The Carbon Markets Conundrum At COP26

Context: Article 6 of the Paris Agreement introduces provisions for using international carbon markets to facilitate fulfilment of Nationally Determined Contributions (NDCs) by countries. The success of COP26 at Glasgow hinges, to a great extent, on the conclusion of carbon markets discussions.

Carbon market challenges before Paris agreement that need to addressed at COP26 at Glasgow

• Potential risk of reversing the gains from Kyoto protocol: Under Kyoto protocol, developing countries like India, China and Brazil, gained from carbon market under Clean Development Mechanism (CDM).
  • Paris agreement provided mitigation targets for developing countries also: This created dilemma before developing countries, that is, whether to sell their carbon credits in return for lucrative foreign investment flows or using these credits to achieve their mitigation targets.
• Confusions regarding leveraging new market mechanism for achieving mitigation targets under NDCs.
  • While developed countries are eager to rely more on market mechanisms for achieving climate targets as they would be comparatively low-cost options.
  • Developing countries have a broader vision that the new market mechanism shall promote sustainable development, assist climate change adaptation, encourage private sector participation and attract foreign investments.
  • India is not enthusiastic on market mechanism and it aims to rely on domestic mitigation efforts to meet its NDC goals.
• Lack of clarity in CDM transition: Not honouring CDM credits under Paris agreement (Article 6) could trigger serious consequences such as loss of billions of dollars’ worth of potential revenue to developing countries, trust issues among private investors under UNFCCC mechanism etc.
  • Some countries have cast doubts on environmental integrity of CDM credits and while there is greater acceptance for transition of projects/activities, same is not true for transition of credits.
• Faulty accounting rules: Under Article 6.4 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.
  • Scope for double-counting of emission reductions: As developing countries wants to monetise mitigation efforts that lies outside NDCs, whereas developed countries views that this will deter developing countries committing to ambitious NDCs.
• Conservative attitude towards Share of Proceeds (SOP) to Adaptation Fund: Adaptation is a necessity for developing countries but it remains severely underfunded compared mitigation activities.

Way Forward: Equitable sharing of carbon and developmental space

• A new supervisory body to be formed under Paris Agreement to re-examine validity and rigour of carbon credits and ensure that there are no double-counting of reductions.
• 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 and would be a win-win solution for all countries.