Climate Change Negotiations – UNFCCC, COP, Other Conventions and Protocols

What is a Carbon Market, and why does India want to create one?


From UPSC perspective, the following things are important :

Prelims level: Carbon Credits

Mains level: Carbon trading

The Bill to amend the Energy Conservation Act, 2001 seeks to establish a domestic carbon market and facilitate trade in carbon credits.

What are Carbon Credits?

  • Carbon credits are measurable, verifiable emission reductions from certified climate action projects.
  • These projects reduce, remove or avoid greenhouse gas (GHG) emissions.
  • But they also bring a whole host of other positive benefits, for example, they empower communities, protect ecosystems, restore forests or reduce reliance on fossil fuels.
  • Projects must adhere to a rigorous set of criteria to pass verification by third-party agencies and a review by a panel of experts at a leading carbon offset standard.
  • After an organization or an individual buys a carbon credit, the credit is permanently retired so it can’t be reused.

What are Carbon Markets?

  • Carbon markets are regulatory structures that allow, in particular, oil and gas-intensive companies or heavy industry (or, in the case of COP25, countries) to reduce their economic footprint through a series of incentives.
  • The idea behind this system is that the most polluting countries can purchase the right to pollute more from countries that have not reached their emissions limits.
  • The 1997 Kyoto Protocol turned polluting emissions into a commodity.
  • For example, the European Union Emissions Trading System (EU ETS) is the largest in the world and has been in operation since 2015.

How is the concept evolved?

  • When the world evolved the ‘clean development mechanism’ (CDM) after the Kyoto Protocol agreement of 1997 as companies in the developing world could put up projects.
  • These include renewable energy or afforestation — that helped reduce carbon dioxide emissions, and earn ‘credits’ that could be sold in the market.
  • It was expected that these credits would be bought by the developed countries that had committed to emissions cuts under the Protocol.
  • Thus emerged the CDM market, aka ‘compliance market’. Alongside, environmentally conscious entities also started buying these carbon credits (or offsets) — the ‘voluntary market’.

What is the status now?

  • This system functioned well for a few years.
  • But the market collapsed because of the lack of demand for carbon credits.
  • As the world negotiated a new climate treaty in place of the Kyoto Protocol, the developed countries no longer felt the need to adhere to their targets under the Kyoto Protocol.
  • A carbon market was envisaged to work under the successor Paris Agreement, but its details are still being worked out.

Global successes

  • Domestic or regional carbon markets are already functioning in several places, most notably in Europe, where an emission trading scheme (ETS) works on similar principles.
  • Industrial units in Europe have prescribed emission standards to adhere to, and they buy and sell credits based on their performance.
  • China, too, has a domestic carbon market.

Mechanism in India

  • A similar scheme for incentivizing energy efficiency has been running in India for over a decade now.
  • This BEE scheme, called- Perform, Achieve and Trade (PAT) Scheme allows units to earn efficiency certificates if they outperform the prescribed efficiency standards.
  • The laggards can buy these certificates to continue operating.

What does new Amendment seeks to bring?

  • The new carbon market that is proposed to be created through this amendment to the Energy Conservation Act, would be much wider in scope.
  • Although the details of this carbon market are not yet known, it is likely to be on the lines of the European ETS, facilitating the buying and selling of carbon credits.


UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.

💥Mentorship New Batch Launch
💥Mentorship New Batch Launch