Consider the following statements: 

Statement I: Carbon markets are likely to be one of the most widespread tools in the fight against climate change.

Statement-II: Carbon markets transfer resources from the private sector to the State. 

Which one of the following is correct in respect “of the above statements? 

(a) Both Statement I and Statement II are correct and Statement II is the correct explanation for Statement I 

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I 

(c) Statement I is correct but Statement II is incorrect 

(d) Statement I is incorrect but Statement II is correct 

Ans: b

Explanation:

Carbon markets have become one of the most widespread tools in the fight against climate change. 21% of the world’s emissions were covered by some form of carbon pricing (by end of 2021). Trading on these markets are growing year -on-year.

Hence, statement 1 is correct.

For the right to release “a tonne of carbon dioxide” into the atmosphere businesses have to pay regulators. The revenue from the sale of carbon permits, can be reinvested by  governments  in renewable energy or other righteous ventures (like subsidy on buying electric vehicles).

Additional Information:

What are Carbon Markets?

Carbon markets are trading systems in which companies or individuals can compensate for their greenhouse gas emissions by purchasing ‘carbon credits’ from entities that remove or reduce greenhouse gas emissions.

One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. The emitters can use these credits as their own to meet their reduction targets.

There are broadly two types of carbon markets: compliance and voluntary. 

• Compliance markets (like emissions trading systems (ETS) of European Union) are created as a result of any national or international regulatory requirement.

The European Union launched the world’s first international ETS in 2005. In 2021, China launched the world’s largest ETS.

Currently ETS Mechanism is in force in 29 countries and under consideration in 11 countries. In India ETS mecahnism is under consideration.

The Clean Development Mechanism (CDM), adopted under the Kyoto Protocol in 1997, is another example of an international compliance market. Under the CDM, emission-reduction projects in developing countries have generated carbon credits used by industrialized countries to meet part of their emission reduction targets.

• Voluntary carbon markets – national and international – are outside the regulatory requirements.

The demand for voluntary comes from private individuals that want to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at a higher price to make a profit.

Hence, statement 2 is correct, but statement 2 doesn’t explain statement 1.

Read: Solved Economy PYQs With Explanation 2023 UPSC Prelims