How Markets Can Serve Climate

This article is based on ‘How markets can serve climate’ which was published in The Indian Express on 08/11/2019. It talks about the ways in which the markets can contribute in solving climate change problem through the Clean Development Mechanism.

The United Nations Climate Change Conference, 2019 which will be held in Madrid, Spain in December, has the challenge of deciding how markets can be deployed to deal with climate change. Also known as Conference of the Parties (COP), it is the 25^th UN Climate Change Conference (COP25).

• The Clean Development Mechanism (CDM), a product of the Kyoto Protocol, is one such market instrument that can help the industry as well as climate. Along with China and Brazil, India is a leader in CDM. 
• The situation may change in 2021 when market mechanisms mandated under the Paris Agreement come into operation.
• CDM has provided financial support to a lot of energy efficiency and renewable energy projects in India, which have been set up in the last two decades.

Clean Development Mechanism

• It allows emission-reduction projects in developing countries to earn Certified Emission Reduction (CER) credits, each equivalent to one tonne of CO2.
• The CDM is the main source of income for the UNFCCC Adaptation Fund. The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.
  • Adaptation Fund (AF) was established under the Kyoto Protocol in 2001 and has committed US$ 532 million to climate adaptation and resilience activities.
• Under CDM, CER units are issued by the UNFCCC which is the global administrator of Kyoto mechanisms.

Kyoto Protocol

• The Kyoto Protocol was adopted in Kyoto, Japan, in 1997 and entered into force in 2005.
• The detailed rules for the implementation of the Protocol were adopted at COP-7 in Marrakesh, in 2001, and are referred to as the Marrakesh Accords.
• Its first commitment period started in the year 2008 and ended in 2012.
• Kyoto Protocol Phase-1 (2005-12) gave the target of cutting down emissions by 5%.
• Phase- 2 (2013-20) gave the target of reducing emissions by at least 18% by the industrialized countries.

Concerns

• Opposition from developed countries: Most developed countries are strongly opposed to permitting the carryover of CDM projects and their credits into the Paris Pact’s mechanisms. It has been argued that:
  • CDM has failed to demonstrate environmental benefits in addition to the normal exchange of carbon credits or providing technological benefits.
  • CDM's transition to new mechanisms will have adverse impacts on carbon prices and investor sentiments in future markets.
  • Double-counting of could compromise global ambition on reducing Green House Gas emissions.

Double-Counting

In the context of climate change mitigation, double counting is widely used to describe situations where a single greenhouse gas emission reduction or removal is used more than once to demonstrate compliance with mitigation targets. Double counting becomes prominent where multiple mitigation mechanisms overlap over sources or sinks and when emission reductions are transferred among entities subject to mitigation targets and accounted towards them.

• The demand in the European Union, which has been the largest market for CDM credits, has declined sharply over the last decade because of regulatory barriers. 
• The credits lying unsold with the CDM projects could lose their economic worth.
• Also, the CDM projects will have to go through the process of validation and registration again with the new mechanism. This will involve additional financial and administrative costs.
• India might lose substantially if the doors on the existing CDM projects and credits are closed in 2020. 
  • The number of CDM projects registered in India is 1,376 (out of total 7,979 globally) and 89% of these projects are active.
• The question of the impact of CDM on global environmental integrity is very important. Environmental integrity is an objective of the market mechanisms under the Paris Agreement. It is influenced by four main factors-
  • Robust accounting
  • Quality of units, as issued by the underlying mechanism
  • Ambition and scope of the Nationally Determined Contribution target
  • Incentives or disincentives for future mitigation action

Way Forward

• A pragmatic assessment of possible gains and losses from competing approaches to CDM transition into new mechanisms is the need of the hour.
• The full-scale transition of CDM credits will not flood the market and lead to deterioration in the carbon prices in future markets instead more than 60% of the credits may be used fully even before 2022.
  • The demand from airline operators to meet commitments under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA which addresses the increase in total CO₂ emissions from international aviation above 2020 levels) is very high.
• CDM project proponents should be free to choose available cost-effective technologies as long as the objective of emission reductions is achieved.
• CDM projects should not be judged only on the criterion of technology but the investments and ability to overcome market barriers should also be considered.
• India should strategise to ensure that it does not get shut out of the CORSIA market even as ICAO enlarges the source of supplies from other countries.
• Countries which are having stakes in CDM should try to negotiate with ICAO for long-term use of credits originating.
• In project/programme-based mechanisms, countries should make arrangements to prevent double-counting of emission reduction units in their national accounts.

It is time that India rethinks the relationship between the project/programme-based emission reduction units and the national pool of emission reductions so as to establish a firm basis for access to future carbon markets. CDM has been a useful source of finance to industry and India may build a viable domestic carbon market in future on the foundations of industry interest as well as environmental protection. Policies and principles should not be applied uniformly to developed and developing countries if sustainable development is desired.

Drishti Mains Question

How can the market play an important role in solving the climate change crisis? Explain.