Published on: 14th January 2025
Authored by: Bibhash Das
University Of Allahabad
Abstract
The country is facing drastic changes in the environment, air quality, and public health, and many measures have been taken to protect the environment. One of these measures is carbon credits. Carbon Credits are authorizations granted to companies that allow them to release CO2 gas into the environment caused by their manufacturing process and industrial operations. A company or industry can buy carbon credits from the government in carbon markets to get a permit for the emissions that their company’s production causes. Carbon markets arose due to the demand to reduce the carbon footprint caused by industrial production. This requirement was established in the 2015 Paris Agreement, which set CO2 emission targets for environmental issues. Carbon credits’ main aim is to serve as a financial benefit or incentive for companies to minimize their greenhouse gases and emissions and engage in greener and more sustainable operations and management. Carbon credits and carbon offsets are two categories that have been found to help industries and companies reduce their carbon footprint. An organization earns carbon credits when it invests in a carbon offset system. As a result, they earn annual carbon credits as a reward for extending their emissions targets. In other words, instead of reducing their pollution, they can buy offsets called carbon credits that are supposed to represent reductions in emissions elsewhere. Carbon credits are sold in two types of markets: regulated markets and voluntary markets. One carbon credit is equal to the permission to produce emissions equivalent to one ton or 100 kgs of CO2. However, adapting to the credit market or newer technologies allows some companies, especially the more lucrative ones or the big multinational giants, to continue emitting greenhouse gases into the environment. The trading of these carbon credits is further regulated by carbon market regulators, but there are no such strict laws to regulate it.
Keywords: Carbon Credits, Carbon Market, Carbon footprints, Sustainability, Regulations
Introduction
The Kyoto Protocol of 1997 and the Paris Agreement of 2015 set international targets for CO2 emissions. It was ratified by all but six countries and resulted in national emissions targets and the regulations that support them. Because of these regulations, companies and industries need to reduce their carbon footprint, and Carbon Markets comes up with solutions. Carbon credits and carbon offsets are two categories that have been found to help industries and companies reduce their carbon footprint.
● Carbon Credits: Carbon credits are authorizations granted to companies and industries that allow them to emit CO2 produced by their manufacturing and industrial operations in order to reduce their carbon footprint.
● Carbon Offsets: Carbon Offsets are tradable “rights” or certificates associated with activities that reduce the amount of carbon dioxide (CO2) in the atmosphere. By purchasing these certificates, a person or group can fund projects that fight climate change instead of taking steps to reduce carbon emissions.
Research Methodology
The research methodology used in this research work is a doctrinal research methodology that uses various secondary sources of law such as cross-sectional studies, case studies, and literature reviews. Various sources such as analysis of UN reports and carbon credit trading manuals, magazines, articles, and official websites are used to verify the collected and summarized information in order to analyze the real cause of this paper and examine the aspects of the Carbon Credits Trading System around the world, its advantages, challenges, and precautions.
Review of Literature
The Carbon Credit Trading System has become a vast concept globally as it focuses on measures to save the planet. This system has benefited industrialists in reducing environmental catastrophe while also creating many new and innovative opportunities for their production. Along with the benefits, there are several issues that the market faces regarding fair trading and financing of offset projects. For transactions to take place in the carbon market, the institutional and financial infrastructure must be transparent.
The article “The ultimate guide to understanding carbon credits” explains that a carbon market is a market that allows investors, individuals, companies, and corporations to trade both in carbon credits and carbon offsets. These new challenges always produce new markets, and the ongoing climate crisis and rising global emissions are major issues for everyone, although the renewed interest in carbon markets is relatively new.
The Climate Promise by UNDP raises serious issues related to double-counting of GHG (Green House Gases) emission reductions, human rights abuses, and greenwashing (in which companies falsely market their green credentials, for example, misrepresentations of climate-neutral products or services). If carbon markets are to be successful, these issues must be addressed immediately, and there must be adequate social and environmental safeguards in place to mitigate adverse project impacts and promote positive ones.
How are Carbon Credits created?
● Through the use of carbon offsets, a method of carbon trading, organizations can offset their greenhouse gas emissions (GGE) by funding initiatives that reduce, eliminate, or otherwise reduce emissions either completely or partially.
● An organization receives carbon credits when it invests in a carbon offset system. Under this system, businesses are awarded annual limits of carbon credits that decrease over time. They can sell any surplus to other companies.
● The company is entitled to emit one ton of CO2 when purchasing one carbon credit.
● Annual credits are usually issued according to emission targets.
● The term cap-and-trade program is widely used and awards credits based on each company’s size and operating efficiency compared to industry benchmarks.
