Carbon markets are systems designed to facilitate the buying and selling of credits for greenhouse gas emissions. These credits allow entities, such as countries or companies, to emit a designated amount of carbon dioxide or equivalent greenhouse gases. Generally, one credit permits the emission of one ton of carbon dioxide or its equivalent.
The primary importance of carbon markets lies in their ability to assign a monetary value to carbon emissions. This pricing mechanism serves as an incentive for companies and countries to reduce their greenhouse gas emissions, thereby aligning with global objectives to mitigate climate change.
In a carbon market setup, governments establish an emissions cap. Companies can then trade allowances or credits within this framework. If a company manages to reduce its emissions, it can sell its surplus allowances to others that exceed their emission limits.
A carbon credit is essentially a permit allowing the holder to emit a specific quantity of carbon dioxide or other greenhouse gases. These credits are tradable within the carbon market, providing flexibility for companies to manage their emissions.
During COP 28, discussions centered around carbon markets took place. However, there was no unanimous agreement on the terms and conditions governing the global carbon market.
There are two primary types of carbon markets: compliance and voluntary. Compliance markets are government-regulated, requiring firms to adhere to emission limits or purchase allowances. Voluntary markets, on the other hand, enable companies to purchase credits to offset emissions for reasons such as corporate social responsibility or public relations.
India plays a pivotal role in supplying carbon offsets, where entities earn credits through initiatives like afforestation. The country also engages in market-based emission reduction strategies, such as the PAT scheme for energy-heavy industries and the REC system for renewable energy.
Several challenges impede the effectiveness of carbon markets. These include determining the appropriate price for carbon, ensuring the legitimacy of carbon offsets, and preventing carbon leakage. This phenomenon occurs when companies relocate to countries with less stringent emission regulations, resulting in no net decrease in global emissions.
Carbon markets are a vital component in the suite of tools aimed at reducing global greenhouse gas emissions. By providing financial incentives, they encourage companies to invest in cleaner technologies and adopt practices that result in fewer emissions.
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