As India assumes the G-20 presidency, addressing environment and climate change continues to be one of the forum’s key thematic areas. It is widely accepted now that carbon pricing needs to be a central element of a country’s climate mitigation strategies. Carbon pricing applies charges on fossil fuels based on their carbon content or on their emissions when they are burned. The International Monetary Fund (IMF)-World Bank Climate Policy Assessment Tool estimates that adopting a $50 carbon price in all G-20 countries would cut CO2 by around 15-35% below business-as-usual levels in 2030 and also generate additional fiscal revenues ranging from 0.5-2% of GDP. One of the specific interventions for bringing in market-based carbon pricing is emissions trading, more commonly referred to as “carbon markets”.
Essentially, carbon markets involve tradable units representing emissions or emission savings. In the more common “cap-and-trade” carbon market, a regulator (often the government) determines the permissible emission allowances (termed as “the cap”), which are then released to the market either for free or at a charge. Registered market participants have the option of meeting their mandated emission levels for their respective sector either through internal abatement measures or by purchasing allowances at the market price over the compliance period and surrendering them back to the administrator. Carbon markets therefore not only ensure implementation of the “polluter pays” principle but also help in achieving sector specific emission goals and establishing a market discovered carbon price. This is unlike the other commonly used intervention of carbon tax which is used to price carbon, where the carbon or emissions price is decided by the regulator without any correlation to permissible emission levels.
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There are currently over 40 functioning carbon markets across the world, comprising a mix of national, regional and even city level jurisdictions. Some of the prominent ones include the EU Emissions Trading System (ETS) which covers all EU member states as well as Iceland, Norway and Liechtenstein; the Regional Greenhouse Gas Initiative which was the first mandatory regional ETS among US states in the North East and Mid Atlantic region; the Alberta Greenhouse Gas Reduction Program in Canada, Republic of Korea ETS etc. As per IMF, ETS and carbon tax together cover around 30% of global carbon emissions as of July 2022.
When it comes to the large emerging economies, China set up functional ETSs on a pilot basis in 2014-15 in five cities namely Beijing, Chongqing, Shanghai, Shenzen, Tainjin and two provinces namely Guangdong and Hubei. This was followed by the launch of its national ETS in 2021. India implemented its Renewable Energy Certificate scheme in 2010 based on a renewable energy purchase obligation for electricity distribution companies. This was followed by the Perform, Achieve and Trade (PAT) energy efficiency trading scheme in 2012 covering energy-intensive industries. The country has now moved closer to a wide spectrum carbon market with the passage of the Energy Conservation (Amendment) Bill in the Lok Sabha in August 2022. The Bill empowers the government to specify a carbon credit trading scheme.
For developing countries, carbon markets are expected to have significant benefits not only in helping them meet their climate goals but also generate additional fiscal revenues through market transactions. To enable quicker adoption in developing countries, the G-20 can play an anchor role in two areas: (a) setting up a knowledge and experience sharing platform which countries can leverage to set up their own carbon markets and (b) creating a framework for interlinking of carbon markets across countries.
Effective design and implementation of carbon markets involves careful attention to various areas like which sectors and type of emissions to cover, level of emission caps & their allocation mechanisms, market enforcement & regulatory mechanisms and emissions reporting & monitoring mechanisms. It is here that early movers like the EU and others can make their knowledge and experience available to other jurisdictions through G-20 .
Interlinking of carbon markets across countries or jurisdictions is the other area where the G-20 can play a key facilitation role. ETSs are linked if one system’s emissions or emission reduction credits can be used for compliance purposes in another system. This has been shown to yield considerable benefits in the form of higher economic efficiencies as there is greater access to cheaper abatement opportunities overall. Notable examples include the interlinking of the EU & Norway ETS, California & Quebec ETS and Swiss & EU ETS. However, the process of interlinking between two or more jurisdictions requires harmonisation of market enforcement & regulatory mechanisms, emissions reporting & monitoring mechanisms etc. This is where the G-20 can play a key role by creating a framework for facilitating such interlinkages.
Given the significant impact carbon markets continue to have on global emissions, this is a good opportunity for India to leverage its G-20 presidency and facilitate developing countries leverage this opportunity.
The author is Partner and leader (government & public services), Deloitte India