Carbon Markets & Emission Trading (2024–26): Carbon Credits, ETS & India’s Framework

Carbon Markets & Emission Trading (2024–26): Carbon Credits, ETS & India’s Framework

1. Why in News?

During 2024–26:

  • India progressed toward operationalising a domestic carbon market.

  • Discussions on carbon credit framework gained attention.

  • Global carbon trading mechanisms were reviewed under climate negotiations.

Market-based climate solutions moved from theory to policy.

2. What is a Carbon Market?

A carbon market allows:

Buying and selling of carbon emission allowances or credits.

It creates a financial incentive to reduce emissions.

3. What is Emission Trading System (ETS)?

ETS is a:

Cap-and-trade mechanism.

How it works:

1️⃣ Government sets an emissions cap.
2️⃣ Allowances are distributed.
3️⃣ Companies can trade allowances.

If a company emits less → sells excess credits.
If it emits more → buys credits.

UPSC loves mechanism-based questions.

4. Carbon Credit vs Carbon Offset

Carbon Credit:
Represents permission to emit a certain amount.

Carbon Offset:
Investment in project that reduces emissions elsewhere.

Trap zone. These are not identical.

5. Types of Carbon Markets

1️⃣ Compliance Market

Mandatory participation (government regulated).

2️⃣ Voluntary Market

Companies buy credits voluntarily.

UPSC can mix these.

6. India’s Framework

India aims to:

  • Develop a national carbon market.

  • Align with climate targets.

  • Encourage industry participation.

Energy Conservation Act amendments support market development.

7. Global Linkage

Paris Agreement → Article 6 enables carbon trading cooperation.

Article 6.2 → Bilateral trading
Article 6.4 → Centralised mechanism

High prelim probability.

8. Benefits of Carbon Markets

  • Cost-effective emission reduction

  • Encourages innovation

  • Mobilises private finance

9. Criticism

  • Greenwashing concerns

  • Verification challenges

  • Market volatility

UPSC may frame critical statement.

10. Static Linkage

Difference between:

  • Carbon tax

  • Cap-and-trade system

Carbon tax:
Price-based instrument.

ETS:
Quantity-based instrument.

Classic prelim trap.

11. Prelims Angle

Likely questions:

  • What is cap-and-trade?

  • Difference between carbon tax & ETS?

  • Article 6 relates to what?

  • Compliance vs voluntary market?

Statement-based question very likely.

12. Mains Angle

  • Are carbon markets effective for India?

  • Equity concerns in carbon trading

  • Developing country challenges

13. RBI Grade B Angle

  • Climate risk disclosure

  • Sustainable finance instruments

  • Green investment flows

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