● Regulators have set a cap on carbon emissions.
● Over time, the cap gradually lowers, making it more difficult for companies to stay within it. To offset the carbon emissions their operations create, they buy carbon credits, which allow businesses to emit carbon emissions while also funding green projects, such as planting trees on a larger plot of land. In other words, instead of reducing their pollution, they can buy offsets called carbon credits that are supposed to represent reductions in emissions elsewhere. Simply put, companies can buy two different types of carbon credits that are available in the carbon market: First is Carbon Credits, which is like, “Hey, we exceeded our emissions, so we pay a fee for every metric ton of carbon above what we were allowed,” and Project credits for reducing emissions. The second is (Offset Credits), where a company uses a project carbon credit to offset its carbon emissions by investing in environmental projects.
Sale of Carbon Credits
The Carbon credits can be sold in two types of markets: regulated markets and voluntary markets.
In Regulated markets, credits are issued to companies through a cap-and-trade program. When companies reach their emissions “ceiling,” or the maximum permissible limit, they turn to the regulatory market to “trade” to stay below that limit. It is a regulated market. So if one company is producing less emissions, it can trade its excess carbon credits to a company that has exceeded its emissions production limit. Example: let us assume that there are 2 companies, Company 1 and Company 2, and they can only emit 300 tons of carbon emissions. However, Company 1 is on track to emit 400 tonnes of carbon this year, while Company 2 has only emitted 200 tonnes. So to avoid fines, penalties, and special taxes, Company 1 can offset an additional 100 tons of CO2 emissions by buying credits from Company 2, which emits 100 tons less carbon through its production means.
In Voluntary Markets, companies buy credits to reduce their Carbon emissions of their own accord. This is optional. Carbon offsets are a voluntary market. Companies operate only in Voluntary Markets where cap-and-trade programs don’t exist yet.
Double Counting of Carbon Credits
In the process of carbon offsetting, the term double counting refers to when a carbon credit (and the climate impact it represents) is claimed by more than one entity or company. For example, if 5 companies buy the same offset credits and there is an emission of 50 tonnes of GHG gases by the production of these 5 companies but the reduction of emission by the offset credits they purchased is only 10 tonnes, the 50 carbon credits would be claimed by 5 different companies and would be counted 5 times, even though no additional carbon benefit is produced 5 times. This is day by day taking the form of a scam by persons selling offset credits.
Which laws govern Carbon Credit Trading?
Organizations within the United Nations (UN) are making efforts and plans to create a comprehensive, broad, and well-coordinated legal framework for managing carbon credits. Several schemes, agreements, and policies govern the trading of carbon credits, including:
- Article 17 of the Kyoto Protocol of 1997
- Article 6 of the Paris Agreement of 2015
- European Union emissions trading scheme
But “no specific legislation” is in place for the regulation of Carbon Credit Trading alone. Furthermore, the growing and expanding international trading of carbon credits and securities exposes the disparities in the legal treatment of carbon credits across different organizations and jurisdictions. If several companies are being referred to carbon offsetting schemes when only one or two should have been, then there is no incentive to penalize them, and strict adherence to the regulations may or may not be observed. The United Nations and other relevant international organizations like UNIDROIT’s very ambitious “VCC Project” on the Legal Nature of Verified Carbon Credits, also the World Bank’s Forest Carbon Partnership Facility (FCPF) programme since 2018, are committed to conducting detailed research on the legal issues related to carbon credits in international trade and making efforts to explore and form a clear and coordinated legal framework.
Effect of legal nature of Carbon Credits on trading and financing globally
The legal nature of the thing is important in determining how it can be bought and traded, what kind of security can be provided, how that security can be enforced, and how it will be dealt with in the event of insolvency. Specifically, in the case of carbon credits, the legal nature may affect the owner’s right to retire and their rights in the event of cancellation of the carbon credits by the registry provider for any reason, including fraud or scandal. There is no international guideline on determining the legal nature or legal framework of carbon credits, and most countries—including China and India—have not yet clarified what carbon credits are. The legal nature of carbon credits has a direct and deep impact on carbon trading and financing in a number of ways, including:
- purchase and sale of carbon credits;
- the rights that owners of carbon credits may have against them;
- sale of carbon credits linked to market participants in the event of their bankruptcy or insolvency;
- accounting and taxation regulations on carbon credits.
