A Carbon Credit Trading Scheme is a market-based mechanism designed to reduce greenhouse gas emissions. Carbon credits are measurable, verifiable emission reductions from certified climate action projects. These projects reduce, avoid or remove greenhouse gas (GHG) emissions. It works by creating a market for carbon credits, where entities that reduce their emissions below a certain threshold can sell their surplus credits to those who exceed it. 

The Carbon Credit Trading Scheme is a topic relevant to the UPSC context under General Studies Paper III. It is a basic topic for aspirants to understand the dynamic aspect of the Carbon Credit Trading Scheme. The Carbon Credit Trading Scheme is an important topic for UPSC Civil Services because it highlights the Science & Technology, Earth Science, Environmental Studies, which are frequently discussed in the exam. Join UPSC Coaching today to boost your preparation. 

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The CCTS is a strategic initiative by India's Power Ministry, in collaboration with the Bureau of Energy Efficiency (BEE), designed to encourage the reduction, removal, or avoidance of greenhouse gas emissions. It facilitates the trading of Carbon Credit Certificates (CCCs), where each certificate represents a tonne of CO2 equivalent reduced, removed, or avoided from the atmosphere.

• Carbon Credit Trading sets a quantitative total limit on the emissions produced by all participating emitters, which correspondingly determines the prices of emissions.
• Under emission trading, a polluter with more emissions than their quota has to purchase the right to emit more from emitters with fewer emissions.
• This can reduce the competitiveness of fossil fuels, which are the primary driver of climate change.
• Instead, carbon emissions trading may accelerate investments in renewable energy, such as wind power and solar power.

Purpose

• The primary purpose of a carbon credit trading scheme is to reduce greenhouse gas emissions by creating a market for companies to buy and sell permits to emit carbon dioxide. 
• This incentivizes companies to reduce their emissions, as those who pollute less can sell their unused permits to those who pollute more. 
• This market-based approach can be a cost-effective way to tackle climate change and encourage investment in cleaner technologies. 

Objectives

• The main objectives of a carbon credit trading scheme are to reduce greenhouse gas emissions, create a market-based system for carbon pricing, incentivize efficiency and innovation, and promote sustainable practices. 
• It also aims to help countries meet their climate commitments and attract international investment in green initiatives. 
• Ultimately, it's a mechanism to achieve climate goals through market-based solutions. 

An Overview Of Carbon Credit Trading Scheme

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What Is Carbon Pricing?

Carbon pricing is an economic strategy that captures the external costs of carbon emissions (such as damage to crops, rising healthcare costs, and property losses due to extreme weather) and links them to their sources.

• Pricing carbon can provide an economically efficient means of reducing greenhouse gas emissions and minimizing the disruptive risks of climate change.
• A carbon price provides a relatively direct way to ensure that more of the costs of climate change are brought into the economic calculus behind investments and consumption, including resource and fuel use.
• It sends a price signal that could influence widely dispersed economic decisions, help guide future economic growth toward a lower carbon economy, and reduce the impacts of climate change over time.

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Carbon Pricing – An Effective Tool To Mitigate Emissions

• Expressing carbon emissions in monetary terms makes it easy for businesses to incorporate the data into their financial and planning strategies. Internal carbon pricing thus becomes an effective gauge to measure possible returns on future investments.
• Carbon price as a planning tool helps identify revenue opportunities and risks to reduce costs and emissions and guide capital investment decisions.
• If used effectively and in an unrestricted manner, it can become as much of a tool in decision-making as ROI or profitability are. 

How Carbon Pricing Yields Benefits For Business?

• Companies employing an internal carbon price are able to better manoeuvre in regulatory environments where GHG emissions reductions are mandatory - such as the EU and Canada, and are more responsive to external carbon prices.
• Many companies find that after setting absolute emission reduction and intensity goals, internal carbon price helps them evaluate returns on related investments and incentivize employees to meet established corporate targets.
• Internal carbon pricing encourages innovation and sustained economic competitiveness. It also helps companies identify organizational inefficiency that is adding to overall costs. 
• It helps prepare for the forecasted low carbon economy and to increase their own efficiency and market profitability. 

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Challenges in the Effective Implementation of CCTS

• Target Setting and Carbon Pricing: Balancing emission reduction targets is crucial. Lenient targets can oversupply CCC, lowering prices, while stringent targets may increase compliance costs and inflation. 
• Compliance and Enforcement Issues: Under PAT, 50% of the required ESCerts remained unpurchased, with no penalties imposed, indicating a lack of strict compliance and enforcement mechanisms in the carbon market that can impact CCTS, making it ineffective. 
  • CCTS may face the risk of double counting or inaccurate emissions reporting, as observed in global carbon markets. 
• Delays in Credit Issuance: Delays in the issuance of credits under PAT since 2021 have reduced market confidence. Similar delays in CCTS CCC issuance could hinder participation and investment in clean energy. 
• Transparency: Lack of publicly available data on industry emissions and compliance could reduce market trust

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Ways India Can Strengthen the CCTS

Ways India Can Strengthen the Carbon Credit Trading Scheme refers to strategic actions and reforms aimed at enhancing the effectiveness, transparency, and scalability of the Carbon Credit Trading Scheme. These measures ensure broader participation, credible monitoring, and alignment with global climate goals.

• Adopt Global Standards and Frameworks: Adopt lessons from the European Union (EU) ETS, such as gradual tightening of caps, carbon price stability measures, and rigorous compliance frameworks. Build capacity for MRV (Monitoring, Reporting, and Verification) to ensure credibility. 
• Establish a Reliable Carbon Market Infrastructure: Introduce digital registries to track credits and prevent fraudulent activities. Ensure cross-border compatibility to avoid trade restrictions (e.g., EU's Carbon Border Adjustment Mechanism, CBAM).
• Promote Active Involvement of Industrial Stakeholders: Provide incentives for early adopters, such as tax benefits for companies reducing emissions beyond compliance requirements. Promote investment in green technologies, renewable energy, and energy efficiency improvements. 

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