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Carbon Trading Policy

by | Dec 16, 2022 | Carbon Trading, Sustainable Finance

Indian Policies

The carbon trading policy in India started when India signed and ratified the Kyoto Protocol in August 2002. Because of its developing status, India is a non-Annex I country under the United Nations Framework Convention on Climate Change (UNFCCC). This means that India is under no obligation to cut carbon emissions.

Article 12 of the Protocol defines the Clean Development Mechanism (CDM). The CDM allows emission-reduction projects in developing nations to generate Certified Emission Reduction (CER) credits. Developed countries buy these credits to help them meet a part of their emission reduction targets.

The Government created a National CDM Authority to enforce CDM projects in India. India has 2574 CDM projects which have released 1527 billion CERs.

Today, India has two commodity exchanges that deal in trading carbon trading policy. They are the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX). The MCX and NCDEX made carbon trading an excellent business opportunity for India.

The World Bank reported that India controls 20-25% of the world’s carbon trade. India’s carbon market is one of the fastest-growing in the world. It has generated around 30 million carbon credits. Carbon trading started on the MCX after the Indian Government recognized carbon credits as commodities in January 2008.

Businesses trade carbon credits on the NCDEX only as future contracts. A futures contract is a standardized contract between two parties. The parties agree to buy or sell a specified asset of a particular quantity at a specified future date at a price the parties agree to today.

Even though India is one of the largest beneficiaries of carbon trading, the country still does not have a proper policy in place for carbon trading in markets. The NCDEX has asked the Centre to establish an appropriate policy framework for trading CERs and carbon credits in Indian markets. India also has a vast number of carbon credit sellers. However, under present Indian law, buyers from European markets are not allowed to enter the Indian carbon credit market. To overcome this challenge and increase the market for carbon trading, the Government has introduced a bill in Parliament. The bill will help traders and farmers use NCDEX as a platform to trade carbon credits.

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US Policies

A handful of states in the US have put a price on carbon emissions via a carbon trading policy. The price acts as an incentive for reductions by major greenhouse gas emitters. While these states take credit for reducing only a small portion of global emissions, market-based policies in the US have proven effective at reducing emissions. They also serve as models for other states and national policies. Some of the US state carbon pricing policies are:

1. Regional Greenhouse Gas Initiative (RGGI)

The US government launched this carbon trading policy in 2009. It was the first cap-and-trade program in the US to reduce carbon emissions from the power sector. As of January 2021, eleven US states were part of the RGGI. The states include Maryland, Maine, Delaware, Connecticut, Rhode Island, New Jersey, New York, New Hampshire, Massachusetts, Virginia, and Vermont. These states cap the carbon emissions from power plants. The power plants are allowed to trade emission allowances. Since the program’s start, emissions have fallen from their 2005 high level. The state has further set goals of reducing emissions by 30% below 2020 levels by 2030.

2. California Cap-and-Trade

The RGGI covers only the power sector. On the other hand, California’s cap-and-trade program covers the entire Californian economy. This was the first multi-sector cap-and-trade program in North America. California reduced its greenhouse gas emissions cap by 3% every year from 2015 to 2020. The goal of decreasing the cap was to help the state achieve emission reductions to 1990 levels by 2020. In 2017, the state enacted a new law that would further reduce the cap to help the state achieve 40% emission reductions by 2030.

3. Washington Cap and Invest

Washington is now the second US state to implement a multi-sector cap-and-trade program. In May 2021, Washington signed the Climate Commitment Act. The Act allows the creation and implementation of a cap-and-invest program by capping emissions from specific entities, distributing emission allowances, and establishing a climate investment account for revenues from allowances.

The program covers entities emitting 25,000 tons or more of carbon dioxide per year. The program seeks to reduce greenhouse gas emissions by 45% by 2030, 70% by 2040, and net zero by 2050. Legislature will use revenue generated from the program to deploy clean energy, make the transition easier for fossil fuel workers, and programs to increase resilience to wildfires.

The program will commence in 2023.

Legal Requirements for Carbon Credits

The voluntary carbon market has existed for some time now. The processes of creating, verifying, and transferring the benefits of projects that reduce emissions already exist within robust legal frameworks. However, some legal uncertainties still remain in certain jurisdictions.

Many businesses have raised questions as to the treatment of Voluntary Carbon Credits (VCCs) for capital, margin, and trade reporting purposes. These are difficult to answer due to the uncertainty of their legal nature.

But greater clarity over the legality of VCCs would contribute to a more robust carbon market. It would enhance the development of a global voluntary carbon market since the legality would cover the creation, transfer, and retirement of VCCs, the circumstances under which a person obtains ownership rights to a VCC on transfer, etc.

The legal nature of VCCs differs across countries. Some countries view credits as some form of intangible property, while others characterize them as a bundle of contractual rights. Because of these, different rules apply in different countries regarding how to buy, sell, and retire VCCs. VCCs have no statutory framework guiding their trade. Because of this, they have no special role in facilitating compliance with regulatory obligations.

The International Swaps and Derivatives Association (ISDA), an international trade organization, is currently engaging with carbon market participants. The organization plans on drafting standard documentation governing the legality of VCCs. The organization is also working to lay the foundation for robust, well-governed, and transparent markets for emissions trading.

ISDA also supports mandatory carbon markets by developing and publicizing legal definitions and documents.

 

Author

  • Sigma Earth

    The author has done a master's in Environmental science and is currently working as chief Environmental Advisor with New Delhi State Government.

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