What is cooking at COP28?

What is cooking at COP28?

Subject : Environment

Section: International conventions

Climate finance:

• ‘Market Mechanism’ or ‘Carbon Market’ is a way of making finance available to fight climate change.
• Article 6 of the Paris Agreement, which deals with bilateral (6.2) and global carbon markets (6.4), is said to be the most complex part of the agreement.

About Carbon Market:

• Carbon markets are a tool for putting a price on carbon emissions. It allows the trade of carbon credits with the overall objective of bringing down emissions.
• These markets create incentives to reduce emissions or improve energy efficiency.
• It establishes trading systems where carbon credits or allowances can be bought and sold.
  • A carbon credit is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
  • Carbon allowances or caps, meanwhile, are determined by countries or governments according to their emission reduction targets.
• Article 6 of the Paris Agreement provides for the use of international carbon markets by countries to fulfill their NDCs (Nationally Determined Contributions).
  • NDCs are climate commitments by countries setting targets to achieve net-zero emissions.

Types of Carbon Markets:

1. Compliance Markets:
   • Set up by policies at the national, regional, and/or international level and are officially regulated.
   • Compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU).
   • Under the EU’s emissions trading system (ETS) launched in 2005, member countries set a cap or limit for emissions in different sectors, such as power, oil, manufacturing, agriculture, and waste management. This cap is determined as per the climate targets of countries and is lowered successively to reduce emissions.
   • Entities in this sector are issued annual allowances or permits by governments equal to the emissions they can generate.
   • If companies produce emissions beyond the capped amount, they have to purchase additional permits. This makes up the ‘trade’ part of cap-and-trade.
   • The market price of carbon is determined by market forces when purchasers and sellers trade in emissions allowances.
2. Voluntary Markets:
   • Voluntary markets are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO2 or equivalent greenhouse gases.
   • Such carbon credits are created by activities which reduce CO2 from the air, such as afforestation.
   • In this market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.
   • In voluntary markets, credits are verified by private firms as per popular standards. There are also traders and online registries where climate projects are listed and certified credits can be bought.