Cap and trade: An idea whose time has come

Context: India has set up an inter-ministerial panel to oversee an action plan to achieve its 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.

Carbon pricing: An effective method to counter climate change in present times

• COVID-19: Slowing the battle against climate change
• Hard pressed global economy is resulting in fewer resources being diverted towards fighting climate change.
• The 26th United Nations climate summit (or CoP26) has been postponed by a year.
• Signatories to the 2015 Paris Agreement have been quibbling over the design of a global carbon market, delaying emission-choking green projects.
• Cap-and-trade market for carbon:
• How it works:
• Under such a scheme, government must fix a target, back-calculate a schedule of gradual carbon reduction, and then either sell/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.
• How will it help:
• It will pressure industries to function as eco-friendly as possible to ensure low operational costs.
• Increase in investment and development of green-tech innovations by companies to ensure their carbon neutrality.
• Indian experiment: A pilot project based on the concept has been launched in Surat’s textile sector to cut air pollution of the particulate matter sort.
• Challenges for India:
• Will be difficult to scale on a country-wide basis due to its highly complex mechanism.
• Difficulty in arriving over initial allotments and pricing (which is bound to be arbitrary) as seen in the Western Countries.
• Lack of cost-competitive industrial base.
• Issue with the monetization of carbon credits as happened after the Kyoto protocol.

Conclusion: The world’s climate crisis is a classic “tragedy of the commons", one that will take international cooperation to resolve. India will do well to create our own carbon market to start with.