💨 What is a Carbon Credit?

• A carbon credit = a permit that allows the holder to emit one tonne of CO₂ (or equivalent GHG)
• Carbon credits are tradeable — companies that emit less than their allowance can sell surplus credits to companies that emit more
• The goal: create a financial incentive to reduce emissions — it becomes cheaper to reduce emissions than to buy credits
• 1 carbon credit = 1 tonne of CO₂ equivalent (CO₂e) reduced, avoided, or removed
• Two main types of carbon markets:
  • Compliance markets — mandatory; regulated by governments; companies must participate (e.g., EU ETS)
  • Voluntary markets — companies voluntarily buy credits to offset their emissions; not legally required

🏭 Cap-and-Trade System

• Government sets a cap (limit) on total GHG emissions from covered sectors
• Companies receive or buy emission allowances up to the cap
• Companies that emit less than their allowance can sell surplus allowances
• Companies that emit more must buy additional allowances or face penalties
• The cap is gradually reduced over time → total emissions decline
• EU Emissions Trading System (EU ETS) — world’s largest carbon market; launched 2005; covers power, industry, aviation
• Other ETS: California, China (world’s largest by volume), South Korea, New Zealand

🌍 Kyoto Protocol Mechanisms

📜 Article 6 of Paris Agreement

• Article 6 establishes the framework for international carbon markets under the Paris Agreement (replacing Kyoto mechanisms)
• Article 6.2 — bilateral/multilateral cooperative approaches; countries can transfer emission reductions (Internationally Transferred Mitigation Outcomes — ITMOs)
• Article 6.4 — new centralised UN carbon market mechanism (successor to CDM); “Paris Agreement Crediting Mechanism”
• Article 6.8 — non-market approaches (e.g., capacity building, technology transfer)
• Rules for Article 6 were finalised at COP26 (Glasgow, 2021) after years of negotiations
• Key safeguard: corresponding adjustment — when a country sells carbon credits, it must adjust its own NDC accounting to avoid double-counting

🇮🇳 India’s Carbon Market — CCTS

• India is developing its Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022
• The Bureau of Energy Efficiency (BEE) is the nodal agency
• CCTS will cover energy-intensive industries; companies that reduce emissions below targets earn carbon credits; those above targets must buy credits
• India’s existing Perform, Achieve and Trade (PAT) scheme — energy efficiency trading for designated consumers (DCs) in energy-intensive sectors; earns Energy Saving Certificates (ESCerts)
• India’s Renewable Energy Certificates (RECs) — tradeable certificates for renewable energy generation; promote renewable energy in states with poor renewable potential

🌳 REDD+ — Forests & Carbon

• REDD+ = Reducing Emissions from Deforestation and Forest Degradation (+ conservation, sustainable management, enhancement of forest carbon stocks)
• A UNFCCC mechanism that provides financial incentives to developing countries to protect forests
• Countries earn carbon credits for reducing deforestation below a reference level
• India has significant REDD+ potential — large forest cover; Green India Mission
• Challenges: measuring forest carbon accurately; ensuring permanence; addressing leakage (deforestation shifting elsewhere)

✅ Revision Checklist — Carbon Credits & Trading