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Home / Opinion / Views /  Cap and trade: An idea whose time has come

The covid pandemic has not only scrunched the global economy, which is likely to contract by more than 4% this year, it may also have slowed the world’s battle-charge against climate change. The 26th United Nations climate summit (or CoP26) has been postponed by a year to next November. Signatories to the 2015 Paris Agreement have been quibbling over the design of a global carbon market, delaying emission-choking green projects, and kicking other such cans down the road. Coronavirus offers us no reprieve from the urgency to arrest global warming, though. Air pollution that entraps heat must be capped

at the earliest and a usable set of rules framed for the trading of carbon permits, so that the very mechanism of market prices that spelt prosperity for much of the world can be deployed to contain its environmental fallout. The odds of this may have brightened with the election of Joe Biden to the White House in the US and his pick of John Kerry as his climate envoy, but the path ahead does not promise to be easy. Thankfully, India has made a start by setting up an inter-ministerial panel to oversee an action plan for us to achieve our climate-change mitigation goals under the Paris pact. This apex committee’s mandate includes the formulation of guidelines for carbon pricing and the regulation of a domestic market for a limited clutch of pollution permits, as it were.

After having floundered in the West about a decade ago, a cap-and-trade market for carbon permits looks like an idea whose time may finally have come. At the core of it is the power of economic incentives. This gives it a certain conceptual elegance. Under such a scheme, the government must fix a target, back-calculate a schedule of gradual carbon reduction, and then either sell or award a preset number of annual licences for emissions. These could be rationed across various industries and other polluters, or auctioned openly for anybody to acquire, with the permissible total programmed to go down every year. Companies that exceed their emission limit would need to buy unused permits in an open market, supplied by those that perform better on that score. Keeping operational costs low would then depend on going as eco-friendly as possible. The pressure to do the planet justice would increase as the years roll by and permits turn increasingly scarce, pushing their price up. Of course, they could get cheaper too, should green-tech innovations make it easier for firms to achieve quick carbon neutrality.

A pilot project based on the concept has been launched in Surat’s textile sector to cut air pollution of the particulate matter sort. A carbon scheme for all of India, however, would entail far greater complexity. If arguments break out over initial allotments and pricing (which is bound to be arbitrary), as seen in the West, the project could get jinxed. Meanwhile, the dream of a global carbon market seems unrealistic, given that we would need significantly lower prices. Our industrial base needs to be cost-competitive. Also, we must retain autonomy over how we help save a world put at threat mostly by industrialized economies. Cynicism over outcomes may also need to be overcome, after our adherence to the Kyoto Protocol left us with carbon credits that could not easily be monetized. The potential expiry of past credits and the US flip-flop over climatic risks have hurt the cause. The world’s climate crisis is a classic “tragedy of the commons", one that will take international cooperation to resolve. But we’d do well to create our own carbon market.

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