Charting the carbon course

After a near breakdown of trust between Northern and Southern nations during the 27th session of the Conference of the Parties (COP27) to the United Nations Framework Convention on Climate Change (UNFCCC), held during November 6-18, in Sharm-El-Sheik, Egypt, climate activists across the globe were apprehensive of any advancement on various long pending contentious issues at the COP28 in Dubai, held between 30 November and 13 December 2023. Some 85,000 participants, including more than 150 Heads of State and Government, were among the representatives of national delegations, civil society, business, indigenous peoples, youth, philanthropy, and international organisations.

Nonetheless, few analysts believe that despite the significance of this multilateral platform, members of the general public do not seem to be interested in hearing about COP or its outcomes. They question the significance of continuation of COP, as the world has entered the decade of implementation of the Paris Agreement (2015).

Considering the complexities faced by the emerging carbon economy, this observation looks simplistic and over ambitious.

Major agenda and achievements in COP28

At COP28, the key issues included:

* The global stocktake: The global stocktake is a process for countries and stakeholders to see where they’re collectively making progress towards meeting the goals of the Paris Climate Change Agreement, and where they’re not.

* Funding arrangements of the Loss and Damage Fund established at COP27: The Conference of the Parties (COP) and the Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement (CMA), established a new funding arrangement for assisting developing countries that are particularly vulnerable to the adverse effects of climate change, in responding to loss and damage. The two-week-long conference at COP28 got underway with a historic agreement on the operationalisation of funding arrangements for addressing loss and damage, including a new dedicated fund under the UNFCCC.

* Adoption of a Global Goal on Adaptation: At COP 28, Parties agreed on targets for the Global Goal on Adaptation (GGA) and its framework, which identify where the world needs to get to in order to be resilient to the impacts of a changing climate

* Mitigation Work Programme: Nearly every country in the world has agreed to “transition away from fossil fuels” – the main driver of climate change – at the COP28 climate summit in Dubai.

* Just transition: At COP28, the ILO was working to advance ambitious climate action with decent work and a just transition for all. The just transition went viral at COP28 with the acceptance that delivering the scale of climate action needed by 2030 and then by 2050 requires a new social contract within and between countries. The International Labour Organisation’s 2015 Just Transition Guidelines were reaffirmed by all countries in June and over 30 per cent of national climate plans for 2030 (Nationally Determined Contributions or NDCs) incorporated the social dimension through dedicated just transition funds, as well as laws and strategies for protecting workers, job creation and skills development.

* Climate finance and carbon markets under Article 6 of the Paris Agreement: In a major setback to international carbon trading, countries at COP28 failed to adopt key texts laid out under Article 6 of the Paris Agreement, though an agreement on non-market mechanisms was passed on December 13, 2023. There was a lot of optimism at the start of COP28 that a deal on the guidelines of project methodologies and removals around Article 6.4 would be agreed upon in Dubai. The operationalisation of Article 6.4 would have provided a new structure for a global carbon market, opening up fresh demand for credits, with the UN deciding the rules on eligibility. Carbon Market Watch, a non-profit climate policy organisation, said the lack of any breakthrough left the UN-led carbon market in a continued state of uncertainty, although it also avoided the adoption of inadequate rules that would have chained down climate ambition, enabled questionable trading and facilitated green washing.

This piece will primarily focus on the failure of COP28 in evolving adequate rules for establishing an UNFCCC regulated carbon market for which the International Emissions Trading Association lamented for the “lack of consensus”, saying this reflected the politicisation of carbon markets.

The Paris Agreement

Importance of COP28 and its major failure must be judged from the perspective of the Paris Agreement. It may be recalled that to tackle climate change and its negative impacts, world leaders at the UN Climate Change Conference (COP21) in Paris reached a breakthrough on 12 December 2015. This historic Paris Agreement provided a durable framework-guiding the global effort for decades to come. It marked the beginning of a shift towards a net-zero emissions world. It is argued that the implementation of the Agreement was crucial for the achievement of the Sustainable Development Goals (SDGs).

The Agreement had set long-term goals to guide all the participating nations to:

* substantially reduce global greenhouse gas emissions to hold global temperature increase to well below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit it to 1.5 degrees Celsius above pre-industrial levels;

* periodically assess the collective progress towards achieving the purpose of this agreement and its long-term goals;

* provide financing to developing countries to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate impacts.

