Understanding the Carbon Credit Market: How It Works and Who Buys Them
Guest Author: Dr. Sat Kumar Tomer, Founder & CEO, Satyukt Analytics
06 January 2025, New Delhi: The carbon credit market is a landmark financial instrument in the world’s fight against climate change. By encouraging organizations, governments, and enterprises to participate in greenhouse gas emission reduction activities, the credits incentivize them to adopt environmentally sustainable practices. With the increasing concern about climate change globally, it is very important to know how the carbon credit market operates and identify its key players.
The carbon credit market is mainly divided into two broad types, namely compliance markets and voluntary markets. Compliance markets are those markets that have been set up and regulated by the state so that some industries are subjected to prescribed emission reduction levels compliance. Such emissions are bought or sold allowances among firms as required. For example, if a business is less gaseous than what it should emit under the cap, the excess amount may be sold to another company that has exceeded the limit.
For example, under the PAT Scheme under the Bureau of Energy Efficiency, the Indian scheme should be considered very effective. Thirteen energy-intensive sectors were covered, varying from 2012 to 2023, achieving energy savings of 17.9 million tonnes of oil equivalent and significant emission reductions. Furthermore, India will now likely set up its compliance carbon market by 2026, covering 11 key sectors such as steel, cement, and power generation, against an intensity approach for emissions limits.
In fact, through voluntary carbon markets, companies, governments, or even individuals may purchase carbon credits voluntarily outside mandatory regulatory systems to offset their emissions. Such voluntary credits are usually put to use by organizations in their strategies for corporate sustainability, as evidence of their leadership in tackling climate change, although not required by law to do so. Voluntary markets are populated mainly by sectors like airlines and technology companies that want to give the public an idea of their attainment of a low-impact environment through this alternative financing to sustain certain environmentally beneficial projects.
Some Common sources of carbon credits include reforestation and afforestation undertakings, renewable energy schemes, and capture and storage technologies. For example, trees absorb carbon dioxide from the atmosphere making reforestation projects the pivotal means to earn credits by quantifying the CO₂ removed via tree planting. Renewable energy projects include things like solar and wind farms. Between 2021 and 2023, for example, India added over 15 GW of annual solar capacity, so that by 2023, the total installed capacity was 71.6 GW. Likewise, carbon capture and storage (CCS) technologies are also gradually becoming popular. In India, CCS is still in its infancy, but pilot projects such as CO₂ capture from industrial plants have been taken up for study. These initiatives are additionally subjected to very rigorous validation and verification processes so that their results are certified to be accurate, indefinite, and On an individual basis, private ones also start buying carbon credits to offset their carbon emissions. Travel by air, energy consumed at home, or activities in between, many consumers are mindful of their impact on the environment and will take measures to balance it with support from such credits.
Price of Carbon Credits in India
The price of carbon credits in India is anticipated to start at approximately $10 per metric ton of CO₂ equivalent (mtCO₂e) when the Carbon Credit Trading Scheme (CCTS) becomes operational. The voluntary carbon credit market in India generated revenue of USD 122.7 million in 2023 and is projected to reach USD 1,158.6 million by 2030, with a compound annual growth rate (CAGR) of 37.8% from 2024 to 2030. While the regulatory framework for the CCTS is established, actual trading under this scheme is expected to commence in the 2026-27 financial year. Meanwhile, voluntary carbon credit transactions have been ongoing, with sectors such as renewable energy and energy efficiency being the largest contributors.
This is what the carbon credit market does, it builds financial incentives for industries and countries to invest in renewable energy, energy efficiency, and otherwise climate-oriented projects. By putting a financial value to reducing emissions, innovation, funding, and development of low-carbon technologies will be incited and developed. At the same time, the companies will be able to meet their regulatory and corporate sustainability objectives of offsetting emissions when direct reduction is too expensive or difficult.
Carbon markets can deal with emission reduction problems, but still, many barriers exist, such as issues of transparency and verification of how reductions are achieved, equitable access to resources, and investments aligning with measurable and permanent climate benefits. As an example, from 2021 to 2023, India’s efforts to establish a compliant carbon market faced hurdles in verifying emission reductions in the sectors of steel and cement, which contribute now more than 20 percent to national emissions.
To say that India has been able to address the barriers through the PAT scheme would be an understatement as PAT saved a staggering 17.9 million tonnes equivalent of oil energy from 2012 to 2023, but the challenge remains on real measurable impacts since pilot projects always need strong monitoring frameworks and standardized reporting systems to verify claims.
The carbon credit market has become an essential part of the global fight against climate change. By enabling governments, corporations, investors, and individuals to offset carbon emissions, this system not only fosters innovation and climate action but also promotes sustainability worldwide. With proper governance, technological innovation, and collaboration, the carbon credit market will likely continue to grow, offering an important pathway toward achieving a greener, more sustainable future.
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