Carbon Market and Carbon Tax
Origin for Carbon Market
The idea of carbon markets has come back into focus after COP29, which finalised the rulebook under Article 6 of the Paris Agreement
Carbon market and its challenges
A market-based mechanism of carbon credits offers the flexibility to find the most cost-effective ways to reduce emissions
Carbon markets work best when there are targets for firms to reduce emissions. There needs to be a clear incentive for companies to either buy credits (to offset emissions) or sell them (after making reductions).
In the absence of targets, voluntary markets will not have sufficient demand for carbon credits.
"Greenwashing”, which refers to the practice where carbon credits are fake and do not represent actual emissions reductions.
Too lax a system and the market will be flooded with cheap credits that do little to reduce emissions.
Too strict a system and companies may resist participation or simply pass on the costs to consumers, leading to inflationary pressures.
The incentives of small and medium-sized enterprises (SMEs) are even more skewed—given the generally low-profit margins of Indian firms, purchasing credits will be seen as an unnecessary expense.
Carbon Tax and its challenges
The tax imposes a price on carbon emissions and provides clear and predictable incentives for companies to reduce their carbon footprint.
It overcomes the issue of greenwashing as companies cannot offset their emissions by buying dubious credits.
often politically contentious, as they are an additional cost to businesses and consumers, and are likely to face stiff resistance.
November 2024
In Baku, at COP29, agreement was reached to establish a global carbon market, enabling countries to trade carbon credits as per Paris agreement Article 6.
Article 6.2 - allows bilateral trade of carbon credits between countries
Article 6.4 - focuses on establishing a global carbon market
