Explained: What is a carbon market and why does India want to create one?

To help achieve more ambitious climate change targets and ensure a faster transition to a low-carbon economy, the government is seeking to strengthen a 20-year-old law, called the Climate Conservation Act. of 2001, which fueled the first phase of India’s transition to a more energy-efficient future.

The Energy Conservation Amendment Bill 2001, which was presented to Parliament Wednesday, has two main purposes. First, it aims to force a select group of industrial, commercial and even residential consumers to use green energy. A prescribed minimum proportion of the energy they use must come from renewable or non-fossil fuel sources. And second, it seeks to establish a national carbon market and facilitate the trading of carbon credits.

Importantly, the amendment bill seeks to expand the scope of energy conservation to also include large residential buildings. Until now, energy saving rules mainly applied to industrial and commercial complexes.

Energy Conservation

The 2001 law set energy saving and energy efficiency standards to be followed by a select group of industries and commercial complexes. Efficiency standards were also prescribed for equipment and appliances such as air conditioners or refrigerators. This act created the Bureau of Energy Efficiency (BEE) to promote the use of more efficient processes and equipment to save energy. Star ratings of various home appliances and large-scale switch to LED bulbs are some of BEE’s successful initiatives that have resulted in massive energy savings over a period of time.

The overall objective has been to improve energy efficiency in all sectors, so that greater productivity can be obtained from the same amount of energy. Over the years, India’s energy intensity, or the amount of energy consumed per unit of GDP, has declined significantly.

New provisions

The Amendment Bill seeks to build on the progress made so far. For example, just like standards for appliances and equipment, energy consumption standards would be specified for motor vehicles, ships and other vessels, industrial units and buildings. In the case of vehicles and boats, fuel consumption standards would be defined. And just as with appliances and equipment, the new provisions would empower the government to prohibit the manufacture or importation of any vehicle or watercraft if it does not meet prescribed energy standards.

New sustainable building codes must be defined that every building with a certain energy consumption threshold, whether industrial, commercial or residential, should comply with. Every such building should ensure that at least a portion of its total energy consumption comes from renewable or non-fossil fuel sources. This would help reduce the proportion of fossil fuel-based energy used in the economy and stimulate demand for renewable or other non-fossil fuels.

What are carbon markets?

The creation of a national carbon market is one of the most important provisions of the proposed amendment bill. Carbon markets allow the trading of carbon credits for the general purpose of reducing emissions. These markets create incentives to reduce emissions or improve energy efficiency. For example, an industrial unit that exceeds emission standards is likely to obtain credits. Another unit that struggles to meet the prescribed standards can purchase these credits and demonstrate compliance with those standards. The unit that did better on the standards earns money by selling credits, while the purchasing unit is able to meet its operating obligations.

Under the Kyoto Protocol, the predecessor of the Paris Agreement, carbon markets have also operated internationally. The Kyoto Protocol had set emission reduction targets for a group of developed countries. Other countries did not have such targets, but if they reduced their emissions, they could earn carbon credits. These carbon credits could then be sold to developed countries that had an obligation to reduce their emissions but were unable to do so. This system worked well for a few years. But the market collapsed due to lack of demand for carbon credits. As the world negotiated a new climate treaty in place of the Kyoto Protocol, developed countries no longer felt the need to adhere to their targets under the Kyoto Protocol. A similar carbon market is being considered under the successor Paris Agreement, but its details are still being worked out.

National or regional carbon markets already operate in several places, notably in Europe, where an emissions trading system (ETS) operates on similar principles. Industrial units in Europe have prescribed emission standards to be met, and they buy and sell credits based on their performance. China also has a domestic carbon market.

A similar energy efficiency incentive program has been running in India for over a decade now. This BEE program, called PAT, (or perform, perform and trade) allows units to earn efficiency certificates if they exceed prescribed efficiency standards. Latecomers can purchase these certificates to continue operating.

However, the new carbon market that is proposed to be created through this amendment to the Energy Conservation Act would be much broader in scope. Although the details of this carbon market are not yet known, it is likely to be modeled on the European ETS, making it easier to buy and sell carbon credits.

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