Carbon credit

Topic: Environment and Sustainable Development · NCERT: Beyond NCERT

Meaning

A carbon credit is a tradable certificate that stands for 1 tonne of CO₂e (carbon dioxide equivalent) that has been reduced, avoided or removed from the atmosphere. CO₂e means that other greenhouse gases are converted into the amount of CO₂ that would cause the same warming.

• Unit rule: 1 carbon credit = 1 t CO₂e cut, avoided or removed.
• Why it matters: a carbon credit gives a cut in emissions a price. A firm that cuts pollution can sell the cut, and a firm that pollutes has to pay for it.
• This is how a negative externality gets internalised. A negative externality is a harm, such as pollution, that the polluter does not pay for. Internalising it means making the polluter bear that cost in its own accounts.

Explanation

How a carbon credit works

• The basic problem: a factory's smoke harms other people and warms the planet, but nobody bills the factory for this.
• Its marginal social cost (MSC, the total cost to society of one more unit) is higher than its marginal private cost (MPC, the cost to the firm alone).

• The gap between them is the marginal external cost (MEC, the harm done to others): MSC = MPC + MEC.

• How a credit fixes it:

• Suppose one project cuts 1 t CO₂e more than it would otherwise have done. That cut is checked and turned into 1 credit.
• A buyer who needs to cover its own emissions pays for that credit.

• The cheaper cut gets made, and the polluter pays a price for each tonne it emits.

• Carbon market: a market where carbon credits or allowances are bought and sold.

• Carbon offset: buying credits to cancel out one's own emissions. For example, a company with a net-zero pledge buys credits equal to the emissions it cannot yet cut.

Two kinds of carbon market

	Compliance carbon market	Voluntary carbon market (VCM)
Created by	Law	Buyers' own choice
Who buys	Covered firms that must hand in credits or allowances equal to their emissions	Firms with net-zero pledges, which offset by choice
Rules and standards	Set by the government or regulator	Verra, Gold Standard, and ICVCM's Core Carbon Principles (a quality benchmark)

What makes a credit genuine: the four integrity tests

A credit is only worth something if the tonne it stands for is real. The four tests are:

• Additionality: the cut would not have happened without the money from the credit.
• Permanence: the carbon stays locked away. If a forest that was credited later burns, the carbon goes back into the air.
• No leakage: the emissions do not simply move to another place.
• No double counting: the same tonne is not claimed by two buyers or by two countries.
• What goes wrong when these fail:
• Some REDD+ credits faced integrity scandals. REDD+ (Reducing Emissions from Deforestation and forest Degradation) is a forest-carbon programme.
• The amount of deforestation these projects claimed to have "avoided" was overstated.
• As a result, buyers paid for tonnes that were never really saved. This is greenwashing: claiming green credentials that are not real.

International lineage: Kyoto to Paris

• Clean Development Mechanism (CDM), under the Kyoto Protocol:
• Developed countries paid for emission-cutting projects in developing countries.
• In return they earned CERs (Certified Emission Reductions), which counted towards their own targets.

• India was the second-largest host after China.

• Paris Agreement, Article 6.2: ITMOs (Internationally Transferred Mitigation Outcomes)

• These are country-to-country transfers of emission cuts.

• They need "corresponding adjustments": the selling country adds the tonne back to its own account, so the cut is not counted twice.

• Paris Agreement, Article 6.4: PACM (Paris Agreement Crediting Mechanism)

• This is a UN-supervised crediting system. It replaced the CDM.
• Its rules were finalised at COP29 (Baku, 2024).
• Standards were adopted on the baseline (what emissions would have been without the project), on leakage, and on reversal (making sure stored carbon is not lost later) [4].
• The UNFCCC says Article 6 could help save up to US$250 billion a year in the cost of carrying out national climate plans [4].

In India

• Step 1: PAT scheme (Perform, Achieve and Trade), 2012
• Energy-intensive plants got energy-saving targets.

• Plants that beat their target earned ESCerts (Energy Saving Certificates) to sell. Plants that missed their target had to buy them.

• Step 2: Energy Conservation (Amendment) Act, 2022

• This gave the government legal power to specify a carbon credit trading scheme.

• Step 3: Carbon Credit Trading Scheme (CCTS), notified June 2023

• It created the Indian Carbon Market (ICM) and a National Steering Committee for the Indian Carbon Market (NSCICM) [2].
• Aim: to reduce or avoid GHG emissions by pricing them through tradable Carbon Credit Certificates (CCCs) [2].

• Who runs it:

  • BEE (Bureau of Energy Efficiency) is the administrator.
  • Grid-India is the registry, which keeps the record of who holds which credits.
  • CERC (Central Electricity Regulatory Commission) regulates trading.

