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How can companies offset carbon emissions?

The Union Government has introduced the Energy Conservation (Amendment) Bill 2022 to the Parliament. The aim for the Bill is to increase the effectiveness of the Energy Conservation Act, 2001. The Amendments are expected to facilitate the achievement of higher-level targets for climate change and facilitate the faster transition towards an economy that is low carbon. The Energy Conservation Act, 2001 has been the catalyst that started the first phase of India’s transformation to an energy-efficient and sustainable future. In the past it has been observed that the intensity of energy (energy consumed per metric gallons of GDP) of India’s economy has been decreasing consistently. But as India is preparing to take on more ambitious climate change action, as promised pursuant to the Paris Agreement, there is an urgent need to expand the extent of the Act to include measures to aid in the achievement of these lofty goals. One of the proposed amendment is to create a national carbon market to facilitate trading in carbon credits.

What are the proposed amendments under the Energy Conservation (Amendment) Bill 2022?

The bill has two major goals: (a) It seeks to require certain groups of industrial, commercial and even residential consumers to utilize green energy sources. A prescribed minimum proportion of the energy they consume must come from non-fossil and renewable energy sources; (b) It is aimed at helping establish a domestic carbon market and to facilitate the trade of carbon credits. The aim is to broaden the definition of energy conservation, encompassing big residential structures as well. In the past, energy conservation regulations have been primarily applied on commercial and industrial complexes.

What is an Carbon Market?

Carbon Markets and Carbon Credits are the components of emission trading, which is a system of market-based approaches for reducing the amount of Greenhouse gases (GHG) in the atmosphere. It provides economic incentives for reducing the emission of the pollutants of which it is a part. A carbon market allows companies and investors to trade carbon offsets and carbon credits simultaneously.

Carbon credits (or allowances) function as permits for emissions. When a business purchases a carbon credit they are granted permission to produce more CO2 emissions. A carbon credit that can be traded is one ton of carbon dioxide or the equivalent of a different greenhouse gas that is reduced, sequestered or avoided.

Credits are compared to benchmarks or permitted GHG emissions. If emissions are less than the allowed limit, then the emitter earns carbon credits (reducing 1 tonnes of CO2 to earn 1 carbon credit). If emissions exceed that limit, then the emitter must buy carbon credits from other companies that have excess credits. Thus, crossing the emissions limit imposes the cost (amount used to purchase carbon credits) to the emitter. The concept is that this price will make emitters improve their efficiency and reduce emission.

There are two kinds of markets for carbon emissions: (a) One is controlled market, defined by “cap-and-trade” regulations at the state and regional levels. (b) The second is a voluntary market in which people and businesses purchase credits (of themselves) to offset their carbon emissions. Click here for information on how to trade carbon credits.

Carbon Markets were allowed by the UN Kyoto Protocol. Its Clean Development Mechanism (CDM) allowed industrialized countries to reduce emissions abroad where that might be cheaper than at home like by planting trees in the tropics.

How can businesses reduce carbon emissions?

There are a variety of ways for companies to reduce carbon emission. They are broadly classified into (a) Carbon Avoidance/Reduction Projects (i.e., reduce the amount of carbon emitted); (b) Carbon Removal/Sequestration Project (i.e., remove the carbon already emitted from the atmosphere).

Investment in renewable energy via providing funds for hydro, wind solar and geothermal generation projects, or switching to such energy sources as often as feasible.

Improved energy efficiency across all over the world, such as by providing more efficient cookstoves to those living in impoverished or rural areas.

The process of capturing carbon from the atmosphere to create biofuel, which makes it a carbon-neutral fuel source.

Redistributing biomass back to the soil as mulch following harvesting instead of removing or burning. This reduces the amount of water evaporating from the soil’s surface, which aids in preserving water. It also aids in feeding soil microbes and earthworms, permitting nutrients to cycle through and help strengthen the soil’s structure.

The promotion of forest regrowth by tree-planting and reforestation programs.

Switching to alternate fuel types using biofuels with lower carbon levels like corn , biomass-derived bioethanol and biodiesel.

What is the status in Carbon Markets across the world?

National or Regional

Domestic or regional carbon markets exist in a variety of regions, but the largest is Europe, where an Emission Trading Scheme (ETS) is based according to similar rules. Industrial units in Europe have emission standards that they must adhere to which they purchase and sell credits on the basis of their performance. China has a carbon market in its domestic market.

An incentive scheme similar to that for promoting efficiency in energy use has been in place in India for more than 10 years now. The BEE scheme, called PAT (or achieve, perform and trade) allows companies to earn efficiency certificates if they surpass the prescribed efficiency standards. They can also purchase certificates to allow them to operate.


In the Kyoto Protocol, carbon markets have been in operation at the international scale as well. According to the Kyoto Protocol had prescribed emission reduction targets for a set of that included developed countries (Annex I, Developed Countries). Other countries were not subject to these targets, however if they did reduce their carbon emissions, they can gain carbon credits. These carbon credits could then be sold off to those advanced nations that were unable to meet their reduction goals. This system functioned well for a couple of years. The market then sank because of the lack of demand for carbon credits.

