agreed on rules for carbon trading. The agreement sets a framework for countries to trade carbon credits. It aims to make carbon markets more efficient and credible globally.
What are India’s climate goals?
India has pledged to reduce its emission intensity by 33-35% by 2030. The country also aims to source 50% of its energy from non-fossil sources by 2030 and achieve net-zero emissions by 2070. The carbon market can help support these goals financially.
What is Article 6 of the Paris Agreement?
Article 6 sets the rules for international carbon trading. It has two mechanisms: one allows countries to trade credits directly with each other (6.2), and the other establishes a global system for creating and trading credits (6.4). This helps coordinate global climate action.
Can India rely on nature-based solutions for carbon removal?
No, India cannot rely fully on nature-based solutions. Nature-based solutions, like forests that absorb carbon, are vulnerable to climate change. Droughts, fires, and other extreme events can release carbon back into the atmosphere. A balanced approach is needed, combining nature-based and technological solutions.
How can India avoid the pitfalls of temporary carbon offsets?
India should focus on permanent solutions for carbon removal, such as carbon capture and storage. This will provide more reliable and long-term benefits. Investing in technology and diverse offset projects will help reduce the risks.
Read our blog: An Overview of the Carbon Credit Trading Platform Market
