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

Answer: (a) Both Statement-I and Statement-II are correct, and Statement-II is the correct explanation for Statement-I

Both are true, and II explains I: markets raise public money while pricing carbon, so governments adopt them widely.

Statement by statement

1. ✓ CORRECT Most countries’ NDCs plan to use carbon markets; the World Bank estimates trading could cut the cost of meeting NDCs by up to $250 billion by 2030. India launched its Carbon Credit Trading Scheme in 2023.

2. ✓ CORRECT Under cap-and-trade the government sells (auctions) emission allowances, so polluters pay the State — the same effect as a carbon tax. This is the framing UPSC lifted from the IMF.

The idea

A carbon market puts a price on emitting. The government fixes a total limit (the cap) and issues permits up to that limit. A firm that emits less than its permits can sell the spare ones; a firm that emits more must buy. So emissions are cut first where cutting is cheapest.

Government sets a cap → Permits are auctioned or allotted → Clean firm has spare permits → Sells them to a firm that is over its limit → Total stays within the cap → Cap is lowered every few years

Why the others are wrong

(c) Treats a carbon market as money moving only between firms; auctioned permits pay the State.

The trap

Allowances may be auctioned by the State or allocated free; offset trading need not bring State revenue.

Also know

Two kinds: a compliance market is created by law (EU Emissions Trading System, 2005; China’s national market, 2021); a voluntary market is where companies buy credits by choice. India: the Energy Conservation (Amendment) Act, 2022 allowed a domestic carbon market and the Carbon Credit Trading Scheme was notified in 2023, with the Bureau of Energy Efficiency as administrator. Under the Paris Agreement, Article 6.2 covers trade between two countries and Article 6.4 sets up a central UN mechanism.