In the process of negotiating an agreement on climate change to replace the Kyoto Protocol, the developed nations no longer felt the necessity to adhere to their commitments under the Kyoto Protocol. A similar carbon market is planned to be implemented under an agreement that will succeed the Paris Agreement, but its details are still being made clear.

What are the advantages of an Carbon Market?

In the beginning, it can assist in reducing the negative effects of climate change through in reducing GHG emissions.

In addition, there are numerous co-benefits of offset projects such as: ecosystem management, forest preservation sustainable agricultural practices, the generation of renewable energy in third-world nations, etc.

Thirdly, the voluntary offsetting market in carbon to offset carbon is smaller in comparison to the conformity market but expected to grow much more extensive in the years ahead. It’s open to individuals as well as companies and organizations that want to reduce or completely eliminate their carbon footprint but are not obliged to comply with the law.

Fourth, the public is becoming aware of the necessity of carbon emissions. Therefore, they’re becoming increasingly dissatisfied with companies that don’t consider Climate change very seriously. By donating to carbon offset projects, companies signal to investors and customers that they’re paying more than mere lip service to fight climate change.

Fifth, it will open an additional revenue stream for environmentally beneficial businesses. For instance, Tesla, the electric car maker, sold carbon credits to legacy automakers to the tune of $518 million in just the first quarter of 2021.

What are the biggest challenges facing running Carbon Markets?

First, there is concern regarding the efficiency of carbon markets in reducing emissions. Some businesses simply purchase carbon credits and do not make any efforts to reduce their emissions. It is cheaper for them to purchase carbon credits rather than to invest in emission reduction technologies e.g., an study by the Center for Science and Environment of the PAT program for thermal power plants found that the cost of one credit is significantly less than INR 700 — when compared to the actual investment of INR 4,020 which must be made to cut energy consumption equivalent to one tonne. If the cost in carbon credits greater than the price of reducing emissions, there is no incentive for emitters who are high to work to reduce their emissions (i.e. corporations have to invest more in purchasing credits instead of investing in emission reduction technology).

*(ESCerts are like carbon certificates, which will be bought and sold in the carbon market scheme).

The second argument is that only carbon offsets of high quality are effective in reducing emissions. High quality carbon offsets have specific characteristics like (a) Additionality: Emission reductions must be added i.e., they would not have happened in the absence of an offset credit market e.g. the renewable project could be created only because a high emitter paid for it; (b) It is verifiable that there must be proper audits to ensure the monitoring reports and verification of emission reductions (c) Permanence This means that the reduction in emissions can be irreversible.

But, many of the credits on the market are of poor quality i.e. they don’t fulfill the above requirements. Many of the credits aren’t ‘additional’ i.e. emissions reduction initiatives would have taken place even in absence of carbon credits (without any opportunity the project’s owners could sell carbon offset credits). It is also very difficult to establish the ‘additionality’. According to an American-based environmental group, more than 60% of credits on the market originate from projects with “questionable claims to additionality”..

In certain cases there are instances where the reduction in emissions is not permanent. There are instances when the afforestation project was undertaken in order to purchase carbon credits. But, afterward, the planted trees were cut-off, thus reversing the reduction.

Third, buying carbon credits may divert wealthy nations from the goal of reducing their emissions. They may continue to emit and buy affordable carbon credits from developing countries.

Fourth, there’s been an immense surplus of carbon credits on the voluntary market. According to an estimate of credits for roughly one billion tonnes of CO2 have been made available for sale on the market of voluntary auctions. But there have been more buyers than sellers. Supply exceeding demand suppresses carbon credits’ price and makes it more easy for emitters to offset and despite the continuing high emissions.

Fifth, it can be difficult to establish the amount of carbon that offset projects reduce (like wind energy or afforestation project). The complexity is in establishing emission baselines (Emissions baseline is what would happen if your project did not occur i.e., the emissions without this project). This makes it challenging to verify emission reductions and assigning credits for carbon.

India’s PAT (Perform Achieve, Trade) scheme has not been able to achieve meaningful emissions reduction. According to an analysis by the Center for Science and Environment, the emission reduction under the scheme has been just 1.57 percent and 1.44 percent in the two years.

What steps should be taken going ahead?

The first is the necessity to establish a national regulatory body for the environment on the similarity to SEBi (Stock Market Regulator), RBI (Banking Regulator) to ensure the carbon markets function effectively.

Second, there must be strict regulatory safeguards in place to ensure that emission offsets that are traded are of a high standard. Else, as experts contend an ineffective carbon market can be more damaging.

Third, there is a need to create a sense of environmental awareness within the general population to ensure that they realize their environmental responsibilities. For instance, people can buy offsets of emissions from an activity that is high in emissions, such as a long flight, or buy offsets regularly to minimize their carbon footprint.

Fourthly, it’s vital to ensure that cap-and trade doesn’t be a check-and-extort regime in India. To do this, a technologically-enabled system of open verification could be adopted by the government.


The development of a national carbon market is a progressive step. However, the actual benefit depends on the efficacy and efficiency of this market. To achieve this, the government must ensure that proper regulations are established. Additionally, there should be a periodic evaluation of the functioning of the system and corrective steps that are needed. Climate change is real and is imminent. the government should take all steps to mitigate the challenges.