Excessive carbon dioxide emissions cause the planet to heat up at a pace that renders the planet’s natural ability to balance it out inefficient. So carbon footprints, in an erratically warming world, are to be tracked and taxed the same way as money. This was agreed upon in the Kyoto Protocol of 1997 where carbon was recognised as a tradable good.
The Paris Agreement of 2015 further reaffirmed it as a result of which, 170 countries agreed upon their respective Nationally Determined Contributions (NDC) towards curbing their carbon footprints. Simply put, carbon footprints are a measure of the amount of carbon dioxide released into the atmosphere as a result of the activities of a particular individual, organisation, or community. To maintain the rise in global temperature well below the 2°Celcius line, we need to watch our carbon footprints. The greenhouse gas emissions need to be cut down by 25 to 50 percent by this decade itself.
In order to control these emissions, governments implement the “cap and trade” method under which they put a cap on the amount of greenhouse gases that a company can emit. It’s a softer alternative to ‘carbon tax’ which directly penalises companies for their emissions through taxes. Under this programme, carbon credits and carbon offsets are two instruments that incentivise companies to reduce their carbon footprints. Carbon credits allow companies to emit greenhouse gases whereas carbon offsets reward them for lower emissions. So a party that has excess credits (an excess of carbon capacity) and a party that needs credits can trade or can have a relationship whereby the excess credits offset the excess emissions of the other party.
What are carbon credits?
Carbon credits are, simply put, an organisation’s permitted levels of carbon emissions as per the country’s government. They are like a trading instrument which can be bought and sold in the market. If an organisation manages to give off lower emissions than their carbon credits, they get to sell the remaining credits off to other organisations for a profit, thus fiscally incentivising businesses and individuals to cut down on their carbon footprint.
What are carbon offsets?
Carbon Offset on the other hand is a compensatory instrument for cutting down on carbon emissions. Say, for instance, if an organisation doesn’t release enough greenhouse gases, they would be rendered unable to benefit from carbon credits. Therefore, to incentivise them to further invest in green technologies to reduce their carbon footprint, carbon offsets have been introduced. These offsets can also be sold in the market for a profit, to organisations that require them to offset their carbon emissions.
Indian Initiative in the carbon market
Just like stocks, there needs to be a regulatory body to verify and locate viable carbon credits and offsets so that their trading can be smoothly facilitated. In that regard, the Indian budget of 2023 proposed the development of a robust carbon market to regulate these transactions which will also help it achieve its NDC goals. These markets will help India in achieving its 2030 goal of reducing emissions by 45 per cent. By making carbon into a currency, profit-driven organisations will be incentivized to invest in green technologies to reduce their carbon footprint; consequently saving the planet from heating up any further.