Different countries define the legal nature and legal framework of Carbon Credits differently and according to their terms. For example, Australian law treats carbon credits as personal property that can be transferred by will, assignment, or legal succession. Carbon credits were recently classified as intangible commodities by the Commodity Futures Trading Commission (CFTC). They are considered corporate security in Argentina. As the legal definition of carbon credits is defined differently, problems may arise in the global trade of carbon credits through the carbon market unit from one country to another. In order for the global carbon market to have a stable and predictable trading climate, the legal status of carbon credits must be clearly defined. These problems undoubtedly arise from the fact that carbon credits are only a tool to reduce carbon emissions; they have not yet been recognized as real rights. Due to the ambiguous legal nature of the difficulties arising from conspiracies and unfair practices in their trade, global trade with them is disrupted.
Benefits if Carbon Credits were “real rights”
If carbon credits are real rights, like property rights, there will be less risk and more certainty for financing transactions. This will help prevent future legal disputes, make financial transactions more predictable, and provide lenders and investors with a safer trading environment. Ownership of these credits will be transferred and verified more easily. If carbon credits are treated as property rights, they can provide stronger safeguards for financial institutions, as property rights can be more easily defined and enforced in a court of law. Because of their ability to reduce risk and provide borrowers with greater certainty of legal protection, title deeds are often accepted as collateral by banks and other financial organizations. The main definition of the legal nature of carbon credits at the global level is therefore essential for the precise interpretation needed in their trading and financing, so as to maintain the right balance and to prevent any unfair practices in the trade flow.
Are Carbon Credits and Carbon Offsetting Programs really helping to protect the environment?
There are a lot of opinions on this question as various environmental activists believe that this solution found for the “reduction of emissions” is just a sham on a large scale which has already been taken to a global level now. Let’s take a look at what people around the globe have to say on this:
Prof Andrew Macintosh, the former head of the government’s Emissions Reduction Assurance Committee, said the growing carbon market overseen by the government and the Clean Energy Regulator was “largely a sham” as most of the carbon credits approved did not represent real or new cuts in greenhouse gas emissions.
His critique clearly questions how these regulating schemes are not real and new emission programs for offset of the same. It also shows how in the belief of reducing their emissions, the number of polluting countries is increasing day by day and such companies don’t look forward to adopting the environment-friendly and greener approach of production as it reduces their profits while expenses rise accordingly.
The forest carbon offsets that are mainly approved by the world’s leading certifier and mainly used by Disney, Shell, Gucci, and many other big corporations and multinational companies are largely worthless and could make global heating worse, according to a new investigation.
According to the analysis of a significant portion of the projects, more than 90% of the rainforest offset credits in Verra, the world’s most popular carbon standard for the rapidly expanding voluntary offsets market, are likely to be “phantom credits” and do not reflect actual carbon reductions. The investigation casts huge doubt on the credits purchased by several globally recognized businesses and firms, some of which have declared their goods to be “carbon neutral” or have assured customers they may travel, purchase new clothing, or consume specific foods without exacerbating the climate catastrophe.
Legal Nature of Carbon Credit Trading in India
Several Indian businesses and government agencies have deliberately tried to capture carbon credits and sell them, despite the lack of official recognition and policy. For example, an Indian company based in Mumbai became the first in the country to sell 20,000 credits produced by agriculture through the implementation of a crop residue management program that prevented the release of more than one million tons of CO2 and other harmful pollutants.
● The Delhi Metro is also the first metro project registered with the UN under CDM in 2007 and has a record sale of approximately 3.55 million credits generated from 2012 to 2018 and earned Rs 195 million. According to a report published in ETA Energy World, between 2010 and 2022, India is estimated to have issued approximately 33.94 million carbon credits and traded these carbon credits on international global markets. However, it is only after the Energy Conservation Amendment Bill 2022 that carbon credit has been legitimized by the Indian government.
Carbon Credit Trading under the Energy Conservation Amendment Act 2022
The Energy Conservation Amendment Act 2022, which went into effect on January 1, 2023, made amendments in the already existing Indian Energy Conservation Act, 2001. The central government’s Ministry of Power has been given the authority to create and oversee the carbon trading program under section 14 and to issue carbon credit certificates under section 14AA of this act. The amendment also institutes a maximum penalty of 10,00,000 rupees and a daily penalty of Rs. 10,000 for persistent non-compliance with the restrictions outlined in section 14.
The Amendment Act gives the Central Government of India the authority to specify a carbon credit trading scheme.
While Carbon Credit has not been defined under the Principal Act or the Amendment Act, it generally refers to a tradeable permit, allowing the holder or the corporation to emit a specified amount of carbon dioxide or other greenhouse gases.
