What does its Finalisation mean for Carbon Markets in India?
We head into 2022 with one of the major sticking points in global climate negotiations finally resolved, paving the way for future work on the proverbial elephant in the room of climate negotiations named Article 6 of the Paris Agreement. At COP26 in Glasgow, Scotland, countries finally agreed to the rules of Article 6, the part of the Paris Agreement that governs the use of market and non-market instruments to help countries achieve their Nationally Determined Contributions (NDCs).
The United Nations Framework Convention on Climate Change (UNFCCC) has now set up a Supervisory Body to draw up the methodologies and administrative requirements for Article 6.
At the same time, individual countries must prepare and strategise on how to participate in Article 6 mechanisms. For India, the decisions on Article 6 addressed some long-standing concerns. Moving forward, we need to understand the implications of these decisions and deliberate on the next steps.
India’s biggest bone of contention in the Article 6 negotiations was the transition of Certified Emission Reductions (CERs) and projects from Clean Development Mechanism (CDM) into Article 6.4’s carbon market (Sustainable Development Mechanism or SDM).
The final decision allowed for the use of CERs towards NDCs provided they originated from projects registered after 2013. Further, existing projects may transfer from CDM to SDM contingent on meeting the criteria of SDM (yet to be finalised by the Supervisory Body), send in a request to UNFCCC for transfer by 2023 and get the host country’s approval by 2025.
Current data show that with a 2013 cut-off date for the use of CERs, if we assume a 100 per cent credit issuance rate, India stands to lose 422 million CERs from projects registered before 2013 and is potentially losing 303 million CERs over the next decade. The study cited was published in February 2021 by the Ministry of Environment, Forests & Climate Change of the Government of India, and the Indo-German Development Cooperation project “Global Carbon Markets” commissioned by the Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV) and implemented by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.
Even if we consider a conservative issuance rate of 30-50 per cent, we are going to miss out on millions of CERs and the associated revenue. Additionally, the demand for the eligible CERs between 2013-2020 – estimated to be 97.94 million at a 30 per cent issuance – remain unclear as many countries have committed to not using pre-2021 CERs towards their NDC. This is creating unease in the private sector. As far as transfer of CDM projects is concerned, there are several in India that can transfer to the SDM. The country will need clarity from the UNFCCC Supervisory Body on the cost and process of transfer of these projects as soon as possible so that the project developers can act swiftly and convey the transfer request to UNFCCC before 2023. Moreover, even if the transfer happens from CDM to SDM, going by the accounting rules finalised in COP26, countries will need to apply Corresponding Adjustment (CA) to avoid double counting. Are developing countries in a position to do this already?
The accounting rules also require CA of all Emission Reductions (ERs) units transferred under Article 6.2 (the bilateral cooperation mechanism) and in other schemes like Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and Voluntary Carbon Markets (VCM). Such robust accounting requires a national-level inventory and strong administrative and governance support. India needs to deliberate on how to set up such a national-level inventory and build institutional capacities to apply CA. The sooner such an infrastructure is developed, the better. This is because once some countries begin to offer ERs backed by CA, such ERs may get a premium price in the market and countries/companies placing a high value on integrity may shift their transactions to those countries.
There is a caveat to CA in the Article 6 rules. The rules state that ERs “authorised” by the host country require CA. This leaves for the possibility of “unauthorised” ERs as well, which do not require CA. India needs to deliberate on what this means and decide which ERs should remain unauthorised, if at all.
Since India hosts the largest portfolio of VCM projects and credits in the world, how VCM will function under this paradigm will be of interest to the Indian private sector.
There are several ways in which VCM can continue to function. For example, companies seeking higher ambition can carry on participating in the VCM, once an accounting mechanism for CA is set up by the VCM standard or by the country. Given that CA must be applied for credits transferred outside the country and cannot be counted towards our own NDC, the government can decide if specific sectors/measures will contribute towards the NDC, allowing international credit transfers from other sectors/measures through the VCM. Alternatively, the Government could consider allowing VCM credits to be traded only within India, removing the need for CA. It will be interesting to see how this space evolves.
Article 6.8 – Non-Market Approaches (NMAs) – should be looked at closely. The definition and scope of NMAs are very broad: they include all types of measures, instruments, and interventions that do not lead to a transfer of mitigation outcomes, and they cover mitigation, adaptation, finance, technology transfer, and capacity building. At COP26, the Glasgow Committee on Non-Market Approaches was established to advance climate cooperation under Article 6.8. With some broad guidelines established, India can begin to engage under this approach. India will remain primarily a coal-based economy for the foreseeable future and the transition to a post-coal economy will depend on how fast the country can adopt better, newer technologies. Support for this can come from Article 6.8. It would be good if India develops a country- and region-specific strategy for technologies like green hydrogen, ecosystem-based adaptation and Carbon Capture and Storage (CCS) so that Article 6.8 partnerships can be explored with different developed countries. Operationalising Article 6.2 and 6.4 will require extensive capacity building, and India can consider accessing Article 6.8 to support this process. Likewise, developing an Emissions Trading Scheme and an extensive explicit carbon pricing mechanism requires enhanced capacities and can benefit from Article 6.8’s mechanism.
India has a little under two years to deliberate and strategise around these questions before Article 6 becomes operational. A clear plan of action will help the country make the best use of these mechanisms and deliver on our ambitious climate goals.
[author title=”Kundan Burnwal, Advisor, Climate Change, GIZ India & Saurab Babu, Junior Technical Expert, Climate Change, GIZ India” image=”http://”][/author]
*Views expresses are personal