There is a lot at stake for India related to the new market mechanisms under the Paris climate pact, which are seen as an important way to mitigate carbon emissions

Market mechanisms are seen as an essential element in reducing industrial emissions (Photo by Pixabay)

Market mechanisms are seen as an essential element in reducing industrial emissions (Photo by Pixabay)

Market mechanisms, as an important means to mitigate carbon emissions, have been in place for long. Under the Kyoto Protocol, a legal treaty with defined carbon emission reduction targets for developed countries, Clean Development Mechanism (CDM) projects, and emission trading schemes broadly constituted the primary basis of market mechanisms.

The Paris Agreement, to replace the Kyoto Protocol, has broadened the ambit and scope of the market mechanisms. Under Article 6 of the Paris Agreement dedicated to markets, new provisions and approaches such as Internationally Transferable Mitigation Outcomes (ITMOs) and Sustainable Development Mechanism (SDM) have been introduced within Article 6.2 and 6.4, respectively.

It has underlined environmental integrity and brought forth the central mandate of the market mechanisms to deliver reductions in Overall Mitigation of Global Emissions (OMGE) with a view to raise ambition. It is therefore amply evident that the new market mechanism seeks to move beyond pure offsetting, as was the case in Kyoto Protocol.

What this implies in finer details has been subject to much heated deliberations leading to markets as the foremost hanging issue in the rulebook to implement the Paris Agreement, which was adopted in December 2018 at Katowice, Poland. Differences notwithstanding, countries ranging from having experience and domestic readiness such as Switzerland, Norway, and Japan to those with little domestic readiness capacity, such as Ethiopia, have shown high interest to engage in the international carbon market. This is partly reflected in countries’ national action plans or the Nationally Determined Contributions (NDCs), wherein markets are highlighted as important mitigation approaches to reduce GHG emissions.

Unresolved issues

Lot of technical and governance issues to set in motion new markets remain unresolved even after the conclusion of climate talks at inter-sessionals held at Bonn, Germany, in June 2019. These include the relation to the NDCs and established accounting procedures; relation between the cooperative approaches and SDM; the nature and scope of centralized authority to oversee and regulate markets; application of corresponding adjustments for accounting purposes and how to maintain consistency; relation between the existing markets and the new markets; form and application of international registry on tracking and reporting of projects; determination and methodology of additionality of projects falling within the market mechanism; proceeds on trading; any limits to trading towards NDCs, and so forth.

Different countries have focussed on different aspects of carbon market post the Paris Agreement. While the European Union-Brazilian proposal on the role of the Conference of Parties as the centralised authority, island states have focussed more on the design how environmental integrity can be maintained in the new markets. The European countries, having good experience with markets, have also tended to focus on the rules and methodology.

India’s stake

India with its huge experience and a notable beneficiary in Kyoto Protocol markets has an important stake in the emerging market architecture. From its end, different stakeholders including policymakers, private sector and civil society alike, in anticipation of revenue generation and investments, have demonstrated keen interest in markets. There are, however, several unanswered questions and challenges that need to be addressed.

The first is with regard to the transition of CDM projects into the new market regime. CDM has been successful in India in terms of rallying positive action and innovation from industry towards greenhouse gas mitigation. A study conducted by GIZ India in 2012 pointed out that CDM triggered an investment of INR 1.6 trillion (EUR 20 billion). Nearly 1,700 projects are registered with a total amount of CER (certified emissions reduction) issuance of around 250 million, while there are also some registered CDM projects that have not been invested into or stopped operating after CER prices crashed post 2012 or due to other reasons.

The existing projects present both a responsibility and a prospect for the Paris Agreement. A responsibility as several projects are in pipeline and expected to run until mid of next decade, UN approval of CDM activities with crediting periods beyond the Kyoto Protocol is required.

It is, however, also a prospect, as the existing pipeline of CDM projects can potentially be used effectively for scaling up mitigation action under market approaches of Article 6 of the Paris Agreement. An important challenge is distinction of relevant carbon projects, which successfully runs the test of environmental integrity, to ensure smooth transition into Article 6 of the Paris Agreement.

Lack of clarity

Secondly, there is lack of clarity on the components of NDC targets, which could be fulfilled through markets. India’s second Biennial Update Report states that against its target of reducing its emissions intensity by 33-35% by 2030 from 2005 levels, 21% has already been achieved.

Likewise, India is well positioned to meet its target of achieving about 40% cumulative installed capacity from non-fossil fuel-based energy resources by 2030. Therefore, it is necessary to decide on what aspects of NDCs, representing low-cost options for emission reduction, would be needed domestically and which others could be traded off.

Thirdly, an important question arises as to the extent of India’s readiness in terms of its domestic equipment, mechanisms and structures to take on with the issue of markets. One significant domestic institution often discussed in Indian circles is the market-based mechanisms like PAT (Perform, Achieve and Trade), which is a scheme for reducing specific energy consumption in industries and other energy-intensive sectors.

In total, 846 DCs (designated consumers) from 13 sectors are undergoing implementation of PAT cycle II, III and IV with a total targeted energy savings of 19 Mtoe (million tonnes of oil equivalent). Nevertheless, how the activities under PAT would be reflected and captured under the global market regime is significant, especially when India also lacks robust transparency and accounting mechanisms, a prerequisite to a thriving market.

India’s readiness

In such circumstances, India’s readiness for the new mechanism under the Paris Agreement can be considered as medium. In comparison, China’s can be considered as high owing to its national emissions trading scheme in the power sector.

With a wide array of questions unresolved, it is recommended that India comes out with a comprehensive policy roadmap to provide clarity on above-mentioned challenges. This can boost private sector participation, provide clarity on international stage and play a leading role in re-establishing a functional carbon market backed by a domestic functional market apparatus.

Such a document would also be helpful in identifying the low-hanging fruits to begin with. India’s stakes are too high to let other players decide the rules of the game.

Vijeta Rattani and Kundan Burnwal work with Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) India on issues of environment and climate change. Views are personal.

 

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