CARBON CREDITS TRADING: Are separate laws necessary for its regulation?

Abstract

The earth is facing drastic changes concerning its environment air and air health and multiple measures have been taken to save the environment. Carbon Credits are one of those measures. Carbon Credits are permissions given to companies, allowing them to emit CO2 gas in the environment caused by their production process and industrial operations. A company or industry can buy Carbon Credits from the Government in Carbon Markets to gain permission for the emissions that their company's production causes. Carbon Markets have come into existence due to the demand for a reduction in the Carbon Footprints that industrial production causes. This demand was laid down after the Kyoto Protocol of 1997 and the Paris Agreement of 2015 where CO2 emission targets were set for environmental issues. Thus, Carbon Credits are intended to serve as a financial incentive for companies to minimize their greenhouse gas emissions and engage in greener, more sustainable operations.  Carbon credits and carbon offsets are the two categories that have been found to help industries and companies reduce their carbon footprints. An organization gets carbon credits when it invests in a carbon offsetting scheme. Through that, they receive annual carbon credits as awards to extend their emissions targets.   In other words, instead of reducing their pollution, they can choose to buy offsets called Carbon Credits that are meant to represent a reduction of emissions elsewhere. The sale of Carbon Credits takes place in two types of markets: Regulated Markets and Voluntary Markets. One Carbon Credit equals permission to generate one ton of CO2 emissions. However, adapting to the credit market allows some companies, particularly the more lucrative ones, to continue emitting greenhouse gases. Further, the trading of these Carbon Credits is regulated by Carbon Market regulators, but there are no such stringent legislations made for its regulations. 

Keywords 

Carbon Credits, Carbon Market, Carbon footprints, Sustainability, Regulations

Introduction

The Kyoto Protocol of 1997 and the Paris Agreement of 2015 set international CO2 emissions targets. It was ratified by all but six nations and has resulted in national emissions targets and regulations to support them. Due to these regulations, companies and industries are demanded to reduce their Carbon Footprints, and Carbon Markets have come up with solutions. Carbon credits and carbon offsets are the two categories that have been found to help industries and companies reduce their carbon footprints. 

● Carbon Credits: Carbon Credits are permissions given to companies and industries allowing them to emit CO2 produced by their production and industrial operations to reduce their Carbon Footprints.

● Carbon Offsets: Carbon offsets are tradable “rights” or certificates linked to activities that lower the amount of carbon dioxide (CO2) in the atmosphere. By buying these certificates, a person or group can fund projects that fight climate change, instead of taking actions to lower their carbon emissions.

Research Methodology

The Research Methodology used in the given research paper is Doctrinal research methodology, which uses various secondary sources of law like cross-sectional studies, case studies, and literature reviews as sources. Various such sources like analysis by the United Nations Reports and Carbon Credits Trading Guides, journals, articles, and official websites are referred for authenticating the information gathered and summarised to analyze the actual cause of this paper and to study what are the aspects of the Carbon Credits Trading System worldwide, what the advantages and challenges are, and the measures that are taken for it.

Review of Literature

The Carbon Credit Trading System has become a vast concept globally as it focuses on the measures to save the planet. This system has benefitted the industrialists to mitigate the environmental crisis, while also creating new opportunities for their production. Along with the benefits, there are several issues that the market faces about fair trading and financing of offset projects and 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”, clearly defines Carbon Credits and Carbon Markets trading the same. A carbon market allows investors and corporations to trade both carbon credits and carbon offsets simultaneously. These new challenges nearly always produce new markets, and the ongoing climate crisis and rising global emissions are no exception. The renewed interest in carbon markets is relatively new.

The Climate Promise by UNDP puts down serious concerns including issues related to double-counting of GHG emission reductions, human rights abuses, and greenwashing (in which companies falsely market their green credentials, for example, misrepresentations of climate-neutral products or services) in their article “What are carbon markets and why are they important” For carbon markets to be successful, these issues must be addressed. And there must be adequate social and environmental safeguards to mitigate against any adverse project impacts – and to promote positive ones.

How are Carbon Credits created?

● Through the use of carbon offsetting, a carbon trading method, organizations may compensate for their offset greenhouse gas emissions by funding initiatives that lower, eliminate, or otherwise mitigate emissions.

● An organization gets carbon credits when it invests in a carbon offsetting scheme. Under the scheme, businesses are awarded an annual cap of carbon credits that decrease with time. They can sell any excess to other companies.

● A company is authorized to emit one ton of CO2 when they purchase one carbon credit.

● Usually, annual credits are issued by emissions targets.

● The term "cap-and-trade" program, which issues credits on each company's size and operational efficiency in comparison to industry benchmarks, is widely used.

● A cap is set on carbon emissions by regulators.

● Over time, the cap gradually declines making it more difficult for companies to stay within it. To make up for the carbon emissions that their operations generate, they purchase Carbon Credits, which enable businesses to emit carbon emissions while financing environmental projects like planting trees on a larger plot of land. In other words, instead of reducing their pollution, they can choose to buy offsets called Carbon Credits that are meant to represent a reduction of emissions elsewhere.

