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 ✓ UPSC's answer
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Why the answer is (b)

• Statement-I is correct: carbon markets — emissions trading systems and carbon-credit markets under Article 6 of the Paris Agreement — are spreading rapidly (EU ETS, China's national ETS, India's Carbon Credit Trading Scheme, 2023) and are seen as a central tool for cutting emissions at least cost.

• Statement-II is treated as correct in the official key: where governments auction allowances or levy charges within a market, resources flow from private emitters to the State, and States also earn from selling credits.

• However, this transfer is not the reason carbon markets are widespread; their appeal lies in putting a price on carbon and letting emitters find the cheapest abatement — so Statement-II does not explain Statement-I.

• Hence option (b).

Why the other options are wrong

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation…: Resource transfer to the State is not why carbon markets are widespread; efficiency in pricing carbon is.
(c) Statement-I is correct but Statement-II is incorrect: Statement-II is treated as correct in the official key.
(d) Statement-I is incorrect but Statement-II is correct: Statement-I is correct: carbon markets are a leading climate tool.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2023, held on 28 May 2023. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.