The Paris Agreement is a legally binding international treaty. It entered into force on November 4, 2016 when 195 Parties (194 States plus the European Union) joined the Paris Agreement.

The Agreement included commitments from all countries to reduce their emissions and work together to adapt to the impacts of climate change, and called on countries to strengthen their commitments over time. The Agreement also provided a pathway for developed nations to assist developing nations in their climate mitigation and adaptation efforts while creating a framework for the transparent monitoring and reporting of countries’ climate goals.

According to the agreement, in every five years, each country is expected to submit an updated national climate action plan — known as Nationally Determined Contribution, or NDC. In their NDCs, countries communicate actions they will take to reduce their greenhouse gas emissions in order to reach the goals of the Paris Agreement. Countries also communicate in NDCs the actions they will take to build resilience to adapt to the impacts of rising temperatures.

It was decided that in 2023, the first “global stocktake” would assess progress on Paris Agreement goals and chart a way forward. This process was scheduled to be concluded at COP28, to encourage countries to take ambitious climate actions that can keep warming below 1.5 degrees Celsius. Hence, COP28 was a very significant meet.

The next two years will also be critical for global climate action. In 2024, at COP29 in Azerbaijan, governments are due to establish a new climate finance goal and submit their first Biennial Transparency Reports on progress made in meeting their climate pledges, or Nationally Determined Contributions (NDCs), and at COP30, countries are expected to submit their next set of NDCs to be achieved in 2035. As per the designated president of COP29, developing nations need USD 6 trillion by 2030 in climate finance.

It is reported that on February 7, 2024, the European Commission published an ‘impact assessment’ recommending that the European Union would cut 90 per cent of its net greenhouse gas emissions by 2040, compared to 1990 levels. The new target is part of the European Union’s push to become the first continent to be carbon-neutral by 2050. It is argued that setting a 2040 climate target will help European industry, investors, citizens and governments to make decisions in this decade that will keep the EU on track to meet its climate neutrality objective in 2050. It will also send important signals to others on how to invest and plan effectively for the longer term, minimising the risks of stranded assets.

Genesis of carbon markets

It may be recalled that the signing of the Kyoto Protocol (1997) created a huge market for green technology and emission trading. In their third annual meet (COP3) at Kyoto, UNFCCC agreed to a Protocol on the reduction of greenhouse gas emissions. The Kyoto Protocol (KP) was negotiated to transform the UNFCCC goals into legally binding policies. The US President Bush had withdrawn from the Kyoto Protocol in 2001 as he thought it would “severely damage the United States’ economy”!

The Kyoto Protocol had set individualised carbon dioxide emissions targets for each of the Annex I parties (industrialised countries including ‘economies in transition’ like the Russian Federation), which would add up to a total reduction of 5.2 per cent below the level of their collective emissions in 1990 during the commitment period, 2008-2012. The developing countries were grouped as Non-Annex I countries and they had no emission reduction targets. With the introduction of Clean Development Mechanism (CDM), applicable to Non-Annex I countries, a huge market for green technology and CERs was created by KP.

In 2012, the emission data revealed that instead of reducing, the global GHG emission has increased by over 50 per cent. In China, the increase was around 287 per cent! Taking advantage of the non-binding provision of KP for non-Annex 1 countries, polluting industries and processes were shifted from the developed to developing countries. For example, imported crude got/get processed in the Indian refineries and petroleum products were/are exported.

After the great recession of 2008, the developed countries realised that they won’t be able to keep their commitment made to the Kyoto Protocol. So, they made it defunct during COP15 at Copenhagen where the US President re-joined UNFCCC and stole the show. Meanwhile, the USA had initiated VER (Verified Emission Reduction) trading similar to the trading of CERs in Annex 1 countries of KP. Thus, the USA became an active player in the climate economy. Meanwhile, China has also emerged as a major beneficiary of the climate economy. They now dominate the global renewable energy market.

At COP21 in Paris, the green market was further expanded with the introduction of a new approach called Intended Nationally Determined Contributions (INDC) wherein 175 countries, including India, have committed (though non-binding) to reduce carbon emission to a certain specific level.

Climate finance and carbon markets

Article 6 of the Paris Agreement (2015) consists of nine paragraphs providing principles on how countries can “pursue voluntary cooperation” to reach their climate targets. At COP 26 in Glasgow in 2021, following several years of inconclusive negotiations, countries agreed on a package of rules to govern and implement international carbon market mechanisms under UNFCCC. The rules governing carbon markets agreed at the COP26 in Glasgow were needed to be implemented at COP27 in Sharm el-Sheikh (Egypt) in a way that was transparent and would benefit the climate. But COP27 failed to frame the same.