Simply put companies can purchase two different types of carbon credits on the carbon market: Permits to pollute (Carbon Credits) which say, “Hey, we went over our emissions, so we’re paying a fee for every metric ton of carbon above what we were allowed.” and Project-based reduction credits (Offset Credits) are when with a project-based carbon credit, a company offsets its carbon emissions by investing in environmental projects.

Sale of Carbon Credits

The sale of Carbon Credits takes place in two types of markets: Regulated Markets and Voluntary Markets. 

● In Regulated Markets, the companies are issued credits through the cap-and-trade program. When companies meet their emissions “cap,” they look towards the regulatory market to “trade” so that they can stay under that cap. This is a mandated market. So if one company produces less emissions then it can trade its excess Carbon Credits to a company that has exceeded its cap limit of producing emissions. Example: Company 1 and Company 2, are only allowed to emit 300 tons of carbon. However, Company 1 is on track to emit 400 tons of carbon this year, while Company 2 will only be emitting 200 tons. To avoid a penalty comprised of fines and extra taxes, Company 1 can make up for emitting 100 extra tons of CO₂e by purchasing credits from Company 2, which has extra emissions due to producing 100 tons less carbon.

●  InVoluntary Markets, companies buy credits to reduce their Carbon emissions of their own accord. This is optional. Carbon offsets are a voluntary market. Doing so is for companies operating where cap-and-trade programs don’t exist yet. 

Double Counting of Carbon Credits

In carbon offsetting, then, double counting refers to when a carbon credit (and the climate impact it represents) is claimed by more than one entity.  For example; 5 companies buy the same offset credits and there is the 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. Here, the 50 carbon credits would be claimed by 5 different companies and this will be counted 5 times, even though no additional carbon benefit is produced 5 times. This is day by day taking the form of scam by persons selling offset credits.

Which laws govern Carbon Credit Trading?

Organizations within the United Nations are making efforts to create a comprehensive and well-coordinated legal framework for carbon credits. Several schemes, agreements, and policies govern the trading of carbon credits, few of the schemes and policies are as follows:

● 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 international trading of carbon credits exposes the disparities in the legal treatment of carbon credits across different organizations and jurisdictions. If several companies are being referred to a carbon offsetting scheme when only one or two should have been, 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 “VCC Project” on the Legal Nature of Verified Carbon Credits, World Bank’s Forest Carbon Partnership Facility (FCPF), since 2018 to establish efficient systems for carbon-crediting initiatives 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 a thing is relevant to determining how it can be bought and traded, the type of security that may be granted how that security may be enforced, and how it will be treated in insolvency. In the case of Carbon Credits specifically, the legal nature of a Carbon Credit may also impact the owner’s right to retire and rights in the event of the cancellation of Carbon Credits by the registry provider for any reason including fraud or scandal. There is no international guideline on determining the legal nature of carbon credits, and most countries—including China—have not yet clarified what carbon credits are.  The legal nature of Carbon Credits has a direct impact on carbon trading and carbon finance in many ways, including: 

• the purchasing and selling of carbon credits; 

• the rights that owners of carbon credits may have against them; 

• the disposal of carbon credits linked to market participants in the case of their bankruptcy;

• the accounting and tax regulations about carbon credits.

Various countries define the legal nature of Carbon Credits differently. For example, Australian law considers carbon credits as personal property that can be transferred by will, assignment, or legal succession. Carbon credits have been classified as intangible commodities by the US Commodity Futures Trading Commission (CFTC) in recent times. They are regarded as the company's security in Argentina.

Due to the legal definition of carbon credits being defined differently, there may be challenges in the event of global trade of carbon credits through the Carbon Market Unit of one country to another. For the global carbon market to have a stable and predictable business climate, the legal status of carbon credits must be made clear.

These problems undoubtedly result from the fact that carbon credits are only a tool for lowering carbon emissions; they haven't been recognized as actual rights yet. Due to the ambiguous legal nature of the difficulties arising from the conspiracy and malpractices in its trade, global trading of the same is disrupted.

Benefits if Carbon Credits were “real rights”

There will be less risk and more certainty for financing transactions if Carbon Credits are real rights, like property rights. This will help to prevent future legal disputes, make financing transactions more predictable, and give creditors and investors a safer trading environment. The ownership of these credits will be transferred and verified more easily. Treating carbon credits as property rights also gives financial institutions more dependable guarantees since property rights are easier to define and uphold in court. Due to their ability to lower risks and give borrowers more certain legal protection, property rights are frequently accepted as collateral by banks and other financial organizations.

Thus, defining the legal nature of Carbon Credits on a global level is necessary for the accurate interpretation needed during its trading and financing to maintain proper balance and avoid malpractices in the flow of trade.

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 a say on this:

1. 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 as to 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 but expenses rise accordingly.

