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Carbon Markets Conundrum at COP26

  • IASbaba
  • October 21, 2021
  • 0
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ENVIRONMENT/ INTERNATIONAL

  • GS-2: International Institutions & Organisations
  • GS-3: Environmental Conservation 

Carbon Markets Conundrum at COP26

Context: The success of COP26 at Glasgow, that will take place from 31 October to 12 November 2021, depends to a great extent on the conclusion of carbon markets discussions

  • Article 6 of the Paris Agreement introduces provisions for using international carbon markets to facilitate fulfilment of Nationally Determined Contributions (NDCs) by countries. 

Why Carbon Markets in significant for India? 

  • Developing countries, particularly India, China and Brazil, gained significantly from the carbon market under the Clean Development Mechanism (CDM) of the Kyoto Protocol. 
  • India registered 1,703 projects under the CDM which is the second highest in the world. Total carbon credits known as Certified Emission Reductions (CERs) issued for these projects are around 255 million amounting to U.S.$2.55 billion.
  • Therefore, logically, India has a lot to gain from a thriving carbon market. However, with the ratification of the Paris Agreement, the rules of the game have changed.
  • Unlike the Kyoto Protocol, now even developing countries are required to have mitigation targets
  • Developing countries are faced with a dilemma of either selling their carbon credits in return for lucrative foreign investment flows or use these credits to achieve their own mitigation targets. 
  • This has made Article 6 a highly sensitive issue that requires careful balancing of interests and expectations.
  • While over 50% of the countries have communicated their intention of using market mechanisms to achieve NDC targets, India is not one of them as it aims to rely on domestic mitigation efforts to meet its NDC goals. 
  • It is the developed countries that would rely more on market mechanisms for achieving their climate targets as they would be comparatively low-cost options.

What are the critical issues with Article 6 of Paris Agreement?

The three critical issues that would be hotly debated in Article 6 negotiating rooms are Clean Development Mechanism (CDM) Transition, Accounting rules and Share of Proceeds to the Adaptation Fund. Let us examine them one by one.

CDM transition: 

  • The Clean Development Mechanism (CDM) projects have gone through due diligence and credits have been issued under UNFCCC oversight. Therefore, the Article 6 mechanism should honour the previous decisions 
  • However, some countries have cast doubts on the environmental integrity of these credits and while there is greater acceptance for transition of projects/activities, the same is not the case for transition of credits. 
  • If the decision regarding transition of CDM is not favourable, it could lead to a loss of billions of dollars worth of potential revenue to India alone. This can result in the formation of the new supervisory body under the Paris Agreement that can re-examine the validity and rigour of such credits.

Accounting rules: 

  • Article 6.4 mechanism is meant to incentivise the private sector and public entities to undertake mitigation activities for sustainable development. 
  • Under this mechanism, a country can purchase emission reductions from public and private entities of the host country and use it to meet its NDC targets. 
  • However, this does not automatically imply that emission reductions transferred from a host country be adjusted against its NDC targets. 
  • It must be appreciated that these reductions represent additional efforts of the private sector or public entities to mitigate greenhouse gas emissions, and in fact raise global climate ambition. 
  • This is also in line with the provision of Article 6.5 of the Paris Agreement wherein the host country is not required to undertake corresponding adjustment for the projects outside its NDC.
  • Therefore, such efforts will be additional to what have been committed in the NDC. 
  • Robust accounting will ensure that there will be no double-counting of emission reductions.

Share of Proceeds (SOP) to the Adaptation Fund:

  • For developing countries, adaptation is a necessity. 
  • However, it remains severely underfunded compared to financing for mitigation activities. 
  • While developing countries emphasise that the SOP must be uniformly applied to Articles 6.2 and 6.4 to fund adaptation, developed countries want to restrict its application to Article 6.4. 
  • This would disincentivise the Article 6.4 mechanism and limit voluntary cooperation to the cooperative approaches under Article 6.2 favoured by developed countries.

Conclusion

  • In a way, carbon markets allow developed countries to keep emitting greenhouse gases while developing countries benefit from the revenue generated from the sale of their carbon credits. 
  • Central to the discussions on Article 6 is equitable sharing of carbon and developmental space. Climate justice demands that developing countries get access to their fair share of global carbon space. 
  • As developing countries are nudged to take greater mitigation responsibilities, a facilitative carbon market mechanism that respects the principles enshrined in UNFCCC would greatly help accelerate their transition to low carbon development pathway.

Connecting the dots:

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