At the end of COP27, developing nations proposed their agenda of funding green growth. Multilateral agencies pitched in with their ideas, such as creating funds to help developing countries travel the climate-friendly growth path. The IMF has attempted to price emissions through models, indicating that if emissions are to be prevented, the economy must pay the price.
In a global economy beset by inequalities, growth is essential to improve the overall economic well-being of the people.
How can reduction in emissions be achieved without impacting economic growth? Market-based incentives would be more effective than creating a global climate fund or a simple transfer of capital from high-income nations.
A robust policy regime that caps emission limits for various economic activities and provides allowances or credits to those contributing to emission reductions from cleaner economic activities can be a way forward.
For example, scientific studies find India and China to be the largest emitters of methane for every tonne of rice produced. Paddy cultivation can be replaced by a variety that can grow under low moisture conditions, and that could potentially lead to lower methane (GHG) emissions. If the current cultivation method is modified to limit methane emissions, a credit may be given to the farmer for every tonne of carbon emission. And that can be sold to a coal-based power producer who exceeds emission limits set by national policy.
Administering such a mechanism would need effective monitoring and an ecosystem of auditors who check the emitters and those who reduce emissions to quantify the savings. A large number of economic activities produce GHG emissions, and there are alternative technologies that can generate the same amount of economic output with lower emissions.
Policymakers should set limits for the stakeholders to trade credits. These markets, when liquid and free from conflicts of interest and political influences, can be a cost-effective path to achieving the net-zero goal.
Carbon credits
Major Asian economies, including city-states such as Hong Kong and Singapore, announced the launch of carbon emissions trading facility over the last year or so. Creating an emission reduction mechanism to reach the net-zero goal is about creating a suitable set of policies, regulations, and institutions.
Nations should work towards synchronising carbon credit issuance standards so that capital can move from polluters to the impacted.
Where is India in terms of doing the base work for the launch of the carbon markets? For a market to exist and for participants to trust it, there should be tradeable instruments assured or recognised by policymakers after appropriate audit/surveillance.
Which market model to go with? There are quite a few that are already operating, including the EU mandatory and the global voluntary markets. Clues to market structure and regulations can be obtained from them.
No one market model fits all unless there is a global effort to create one to tackle this global phenomenon. Until then, the onus is on us to create a market that facilitates cross-border transactions. In this regard, the IOSCO report published on November 22 is a good starting point for providing policymakers with various choices.
Liquid markets can do a much better job pricing emissions than even the complex models attempted by the IMF. Markets make clear not only the cost of emissions but also empowers the carbon-saving value chain to those deploying technologies with transparency in pricing and return expectations. Emission markets can also enable more effortless movement of capital across geographical borders, making emission reduction a global effort.
The writer is with the National Institute of Securities Markets. Views are personal