One of the key outcomes of the recently concluded COP29 was the finalisation of rules for a global carbon market under Article 6 of the Paris Agreement. This market allows the buying and selling of carbon credits earned through green initiatives and paves the way for a centralised UN trading system to launch in 2025. The proposed framework seeks to ensure the credibility and standardisation of carbon credits, enabling countries and companies to trade carbon credits more efficiently and fund climate projects, particularly in developing nations.
Carbon credits serve as incentives for industries to reduce greenhouse gas (GHG) emissions through initiatives like transitioning to renewable energy, reforestation, installing energy-efficient equipment, and capturing landfill methane. In carbon markets, entities buy these credits to offset their emissions and meet regulatory or voluntary emissions limits.
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Central to carbon markets is the process of carbon offsetting, where companies purchase verified reductions from external projects to balance their own emissions. This facilitates compliance while supporting environmental projects globally.
Carbon tax: An essential decarbonisation tool
Carbon taxes and carbon markets share several features. Both set a price on carbon emissions, leverage market efficiencies, generate revenue, impose compliance obligations, and require thorough monitoring and verification.
The principle behind a carbon tax is straightforward — entities pay a tax based on the amount of carbon dioxide they emit. This tax must rise steadily over time to incentivise meaningful emissions reductions and the adoption of clean technologies.
According to the World Bank, over 65 carbon pricing initiatives are in place or scheduled, covering nearly 22% of global emissions. Nationally implemented carbon taxes can help achieve the net-zero targets outlined in the Paris Agreement, but complementary policies addressing social impacts and promoting green investment are vital.
Despite its potential, a carbon tax has its downsides. Critics argue that it can slow economic activity in the short term and may not guarantee emissions reductions. Wealthy companies may choose to pay the tax and continue emitting. Furthermore, none of the South Asian or Southwest Asian countries currently impose a carbon tax, though Pakistan is considering joining such initiatives.
CBAM and its limitations
In October 2023, the European Union implemented the Carbon Border Adjustment Mechanism (CBAM), a tax applied to certain imported goods based on their carbon emissions. Initially, CBAM applies to five sectors: electricity, iron and steel, fertilisers, aluminum, and cement, with potential expansions in the future.
Developing nations view CBAM as an external imposition that leads to trade tensions. For South Asian economies, which heavily rely on the EU market, CBAM poses significant risks. In 2019, 14% of the $40 billion in CBAM-related exports from South Asia went to the EU, with India accounting for 80% of these exports.
India’s aluminum and steel sectors, reliant on coal-fired power, face significant challenges under CBAM. Transitioning to renewable energy is difficult due to the need for stable power supply and limited access to alternative energy sources. CBAM could negatively impact GDP, exports, and household consumption in South Asia, affecting vulnerable groups like low-skilled workers and women.
Climate vulnerability in South Asia
South Asia is highly vulnerable to climate change, despite contributing minimally to global GHG emissions. The region faces extreme weather events, biodiversity loss, and monsoon floods that threaten health and livelihoods. Proactive measures, including domestic regulations and international initiatives, are underway, but socio-political and governance barriers hinder progress.
Regional cooperation is essential for effective climate action. Countries must enhance their Nationally Determined Contributions (NDCs) by updating emission reduction targets and expanding sectoral commitments. However, achieving resilience requires cross-sectoral approaches and coordinated efforts.
India’s roadmap to net zero
India’s policies in the power, residential, and transport sectors have already saved 440 million tonnes of carbon dioxide between 2015 and 2020. Current climate policies are projected to reduce emissions by 4 billion tons between 2020 and 2030, aligning with India’s COP26 commitment to cut emissions by one billion tons by 2030.
In the power sector, policies promoting renewable energy could drive a 24% reduction in coal-based electricity generation by 2030, avoiding the installation of 80 GW of coal power capacity. Currently, coal accounts for 71% of India’s electricity, but solar and wind power could rise to 26% of the energy mix by 2030 and 43% by 2050.
Achieving net zero by 2070 requires bolder action and increased financial support for developing nations. Investments in renewable energy, energy efficiency, and carbon credit trading schemes must be scaled up.
While India’s current policies set the stage for significant progress, new initiatives are essential to accelerate the path to net zero. Global cooperation and climate finance flows without restrictive conditions will be critical to supporting the Global South in building a sustainable future for all.
George Cheriyan is Director of Centre for Environment and Sustainable Development India, a national NGO in Special Consultative Status with UN-ECOSOC, and accredited with UNEP & UN ESCAP. CESDI is also a member of South Asia Network on SDGs.