Making carbon markets work for the developing world
A healthy market in a mysterious commodity – “carbon negative” – has been around for over 22 years now. Airline passengers would often have seen the fine print on a ticket indicating the tons of climate change causing carbon dioxide that would be emitted during the flight, prompting them to pay a small fee to appease their conscience. This is an example of the carbon market in action; it markets the virtue of refraining from emitting greenhouse gases (GHGs). Markets can be purely voluntary or based on law.
The COP-26 summit in Glasgow last November finally agreed on “rulebooks” for two new carbon market mechanisms that were created in the 2015 Paris agreement. These mechanisms should enable countries to deliver on their promises — the “Nationally Determined Contributions” (NDCs) to reduce their carbon emissions at less cost than without them. Negative carbon would be generated in countries where it is cheap to do so and bought by countries where the same is expensive. Both parties would gain, as in the international trade of any good.
Carbon markets under international law were first set up under the Kyoto Protocol (1996) and became operational in 2000. The protocol imposed binding reductions in emissions from developed countries, but not from countries. developing countries, and put in place three carbon market instruments: Emissions trading — under which developed countries could trade reductions beyond their mandates with others that fell short; “Joint Implementation” (JI) covering the negative carbon generated by individual projects that could be traded between companies in developed countries; and the “Clean Development Mechanism” (CDM) through which these credits could be generated from projects in developing countries and traded with companies in developed countries.
Sell patented technology
The CDM has been a huge success — from the perspective of developing countries, particularly India, China and Brazil. Several thousand projects have been approved and billions of tonnes of negative carbon sold to companies in developed countries, allowing them to avoid mitigating emissions at home. However, it was perceived less favorably by developed countries. These countries expected to sell patented carbon mitigation technologies at high license fees to developing countries for CDM projects that would more than offset what they would pay for carbon credits. It didn’t work that way. India, China, Brazil and others have proven adept at developing their own mitigation technologies.
Well-heeled activists, fed by mysterious entities, were furious. They denounced the CDM as “China’s development mechanism” and claimed that many CDM projects actually reversed, rather than promoted, sustainable development. The EU abruptly announced that in future it would no longer buy carbon credits from CDM projects other than those in Africa and “Small Island Developing States” (SIDS). Carbon credit prices collapsed and investors in developing countries cried foul. A crisis was near.
What should be done? The UNFCCC convened a “high-level political dialogue” on the CDM, chaired by respected former South African minister of the environment and cerebrum, Mohammed Valli Moosa (disclosure: I was a member of the dialogue Valli Moosa), to find ways to save the CDM.
Valli Moosa’s “Dialogue” commissioned a number of studies, including one to carefully examine specific allegations made by Western NGOs against 12 CDM projects that they claimed breached sustainable development standards. The study, commissioned from the Energy and Resources Institute (TERI), found that in 11 cases the allegations were unfounded. In the twelfth, the complainant NGO did not respond to the request for testimony. The Valli Moosa ‘Dialogue’ also made a number of recommendations to prevent CDM price collapse and to boost mitigation ambitions in developed countries.
Carbon market instruments under the Paris Agreement are primarily a project-based mechanism (or a program of small individual projects), akin to the CDM, called the “Article 6.4 mechanism” (A 6.4). Under this mechanism, claims about the sustainability benefits of projects would be reviewed by the International Monitoring Body (SO), and there would be mandatory “haircuts” in the carbon credits generated – for contributions to the “Adaptation Fund”, administrative expenses of the SB, and for the OMGE (“Overall Mitigation in Global Emissions”).
The second mechanism concerns large-scale national, regional or sectoral programs or policies, implemented cooperatively by the host country and another country, called the Article 6.2 mechanism (A 6.2). The A 6.2 mechanism does not imply the “haircuts” of A 6.4. Although both mechanisms involve the sharing of carbon credits generated, there are complex “matching adjustments” (CA) requirements to ensure that there is no double counting of carbon credits. The Article 6 mechanisms were a major theme in the deliberations of the recently concluded 2022 World Summit on Sustainable Development.
While the A 6.4 mechanism, despite Valli Moosa’s findings, categorically responds to activists’ claims about the CDM, it does not address developing countries’ apprehensions about a possible collapse in carbon credit prices, or a possible future refusal by some developed countries to buy credits from specified countries.
A huge amount of paperwork is involved in both mechanisms which will increase their running costs. Given their past experience, the question remains open whether many developing countries or their companies would enter such mechanisms as easily, as in the case of the CDM.
The author is Distinguished Fellow at TERI and former Secretary of the Ministry of Environment, Forests and Climate Change
February 27, 2022