Section 14AA (1), The Energy Conservation Amendment Act, 2022: The Central Government of India, or any agency authorized by it may issue a carbon credit certificate to the registered entity or corporation which complies with the requirements of the carbon credit trading scheme.
Any entity registered under the carbon credit trading program, including designated consumers, is referred to as a “registered entity” as defined by the Amendment Act.
It is essential to note that the Carbon Credit Trading Scheme has not yet been notified and may be notified by the Central Government of India in the future.
At Present, there is no clarity on the scope and ambit of the Carbon Credit Trading Scheme. It is to be seen if the certificates are made interchangeable in the future. The Carbon Credit Trading Scheme once notified may bring more clarity on the trading and regulatory framework of the Carbon Credit Trading Certificate and may also bring changes in the compliance structure and penalty provisions.
Challenges
According to the new provisions introduced in the amendment of the Energy Conservation Act, it aims to facilitate the replacement of fossil fuels with renewable sources on the supply side, even if this is not in line with the concept of energy savings. The main idea of putting a price on carbon emissions is that polluters will receive a financial incentive from the Central Government of India to reduce greenhouse gas production, thereby curbing climate change. However, despite these intentions, carbon markets have faced considerable criticism and have been seen as ineffective in achieving their goals. In addition, carbon markets have been criticized for allowing polluters to continue emitting greenhouse gases by buying carbon credits or offsets instead of actually reducing emissions. This has led to concerns about the integrity and effectiveness of these markets in actually reducing overall emissions and combating climate change.
Furthermore, only one section on carbon credit trading has been inserted, even for the jurisdiction of India. However, this leads to a number of problems that can arise in global carbon markets:
- Whether the reduction of greenhouse gas emissions contribute to the health of the planet in the literal sense of the word, or is this scheme just an escape from the eyes of the law regarding companies exceeding the regulatory emission limit?
- What exactly regulates Carbon Credit Trading transactions globally?
- What are the solutions to disputes arising between countries as a result of these global transactions, should companies go bankrupt?
- Who is responsible for trading one carbon offset scheme?
- What measures are taken in case of double counting?
- What are the incentives for fraud in the sale and purchase of loan compensation?
Suggestions
From the above research, it can be concluded that separate laws are necessary and can act as an incentive to influence the health of the planet if properly regulated. Here are some suggestions that can be implemented in terms of creating a separate legal framework worldwide for the cross-border trading of carbon credits:
- Organizations under the UN that are involved in the fight against climate change can ask the UN to create separate legislation that will regulate the trading of carbon credits worldwide without the question of jurisdiction. Why? This will allow carbon trading companies to invest in global initiatives and contribute beyond their national borders. It will also allow regulators to keep proper records of transactions as rules can be prescribed and there will be no confusion as to which jurisdiction a credit transaction falls under in the event of insolvency.
- In the case of national jurisdiction, each carbon trading country should introduce at least one change to its existing energy conservation legislation to strictly adhere to emission targets. Why? This will allow larger emitting companies to comply with national rules that may be created and stay within emissions targets.
- For the trading of carbon offsets or offset credits, one cap-and-trade committee should be established in each country to ensure reasonable trading of such offsets along with penalties for fraud or double counting. Why? Such a commission can check whether one specific offset is not purchased by several companies. This is because the companies remain in the belief that there is a reduction in emissions but in the real scenario it is a fraud or it can also be called double counting. In such a case, such an offset program can be severely penalized by the regulators such as an established trading control commission.
- There should be strict regulations regarding emission targets and no company’s output should generate above the set targets. Why? If and only if the emission targets are strictly regulated, then the environmental impact would be good enough to eventually shift to environmentally friendly production.
Conclusion
To summarize and conclude the research, I would say that carbon credits and offset credits can work as a very effective method to combat climate change problems. If regulated by separate legislation that will be strict, then trading in such credits will help companies to maintain their production and profit targets, as well as compensation for emissions can be properly provided. After methods are properly sought, companies under strict regulations maintain their emission targets longer than they can be advised to convert and use environmentally friendly industrial operations as gradually as possible without affecting their production targets. “Change is gradual,” they say. However, change also occurs when the right path is sought. The requirement that companies switch to environmentally friendly industrial operations will burden the entire functioning of companies. But if the trading of carbon credits by these companies is strictly regulated, they will fall into the category of companies that do not exceed their emission targets. Second, over time they will move into the category of companies producing emissions below the set targets. And later they can move to a greener and more sustainable approach to industrial operations. Therefore, in my opinion, separate laws are really needed to regulate the trading of carbon credits, which will ultimately do the same as an optional solution to reducing emissions, not as the only solution currently being sought.
