Our Earth, a blue planet as we know it, is succumbing to hues of grey. Ever since the industrial revolution came about in the 18th century, a medley of toxic gasses to both us as well as the environment have been released in bulk. The results of these reckless emissions are becoming increasingly visible, including global warming, ozone depletion, increasing sea levels, onset of respiratory diseases and change in weather patterns.

To curb this global problem of greenhouse gases and their effects on the environment, the United Nations designed a Framework Convention for Climate Change back in 1992 for cutting down emissions. The Kyoto Protocol of 1997, realising ratifications based on the premise that global warming does exist and it is mainly caused by man-made carbon dioxide emissions, laid down the treaty for reducing greenhouse gas concentrations in the atmosphere. Under the Kyoto Protocol, its 192 countries promised to cut down/cap their individual greenhouse gas emissions at their base year levels in a period of two phases. The first commitment period for a few selective countries which included 37 industrialised nations and the European Union happened between 2008-2012.

As part of EU climate policy, the member nations came up with a novel and brilliant strategy to tackle the problem of green house gases in a sustainable manner while not adversely affecting its industries. The European Union Emission Trading Scheme (EU ETS), launched in 2005, remains by far the first and the largest carbon trading programme. This ETS functions across 31 countries that includes all of the 28 EU countries plus Iceland, Liechtenstein and Norway. It encompasses more than 11,000 heavy energy-using installations (power stations & industrial plants) and airlines operating between these countries, taking care of more than 45% of EU greenhouse gas emissions. 

The ETS works on the basic principle of ‘cap and trade’. The EU sets a cap at the total volume of greenhouse gases to be released by individual industries, companies, and power plants covered under the system. Within this established cap, each entity receives certain emission allowances which can be traded at a carbon exchange. The ‘currency’ for trading emission allowances are carbon units which corresponds to one tonne of CO2 produced, the main greenhouse gas, or the equivalent amount of N2O and perflourocarbons, the two other, more powerful, greenhouse gases. Furthermore, the admissible cap on power plants, airlines and other such institutions is being shrunk by a certain percentage every year, with hopes of cutting down overall emissions by upto 21% in 2020.

Initially, the majority of emission allowances were given to companies for free. But from 2013 onwards a proper, transparent auctioning has been incorporated, putting into practice the principle of “polluters must pay”. If any company ends up polluting more than its granted emission allowances, dissuasive fines are imposed and is also ‘named and shamed’ by making their pollution statistics public causing a negative impact on them in the market. In a scenario where a company for some reason needs to pollute more than its granted emission allowances, it can buy more carbon units from the open exchange. Many industries that do not end up depleting their entire allotted emissions can monetise on their remaining carbon units by selling them to the companies that might need them. 

Overall, this practice of monetising carbon units promotes the use of clean energy and reduced emissions that will be beneficial in the long run and also economically viable. It also creates an incentive for companies to invest in low carbon technologies. Anyone registered with an EU account can indulge in allowance trading. Trading can be done directly between buyers and sellers, through several organised exchanges or intermediaries active in the carbon market. Supply and demand determine the fluctuating price of allowances. As many as 40 million allowances have been traded per day. In 2012 alone, 7.9 billion allowances were traded with a total value of €56 billion. 

The ETS in the European context has been a very successful intervention which has limited greenhouse gas emissions, promoted green and low carbon technologies while also identifying the heavy polluters and organising them under one umbrella. Other similar national and sub-national systems are also functioning in Australia, Japan, New Zealand, Switzerland and the United States, and are planned in Canada, China and South Korea. A scope for an international carbon market is developing with proposals for connecting the Australian and EU ETS to be completed by 2018.

Although India does not have any binding targets as per the Kyoto protocol of 1997, it has still promised a significant cut down in its emissions by 2022 in the recently concluded UNFCCC meeting in Paris. In a May 2016 WHO air pollution data survey, India was ranked amongst the most polluted countries with 5 Indian cities grabbing positions in the top 10 list. With the promotion of the ‘Make in India’ scheme, there is an increased focus on production and mining. India needs to cut down its emissions for sustainable growth while still maintaining its GDP numbers. The need of the hour for the country is to tackle this problem of air pollution head on with innovative policies. 

An interstate Indian ETS holds a bright prospect within the vast geography of the country. With varied demographics across the country, some of which are population density, availability of resources, green cover and other factors, a ‘cap and trade’ policy can be implemented nationwide in collaboration with the Ministries of Environment, Coal and Renewable Energy along with independent bodies like NITI Aayog. A small collaborative pilot run of ETS by MoEF, CPCB and IFMR/J-PAL was run in the three states of Tamil Nadu, Maharashtra and Gujarat involving around 300 units per state for a period of 2 years between 2011 and 2013. The analysis of the research is ongoing and hopes to present encouraging results for adoption of this scheme on a wider scale.