Home / Opinion / Views /  A carbon market’s form must follow its function
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Time and tide wait for nobody. Nor does temperature, as it goes about pushing the mercury beyond what our planet can bear. On current pledges of climate action, our collective goal of letting the heat go no higher than 1.5° Celsius above the world’s pre-industrial average is looking elusive. Yet, every effort counts. This week, ahead of New Delhi sending an update of India’s plans to the United Nations Framework Convention on Climate Change, the Lok Sabha okayed tweaks of the Energy Conservation Act of 2001. The move will let the government specify standards of energy use by various groups of users, with mandates for clean sources in their usage mix, and set up a market platform for the trading of carbon credits. By 2030, as Prime Minister Narendra Modi declared at last year’s CoP-26 summit in Glasgow, the country aims to have half its power capacity drawn from sources other than fossil fuels and spew 45% less dirty emissions for every rupee of economic output than we did in 2005. Our carbon neutrality aim has been set for 2070, after which we promise to emit CO2 fumes no greater than we absorb.

While the climate crisis has expanded the state’s role in every economy on the logic that externalities like pollution call for market intervention, dedication to the task of carbon reduction must not eclipse a key element of economic success: private incentives. This places a large premium on the success of India’s push for a carbon market. As a concept, it not only weds the pursuit of profit with the burning cause of our times, it uses the efficiency of prices moved by forces of demand and supply in a system of dynamic burden sharing. The idea works by placing a price tag on a fungible tonne of carbon exhaust, thus turning it into a cost that emitters must battle for their own financial well-being. Setting up a ‘cap and trade’ mechanism is an elegant way to go about it. We set legal limits on emissions that are programmed to tighten over the years in accordance with our climate goals, even as we issue tonnage licences for pollution that permit holders can trade openly. Those spouting more gases than their annual allowance would need to buy add-on rights, while efficient carbon compressors could sell their surplus. This way, everyone strives against emissions—all the more furiously so if their market price soars. As an incentive for clean-up jobs, certified credits gained through carbon capture could also be hawked by the tonne.

Theory must translate into practice, of course, and so we need to get India’s carbon market right from the very get-go. Emission caps should be placed and calibrated with full transparency: the scientific data for their basis, devices used for exhaust evaluation and other elements of our policy frame must always be kept amenable to scrutiny. At some point, this trade will have to globalize and every market must reliably reflect its ground reality for the idea to have an impact. Since it’s crucial that cap-and-trade does not end up as an inspect-and-extort regime—as arbitrary authority can lend itself to—a tech-enabled model of open verification might be worth adopting. Past certificates issued by the Bureau of Energy Efficiency stayed mostly illiquid in India, but could be enlisted if they qualify as credits under a cap-and-trade plan driven by the country’s carbon glide path. The point is to deploy private incentives and market signals to help stall climate change. We need a carbon market that works. Let its design follow function.

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