2. The forest carbon offsets approved by the world’s leading certifier and used by Disney, Shell, Gucci, and other big corporations 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 not reflect carbon reductions. The investigation casts doubt on the credits purchased by several globally recognized businesses, some of whom 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 made deliberate attempts to generate 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 over one million tonnes 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 3.55 million credits generated from 2012 to 2018, earning a revenue of Rs.195 million.

As per a report published in the ETA energy world, it is estimated that from the year 2010 to 2022, India has issued 33.94 million carbon credits and has also traded such 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 to the 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 thanks to this act. The amendment additionally 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 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 to emit a specified amount of carbon dioxide or other greenhouse gases. 

• Section 14AA (1), The Energy Conservation Amendment Act, 2022 : The Central Government, or any agency authorized by it may issue a carbon credit certificate to the registered entity 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 pertinent to note that the Carbon Credit Trading Scheme has not yet been notified and may be notified by the Central Government in the future.

Currently, 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 regulation of the Carbon Credit Trading Certificate and may also bring changes in the compliance structure and penalty provisions.

Challenges

The new provisions introduced in the Energy Conservation Amendment Act aim to facilitate the substitution of fossil fuels with renewables at the supply end though this is not consistent with the concept of energy conservation. 

The idea is that by putting a price on carbon emissions, polluters will have a financial incentive to reduce their greenhouse gas output, thus curbing climate change. However, despite these intentions, carbon markets have faced significant criticism and have been deemed ineffective in achieving their objectives. Furthermore, carbon markets have been criticized for allowing polluters to continue emitting greenhouse gases by purchasing carbon credits or offsets rather than implementing genuine emission reductions. This has led to concerns about the integrity and effectiveness of these markets in actually reducing overall emissions and combating climate change.  Further, only one section as regards the Carbon Credits Trading has been inserted, that too for the jurisdiction of India. But this gives rise to numerous issues that may arise globally in the Carbon Markets:

1. Is the reduction of GHG emissions contributing to the planet’s health in a literal sense or is this scheme just an escape from the eyes of law concerning companies exceeding the regulatory limit of emissions?

2. What exactly is regulating the Carbon Credit Trading transactions globally?

3. What are the solutions to disputes arising between countries due to these global transactions if the companies went bankrupt?

4. Who looks after the trading of one single carbon offsetting program?

5. What measures are taken on double counting?

6. In case of fraud in the selling and buying of credit offsets, what are the incentive measures for it?

Suggestions

From the above Research, it can be opined that separate laws are necessary and can act as an incentive to impact the planet’s health if regulated properly. Here, are some suggestions that can be implemented in terms of making a separate legal framework globally for cross-border trading of Carbon Credits:

1. Organisations under the United Nations working to combat climate change can make efforts to apply to the UN for making a separate legislation that will regulate the trading of Carbon Credits worldwide without the question of Jurisdiction.

Why? This will allow the companies trading for Carbon Credits to invest in global initiatives thus, contributing more than just their national boundaries. It will also allow the regulators to maintain a record of transactions properly as the rules may be prescribed and there will be no confusion in what jurisdiction the transaction of credits comes under in case of insolvency.

2. For national jurisdiction, each country trading in the Carbon Market should insert at least one amendment in their already existing Energy Conservation legislation for strict adherence to emission targets.

Why? This will make the companies generating larger emissions abide by the national rules as may be formed and stay within the limits of emission targets.

3. For trading of carbon offsets or offset credits, there should be one committee formed in each country under the Cap-and-trade program, that will look after proportionate trading of such offsets along with penalties in case of fraud or Double Counting.

Why? Such a committee can keep a check on whether one particular offset is not being purchased by numerous companies. It is because companies stay under the belief that reduction of emissions is taking place but in the actual scenario, it is a fraud or also can be called Double Counting In such a case, the committee so formed to keep a check on the trading can strictly penalize such offset program regulators.  

4. There should be stringent regulations with regard to emission targets and no companies’ production should generate above the targets allotted.

Why? If and only if the emission targets are being regulated strictly then the environmental impact would be good enough to eventually move towards environment-friendly production operations.

Conclusion

To summarise and conclude the Research, I would say that Carbon Credits and Offset Credits can act as a very efficient method for combating climate change issues. If regulated through separate legislation which will be stringent, then the trading of such credits will help the companies to maintain their production and profit targets as well as the compensation for emissions can be given correctly. After the methods are sought properly, companies under stringent regulations maintain their emission targets for longer then such companies can be advised to convert and make use of environment-friendly industrial operations as gradually as possible without affecting their production targets. “Change takes place gradually,” they say. But change also takes place when sought through the correct path. Asking Companies to shift to environment-friendly industrial operations will burden the entire working of the companies. But if the Carbon Credit Trading of such companies is regulated strictly, then this will make them come under the category of Companies that do not exceed their emission targets. Secondly, eventually, over time they will move to the category of companies producing emissions less than the targets allotted. And later they can shift to a greener and more sustainable approach to industrial operations. Hence, in my opinion, separate laws are indeed necessary for the regulation of Carbon Credit Trading, which will eventually make the same as an optional solution for the reduction of emissions rather than the only solution as sought currently.

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