In the past few decades, it has become a worldwide phenomenon where development has been a trade-off for the environment. As human civilization moved into different cycles of industrialization, with massive manufacturing, trading, and Global logistics; the price thus paid became more and more evident. 

As the developed world of the West grew in leaps and bounds, without paying the necessary attention to the environmental damage, it caused pressures on the developing countries of Asia, Africa, and Latin America to bear the absolute brunt. The global consortiums of banks and other financial institutions made it a point to question the development of these massively populated developing nations to their contribution to the depletion of the environment. Fossil fuels such as coal and all kinds of petroleum products remain vital for the survival and growth of the world. This is especially true for the developing world which has massive capacity constraints.

While the chatter around adopting green energy, sustainable practices, and reducing emissions have been going around for the last decade; a competitive model to make it economically viable for the developing world was still a difficult task. Green and renewable energy, although massively helpful to the future attracts a huge CapEx and a long gestation period. In developing nations with big populations such as India, China, and Latin American countries like Brazil the trade-off became almost tangible. Without the usage of coal, diesel, petrol and other forms of fossil fuels growth and development would come to a grinding halt.

Another tangible effect that has been experienced globally is global warming now popularly known as ‘climate change’.The greenhouse gases emitted are heating up the whole earth causing massive shifts in temperatures, weather patterns, storms, cyclones, and rising sea levels across the globe.

What can be done?

The answer to many of these problems is simply having more trees to offset the carbon and finding a way to monetize the effort. In other words, to keep our earth green we need to do 2 things with all commitment and on priority:

• Afforestation

• Carbon Trading

Afforestation, as the name suggests, is an effort to plant more trees and cultivate more forests than have been destructed for development. The point to ponder is not all development can be termed evil. There is a pressing need for the construction of roads, bridges, schools, hospitals, and other commercial institutions to support the big populations of developing nations. However, the bigger populated nations also have bigger land mass to them and by adopting efficient methods of afforestation more yield per hectare can be achieved.

The second step is to monetize forests and use the money for developmental work. In this way, development and the environment can exist in tandem for the development of human civilization as a whole. The wonder key that opens this complicated lock is called carbon trading.

Carbon trading is the process of buying and selling permits and credits that allow the permit holder to emit carbon dioxide. It has been a central pillar of the EU’s efforts to slow climate change.

What are carbon credits and how do they work?

The underlying theory is simple. If one party can’t stop emitting CO2, it can ask another to emit less so that, even as the first carry on producing CO2, the total amount of carbon in the atmosphere is reduced.

There are three basic types of carbon credits:

• Those from reduced emissions (typically energy efficiency measures)

• Removed emissions (carbon capture and planting forests)

• And avoided emissions (for example refraining from cutting down rainforests).

How does Carbon trading permit work?

The model used in all current carbon trading schemes is called ‘cap and trade’. In a ‘cap and trade’ scheme, a government or intergovernmental body sets an overall legal limit on emissions (the cap) over a specific period of time, and grants a fixed number of permits to those releasing the emissions. A polluter must hold enough permits to cover the emissions it releases. Each permit in the existing carbon trading schemes is considered equivalent to one tonne of carbon dioxide equivalent (CO2e). In the theoretical model, (but rarely in practice) permits are to be sold – usually by auction – so that from the outset, polluters are forced to put a price on their emissions, and are incentivized to reduce to a bare minimum the permits they seek.

These carbon credits can be sold to governments, companies, or individuals seeking to complement their internal emission reductions and to further decrease their carbon footprints. Finance from the sales is channeled to forest countries and communities, providing alternative livelihoods for people who until then had relied on depleting the forest cover. This finance also supports new jobs, wildlife protection, education, clean water, and other initiatives that seek to transform the local economy away from reliance on the forest.

The results speak for themselves. Keeping carbon in the forest becomes an economically attractive option. By the end of 2020, 77 projects for “reducing emissions from deforestation and forest degradation” (REDD) were registered and 185 million credits were issued.

India’s efforts and contribution

India is a significant exporter of carbon credits. It issued 278 million credits in the voluntary carbon markets between 2010 and 2022, accounting for 17% of global supply, according to an analysis by S&P Global.

The Government of India has passed an amendment to the Energy Conservation Act 2001, which lays the foundation for the Indian Carbon Market.

Key Highlights for the Market in India:

• Carbon market could present itself in two alternative forms: project-based/offset market or Emission Trading Scheme (ETS) based market. 

• The Indian stakeholders have significant experience in the offset market.

• More efforts and deep engagement on the ETS approach are desired.

• The government needs to find alternative approaches to settle unsold Energy Saving Certificates (ESCerts) and Renewable Energy Certificates (RECs) rather than making them fungible with carbon credits.

• The domestic carbon offset market might not be a channel for international finance unless it is linked with other similar international ETS programs, although it can be a significant source of domestic finance.

• All three alternative forms of carbon markets — those based on the United Nations Framework Convention on Climate Change (UNFCCC), voluntary, and India’s domestic ETS — could eventually co-exist in the long term.

India has a 2070 net-zero target. Its updated Nationally Determined Contribution (NDC) aims to lower its greenhouse gas emissions intensity per GDP by 45% by 2030 relative to 2005 levels. It’s a tall ask by today’s standard but one can only hope that India shall be a major force in keeping the earth green.

Sources: WEF, CEEW, S&P global, UNDP, UNFCCC