A vigorous market dealing in a mysterious commodity — “negative carbon” — has been in existence for more than 22 years now. Air passengers would have often seen the fine print on a ticket indicating the tonnes of climate change causing carbon dioxide that would be emitted during the course of the flight, coaxing them to pay a small fee to ease their conscience. It is an instance of the carbon market at work; it trades in the virtue of refraining from emitting greenhouse gases (GHGs). The markets may be purely voluntary or based on law. 

The COP-26 Summit at Glasgow in November last finally agreed on a “rule-book” for two new carbon market mechanisms that were created in the 2015 Paris Agreement. These mechanisms are expected to enable countries to accomplish their promises — “nationally determined contributions” (NDCs) to reduce their carbon emissions more cheaply 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 sides would gain, as in international trade for any good. 

Carbon markets under international law were first set up under the Kyoto Protocol (1996) and became operational in 2000. The protocol mandated binding reductions in emissions by developed countries, but not in developing ones, and set up three carbon market instruments: Emissions trading — under which developed countries could trade abatements exceeding their mandates with others which fell short; “Joint Implementation” (JI) covering negative carbon generated from individual projects which could be traded between corporates in developed countries; and the “Clean Development Mechanism” (CDM) by which such credits could be generated from projects in developing countries and traded to corporates in developed countries. 

Selling patented tech

The CDM was a huge success — from the perspective of developing countries, especially India, China, and Brazil. Several thousands of projects were approved, and billions of tonnes of negative carbon sold to corporates in developed countries, enabling the latter to avoid mitigating emissions at home. It was, however, perceived less favorably by developed countries. These countries had expected to sell patented technologies for carbon mitigation at high licence fees to developing countries for CDM projects which would more than offset what they would pay for the carbon credits. It did not work that way. India, China, Brazil and others proved adept at developing their own mitigation technologies. 

Well-heeled activists, nurtured by mysterious entities, were furious. They denounced the CDM as the “China Development Mechanism”, and claimed that many CDM projects actually subverted, rather than promoted, sustainable development. The EU abruptly announced that in future it would no longer buy carbon credits from CDM projects other than from Africa and “small island developing states” (SIDS). Prices of carbon credits crashed, and investors in developing countries cried foul. A crisis was at hand. 

What was to be done? The UNFCCC convened a “High-Level Policy Dialogue” on the CDM, chaired by the respected and cerebral former South African Environment Minister, Mohammed Valli Moosa (disclosure: I was a member of the Valli Moosa Dialogue), to find ways to rescue the CDM. 

The Valli Moosa “Dialogue” commissioned a number of studies, including one to carefully examine specific allegations made by Western NGOs against 12 CDM projects that they claimed infringed sustainable development norms. The study, entrusted to The Energy and Resources Institute (TERI), found that in 11 cases the allegations were baseless. In the twelfth, the complainant NGO did not respond to the request to give evidence. The Valli Moosa “Dialogue” also made a number of recommendations to prevent the collapse of CDM prices, and to enhance mitigation ambitions in developed countries. 

The carbon market instruments under the Paris Agreement are first, a project (or programme of individually small projects) based mechanism, akin to the CDM, called the “Article 6.4 mechanism” (A 6.4). Under this mechanism, the claims regarding sustainable development benefits of the projects would be scrutinised by the international Supervisory Body (SB), and there would be mandatory “haircuts” in the carbon credits generated — for contributions to the “Adaptation Fund”, administrative expenses of the SB, and for OMGE (“Overall Mitigation in Global Emissions”).

The second mechanism is for large-scale country, region, or sector-wide programmes or policies, implemented cooperatively by the host and another country termed the Article 6.2 (A 6.2) mechanism. The A 6.2 mechanism does not involve the “haircuts” of A 6.4. While both mechanisms involve sharing of the carbon credits generated, there are intricate requirements of “corresponding adjustments” (CAs) to ensure that there is no double counting of carbon credits. The mechanisms of Article 6 were a major theme of deliberations at the recently concluded World Sustainable Development Summit, 2022. 

While the A 6.4 mechanism, despite the Valli Moosa findings, responds categorically to the assertions made by activists regarding the CDM, it does not address the apprehensions of developing countries regarding possible collapse of carbon credit prices, or possible future refusal by some developed countries to purchase credits from specified countries.

Immense paperwork is involved in both mechanisms, which will add to their operating costs. Given their past experience, it is an open question whether many developing countries or their corporates would as readily step into these mechanisms, as in case of the CDM. 

The writer is a Distinguished Fellow at TERI and former Secretary, Ministry of Environment, Forest and Climate Change