• (a) Compliance mechanism

• Obligated Entities must meet GHG Emission Intensity (GEI) targets. These are measured in tonnes of CO₂e per tonne of product, not as an absolute cap on total emissions [2][3].
• Entities that do better than their target earn CCCs and can sell them. Entities that miss their target must buy CCCs [2].
• The first GEI targets covered 7 sectors moved over from PAT: aluminium, cement, chlor-alkali, petrochemicals, petroleum refineries, pulp and paper, and textiles [2].

• GEI targets were later notified for 208 more carbon-intensive industrial units [1].

• (b) Offset mechanism

• Entities that are not obligated can voluntarily register projects and earn credits.

• Worked example: how a cement plant earns CCCs

• The plant's target is 0.60 t CO₂e per tonne of cement. It produces 10 lakh t of cement.
• Allowed emissions = 0.60 × 10 lakh = 6 lakh t CO₂e.
• Its actual intensity is 0.57, so it emits 0.57 × 10 lakh = 5.7 lakh t.
• The difference is 6 lakh − 5.7 lakh = 30,000 t, so it earns 30,000 CCCs that it can sell.

• Catch: if output grows, total emissions can still rise. This fits India's NDC (national climate target), which is framed as emissions intensity of GDP (emissions per rupee of GDP).

• Link to CBAM: the EU's CBAM (Carbon Border Adjustment Mechanism) is a charge on the carbon released while making imported goods. Its payment phase starts in 2026. A working domestic carbon price under the CCTS can help Indian exporters argue for a deduction, because carbon already paid for at home can reduce the charge.

Don't confuse with

• Carbon allowance (permit): an allowance is the right to emit 1 t CO₂e under a government cap, as in the EU ETS. A carbon credit is proof that 1 t CO₂e was reduced, avoided or removed.
• Carbon tax: a carbon tax fixes the price of carbon, so the amount by which emissions fall stays uncertain. Credit and permit markets let the market set the price.
• Green Credit (Green Credit Programme): it rewards actions such as tree planting or water conservation. It is not a certified tonne of CO₂e, so it is not a carbon credit.
• ESCerts (PAT) and RECs:
• An ESCert counts energy saved.
• A REC (Renewable Energy Certificate) is proof that renewable power was generated. Discoms (power distribution companies) buy RECs to meet their renewable purchase obligations.
• Neither of them counts a tonne of CO₂e directly.

Prelims Hooks

• 1 carbon credit = 1 t CO₂e reduced, avoided or removed. In India's CCTS, 1 CCC = 1 t CO₂e.
• CCTS (June 2023) was notified under the Energy Conservation (Amendment) Act 2022. BEE is the administrator, Grid-India the registry and CERC the trading regulator [2].
• CCTS targets are emission intensity (GEI) targets, not absolute caps. The first 7 sectors came over from PAT, and targets were later notified for 208 more units [1][2].
• The four integrity tests: additionality, permanence, no leakage and no double counting.
• Article 6.2 = ITMOs (country-to-country transfers, with corresponding adjustments). Article 6.4 = PACM, the successor to the CDM, with rules finalised at COP29 (Baku, 2024) [4].
• Trap: a Green Credit is not a carbon credit. Under the Kyoto Protocol's CDM, India was the second-largest host after China.

Mains Points

• Intensity-based credits protect growth but do not guarantee lower total emissions.
• Efficient plants are rewarded with CCCs, while output is still allowed to grow.

• Total emissions can still rise, so the CCTS fits India's intensity-based NDC but does not ensure that absolute emissions fall.

• Integrity decides whether credits help the climate or only look green.

• The REDD+ scandals show the risk of greenwashing.
• Corresponding adjustments under Article 6 and the COP29 standards on baseline, leakage and reversal strengthen trust [4].

• India needs strong MRV (Monitoring, Reporting and Verification) for its offset mechanism.

• Carbon credits and trade (GS-II/III):

• CBAM tackles carbon leakage, but it shifts the burden onto developing-country exporters, especially of steel and aluminium. India calls it unilateral and against CBDR (Common But Differentiated Responsibilities).
• A credible CCTS price can help India seek a CBAM deduction.
• India can also earn climate finance by selling cuts through Article 6.

Related concepts

• Internalisation of externalities
• Carbon pricing
• Green tax
• Social cost of carbon
• Internal carbon price
• Fossil fuel subsidies
• Cap-and-trade
• Carbon market
• Compliance carbon market
• Voluntary carbon market

Read more

• Pricing pollution: carbon taxes, cap-and-trade and carbon markets