Environmental Management – Introduction
Environmental Law is perceived as one of the most important tools of environmental management. Protection of environment from degradation has now not just remained a legal issue but a management issue.
In India environmental management is largely carried out at the state level. This is true for natural resources such as forests and land as well as for air, water quality and solid waste pollution.
It is observed that just compliance of environmental law on paper does not result in effective control of pollution. An alternate paradigm for pollution abatement for more effective methods of environmental control beyond traditional “command-and-control (CAC)” style regulation is to use economic instruments (EIs) or market-based instruments (MBIs). Introduction of market based instruments will help to reduce emissions, pollution and increase social responsibility of industries. Eco-taxes, tradable emission allowances and negotiated agreements are some of the types of instruments.
Market Based Instruments (MBI) for Environmental Benefits:
“Market Based Instruments refer to the environmental policies which encourage change in technology, behaviour or products through financial incentives like subsidies, taxes, price differentiation or market creation.”
MBIs use the market & price mechanism to encourage firms or households to adopt environment friendly practices. They comprise a wide range of instruments from traditional ones like taxes on pollution, tradable permits to input taxes, product charges and differential tax rates.
The common element among all MBIs is that they work through the market and affect the behavior of economic agents (such as firms and households) by changing the nature of incentives/disincentives these agents face.
CARBON CREDIT – As one of the most effective MBIs:
What does Carbon Credit mean?
A permit that allows the holder to emit one ton of carbon dioxide; Credits are awarded to countries or groups that have reduced their green house gases below their emission quota.
Its goal is to stop the increase of carbon dioxide emissions. The Kyoto Protocol presents nations with the challenge of reducing greenhouse gases and storing more carbon. A nation that finds it hard to meet its target of reducing GHG could pay another nation to reduce emissions by an appropriate quantity. The carbon credit system was ratified in conjunction with the Kyoto Protocol.
For example, if an environmentalist group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.
What is Carbon Trade?
An idea presented in response to the Kyoto Protocol that involves the trading of greenhouse gas (GHG) emission rights between nations.
For example, if Country X exceeds its capacity of GHG and Country Y has a surplus of capacity, a monetary agreement could be made that would see Country X pay Country Y for the right to use its surplus capacity.
Credits versus Taxes
Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon taxes. A drawback of tax-raising schemes is that, they are not frequently hypothecated, and so some or all of the taxation raised by a government may be applied inefficiently or not used to benefit the environment.
By treating emissions as a ‘market commodity’ it becomes easier for business to understand and manage their activities, while economists and traders can attempt to predict future pricing using well understood market theories. Thus the main advantages of a tradable carbon credit over a carbon tax are:
1. the price is more likely to be perceived as fair by those paying it, as the cost of carbon is set by the market, and not by politicians. Investors in credits have more control over their own costs.
2. the flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine sustainable carbon reduction schemes, through its internationally-agreed validation process.
Conclusion
Carbon credits are now a key component of national and international emissions trading schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.
There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon off-setters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project.
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets. The ultimate objective of regulating pollution through MBIs is improved environmental quality.
Written By: Anand Wadadekar, M.A Economics, MBA Finance & Banking, AMFI, DIT, GCIPR
