What are carbon credits?

Winters are no more pleasant for people living in Delhi and NCR. The entire region is engulfed in smoke emanating from fires dotting the region. Burning the stubble is far more convenient and cheaper for farmers instead of plucking the crop from the roots.

Several steps to wean them away proved futile. But now, a novel initiative is showing some promise.

Indian Agricultural Research Institute is teaming up with a private firm to build a marketplace for trading in carbon credits by Indian farmers.

While carbon credit trading in agriculture is a nascent field in India, it can provide an alternative source of earning to farmers. With this, the farmers would be able to claim carbon credits for a host of practices such as not burning paddy straw, not ploughing land, and laser levelling of land. But, what exactly are carbon credits? Let us find out.

Let us first understand carbon market mechanisms. As the UNFCCC explains, when a country sets a limit, or cap, on its greenhouse gas emissions, it creates something of value. That something is the right to emit.

A country or company that reduces its emissions below its set limit now has something to sell. That something is its unused right to emit, which is measured in tonnes of CO2 equivalent.

Now, countries and companies that are unable to meet their targets can buy these one-tonne units to make up for the shortfall. This is the basic idea behind emissions trading, or cap and trade.

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In theory, the net effect on the atmosphere should be the same. However, this would only hold true if the measurements involved are accurate. Accuracy here would mean that each unit represents an actual one-tonne reduction below the cap, and that each unit is only used once.

So carbon credits are like points that are issued to someone for either avoiding carbon dioxide emission or absorbing some amount of CO2 back from the atmosphere. One credit is awarded for a one-tonne reduction in CO2.

Now, the entity that has saved carbon credits can sell it and make money. The entity concerned gets a reward for not spewing or for sequestering CO2. And the buyer of the credit is basically paying a penalty for emitting or not being able to sequester CO2.

And, who does the buying? Typically, the buyers are companies and governments. Companies such as Google, Amazon and Apple, which have vowed to hit “net zero” by a certain date, can keep their promise in part by buying carbon credits. Governments with emissions reduction commitments will also buy these credits.

There is already an active market for carbon credits in place. And, the rules for the functioning of the markets have been agreed upon in last year’s COP26 climate talks.

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