Carbon markets

Story hook

In 2005, the European Union switched on the world's first cap-and-trade system for carbon — the EU Emissions Trading System (EU ETS). The idea sounded radical: put a price on the right to emit one tonne of CO₂, distribute a limited number of permits, and let companies buy and sell them. If you polluted less than your allowance, you could sell the difference. If you polluted more, you had to buy. Suddenly carbon had a market price — €8 a tonne in the first year, €105 by 2023.

Two decades later, every major economy has a carbon market in some form. China runs the world's largest national ETS (covering 4.5 billion tonnes of CO₂). California's cap-and-trade has cut emissions 11 % below 1990 levels. The Kyoto Protocol's Clean Development Mechanism (CDM) alone issued 2.2 billion certified emission reduction (CER) credits between 2005 and 2020, with India accounting for ~20 % of all CDM projects globally.

On 28 June 2023, India notified the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act 2022, formally launching its own carbon market in two stages: a compliance market for energy-intensive sectors (steel, cement, aluminium, fertiliser, paper, petrochemicals, refineries, chlor-alkali) and an offset market open to all entities. The first compliance auction is slated for 2026.

This file is about how carbon markets work, what India's CCTS does differently, and why the EU's Carbon Border Adjustment Mechanism (CBAM) is forcing every steel and cement exporter in India to start counting their emissions.

Why this matters for UPSC

Carbon markets is now a 3-mark Prelims question every cycle (CCTS, CDM, CBAM, Article 6) and a recurring 15-mark Mains essay under GS-III Environment + GS-II International Relations. Interviewers probe market design — why a tax vs a market? Why has CDM failed in Africa? India's 2070 net-zero pledge cannot be financed without functional carbon markets, making this a policy-relevant evergreen topic.