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Securing Our Future- Carbon Trading and Sustainability

Updated: Oct 31, 2022

Image Credits: VOX

Amongst the various pressing concerns facing human civilization, one of the direst problems that we are faced with is climate change. Climate change in this context refers to anthropogenic climate change which means the changes in Earth’s climate caused by the activities of human beings. The research published in Glasgow COP26 suggests that the world is on track for a global rise in the average temperature of more than 2.4 ℃ by the end of the century. This rise in temperature would result in increasing sea levels, global floods, severe heatwaves, droughts, and fierce storms which pose a threat to the very existence of humankind.

Global warming, which is produced by greenhouse gas emissions, is the fundamental cause of climate change. According to a report by IPCC(2014), the carbon dioxide released by the use of fossil fuels and during industrial processes accounts for 65% of the global greenhouse emissions. So, cutting carbon emissions has naturally become the primary focus in the battle against climate change. One such measure which has been put in place to reduce carbon emission is carbon trading.

Carbon trading is the purchase and sale of carbon credits, which are permits that allow the corporation holding them to emit a specific quantity of carbon dioxide or other greenhouse gasses. One credit permits for the release of one tonne of carbon dioxide. These carbon credits can then be traded in the carbon market. Carbon trading takes place between nations where every nation is allocated a certain number of credits, which reduce each successive year and the nations which do not use all of their credits can sell them to nations that emit more carbon than they are permitted to by the credits allocated to them.

Unlike voluntary offsets, which allow consumers to pay a corporation to reduce their carbon footprint, the 'Cap-and-Trade' system, which is a type of carbon trading, is a legally binding system that limits an organization's overall emissions and allows them to trade credits. Organizations are incentivized to emit less carbon so that they can sell their unused credits to organizations that emit more than their credit allotment via carbon markets. The price of carbon credits is determined by the forces of demand and supply where supply is capped at the limit deemed permissible by the government.

The essential tenet of the system is to place an economic cost on the negative externalities arising from the production processes to ensure that organizations work towards cutting their carbon emissions. Carbon trade is believed to be a cost-effective yet partial solution to reduce carbon emissions and tackle climate change since it incentivizes the adoption of innovative technologies that are more efficient and emit limited carbon into the atmosphere.

United Nations Framework Convention on Climate Change (1997)

Image Credits: Britannica

The Kyoto Protocol, a United Nations pact signed in 1997 with the purpose of lowering global carbon emissions and mitigating climate change, paved the way for carbon trading. However, due to rampant corruption, this system failed and the carbon markets collapsed. Currently, there is no global carbon trade market, however, there are carbon emissions markets at the national and regional levels. The European Union's Emission Trading System, which began in 2005, is the world's oldest carbon market. Canada, Japan, South Korea, New Zealand, Switzerland and the United States also have their own national markets.

The most recent nation to join this list was the People’s Republic of China, which in July 2021 officially launched its national carbon market. China, which is the world’s largest emitter of greenhouse gasses, responsible for 28% of the world’s carbon dioxide emissions, is a significant addition to the list of nations undertaking steps to cut their carbon emissions. China is following the ‘Cap and Trade’ model which is initially limited to only coal and gas-fired energy plants but is planned to be expanded to chemicals, oil and construction industries as well in the future.

However, experts have criticized the Chinese ‘Cap and Trade’ model because unlike the schemes developed in other countries which target to reduce the absolute emissions, China’s scheme targets to reduce the intensity of emissions generated. What this essentially means is that China has encouraged the power companies to continue to produce the same or even greater amounts of energy while reducing or at the very least keeping their emissions at the same level. So as long as the volume of emissions per unit of energy output increases, firms can even increase the absolute emissions, which is essentially the opposite of the desired outcome since the end goal is to tackle climate change by reducing carbon emissions.

With China establishing their national carbon market, India, the third-largest emitter of carbon dioxide, which currently only has a voluntary carbon trade system, also needs to work on establishing its own national carbon market. According to a new analysis from the Deloitte Economics Institute titled "India's turning point: How climate action can drive our economic future," India must act now to avoid losing US$35 trillion in economic potential due to unabated climate change over the next 50 years. It also shows how, over the same time period, the country might gain US$11 trillion in economic value by limiting global warming and realizing its ability to 'export decarbonization' to the rest of the globe. India can potentially gain tremendously by leading the action against climate change thus obtaining a seat at the global forum so that it can ensure that the policies implemented are beneficial for India.

This can be done by establishing the ‘Cap and Trade’ scheme in India under a national carbon market. India, which has more than 50% of its labor force employed in the primary sector, can use regenerative farming practices such as cover cropping, rotational cattle grazing and less use of synthetic fertilizers which not only helps increase the yield from the farmland but also allows the soil to replenish its nutrients naturally, thus avoiding land degradation.

Cover crops absorb the carbon dioxide which is already present in the atmosphere and therefore is a carbon-negative activity. This allows the carbon markets to issue carbon credits for farms that practice regenerative farming. These can then be sold to other countries that require more carbon credits than allocated to them. Further, India can go one step ahead of China and ensure that the target of their ‘Cap and Trade’ system focuses on reducing the absolute carbon emissions and not just the intensity of carbon emissions.

Image Credits: VOX

The carbon market has been soaring in the past year. Mckinsey estimates that the market for carbon credit could be valued upward of $50 billion in 2030. I strongly believe that now is the time for India to come forward as a leader in action against climate change to not just ensure its own economic welfare but to guide its citizens as well as the entire world to a safer and cleaner future.





Pratyaksh Kumar
Pratyaksh Kumar
Jan 28, 2022

It’s fascinating how markets can be effectively used to incentivise emission reduction. However, the process needs to be fair in allocating credits in the first place.


Jan 28, 2022

Love the focus on specific issues within climate action. Excited for the series!

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