Article 6.2 allows countries to trade emission reductions and removals with one another through bilateral or multilateral agreements. These traded credits are called Internationally Transferred Mitigation Outcomes (ITMOs). They can be measured in carbon dioxide equivalent (CO2e) or using other metrics, such as kilowatt-hours (KWh) of renewable energy. Certified Emission Reductions (CERs), as initiated under Clean Development Mechanism (CDM) of Kyoto Protocol is one such tradable emission reduction certificate.

Contrary to article 6.2, the Article 6.4 will create a global carbon market overseen by a United Nations entity, referred to as the “Article 6.4 Supervisory Body” (6.4SB). Project developers will request to register their projects with the Supervisory Body. A project must be approved by both the country where it is implemented, and the Supervisory Body, before it can start issuing UN-recognised credits. These credits, known as A6.4ERs, can be bought by countries, companies, or even individuals. The credits created under Article 6.4 (A6.4ERs), are unlikely to be issued or traded until 2024 at the earliest. This system would be overseen by the UN Supervisory Body. A6.4ERs cannot be traded until this regulatory body and a centralised registry are in place. Any project seeking to register under Article 6.4 will need to comply with all 6.4 rules regardless of who buys the credits (company or country). All credits authorised by countries must be accounted for, including when sold to private companies.

Uncertain future

It is reported that the Clean Development Mechanism (CDM), which was established under the Kyoto Protocol, will continue for a transitional period under Article 6. It allows CDM projects to transition to the 6.4 mechanism if it is approved by the country where the project is located, and if the project meets the new rules, with the exception of rules on methodologies. Projects can continue to use the same old CDM methodologies until 31 December 2025, or the end of their current crediting period, whichever comes first. From 2026 onwards, they must be fully compliant with Article 6. But it is feared that hundreds of millions of junk CDM credits (up to 2.8 billion credits) could be rebranded as 6.4ERs, i.e. carbon credits under Article 6.4. It is estimated that as CDM credits (known as CERs) from projects registered on or after 1 January 2013 can be used towards countries’ first nationally determined contributions (which ends in 2030 for most countries), that could lead to the transition of 300 million CERs.

The CDM will eventually expire, even if there is no formal end date yet. Since January 1 2021, it could not accept requests for registration, for crediting period renewals, or for issuance of CERs, relating to emission reductions.

India’s carbon market

It is a fact that after COP28, carbon markets are gaining traction as a solution for high carbon emissions. Parties at COP28 tried but did not reach a consensus on the terms and conditions of the global carbon market. Nonetheless, the Global Renewables and Energy Efficiency Pledge, signed at COP28, commits to tripling worldwide installed renewable energy generation capacity to at least 11,000 GW, and to double the global average annual rate of energy efficiency improvements to more than 4 per cent by 2030. 118 countries signed on to a pledge to triple installed renewable energy capacity by 2030 during the COP28 climate summit in Dubai on December 2, and India and China are among those countries whose names are not on the list. China has the world’s largest installed renewable energy capacity. In the CDM under the Kyoto Protocol, these two nations are the major sufferers.

India does not have a fully operational government-regulated carbon market, and currently operates two market-based emission reduction schemes: the Perform, Achieve and Trade (PAT) scheme and the Renewable Energy Certificates (REC) system. Carbon market experts are of the opinion that India’s voluntary carbon market, as of May 2023, had a valuation exceeding USD 1.2 billion and 1,451 projects registered or under various stages of consideration across two prominent registries, Verra and Gold Standard.

Observations

India is the world’s third-largest carbon emitter. Moreover, due to the adoption of the Carbon Border Adjustment Mechanism (CBAM), requiring EU importers to equate the cost of carbon emissions from goods acquired from outside the EU to those within the EU Emissions Trading System, India must tighten the belt and enact

an appropriate Carbon Credit Trading Regulation to tackle this complex issue. With proper planning and efficient monitoring, India can turn its carbon emission problem into an opportunity in the fast emerging global carbon market. Now emission is both politics and business — it’s a geo strategic issue. It demands a long term actionable national policy to effectively deal with this menace.

Views expressed are personal