COP and carbon

M. Ramesh | Updated on: Jan 09, 2022

Carbon conundrum A lot of Indian companies are sitting on piles of carbon credits, waiting for a buyer | Photo Credit: Mooneydriver

The best outcome of COP25 from India’s perspective could be the framing of rules for carbon trading

Things are not quite working out in terms of climate action and nobody knows this better than Patricia Espinosa, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCC), under whose auspices the 25th Conference of Parties meeting is currently under way in Madrid.

“Current NDCs remain inadequate,” she says, alluding to the Nationally Determined Contributions, or voluntary climate action commitments that all countries made at the Paris summit on climate change, in December 2015.

She adds: “If we stay on our current trajectory, it is estimated that global temperatures could more than double by the end of this century. This will have enormous negative consequences for humanity and threaten our existence on this planet.” The global challenge of climate action is a classical case of ‘we know what needs to be done, but we don’t know how to do it.’ What needs to be done is to stop producing carbon dioxide (and a bunch of other greenhouse gases). Since CO2 emissions cannot be stopped overnight, the course to pursue is to produce it less and less, aiming for ‘carbon neutrality’, a situation where humanity produces no more CO2 than Nature can take back. Many countries, such as Japan, aim for carbon neutrality by 2050 — a tall order.

Look at it another way. If the world’s average temperature rises more than 2 degrees from what it was during the pre-industrial era (mid 19th century), life on the planet is in deep trouble. If the temperature rise is limited to 1.5 degrees, it is no big deal. Anything between 1.5 and 2 degrees is a problem, but manageable.

Now, to limit global warming to 1.5 degrees over the pre-industrial era, greenhouse gas emissions should fall 7.6 per cent each year between 2020 and 2030, according to the United Nations Environment Programme’s latest ‘Emissions Gap Report’. Rather than falling, greenhouse gas emissions increased by 2 per cent in 2018.

“It is an extremely difficult challenge,” says Espinosa.


It is against this dismaying backdrop that the COP25 meet is happening in Madrid. While a number of topics are on the agenda, two stand out: creation of carbon markets (as embodied in Article 6 of the Paris Agreement) and ‘raising of ambition’, or coaxing all countries to do more.

Article 6 is of interest to India. Earlier, under the ‘clean development mechanism’ (CDM), established under the Kyoto Protocol, many Indian companies earned carbon credits (‘certified emission reductions’) that would be sold in the market. But the market for carbon collapsed, because there were not enough buyers. As a result, a lot of Indian companies are sitting on piles of carbon credits, waiting for a buyer.

A solution could come up in Madrid. It is broadly expected — but not certain — that the CDM mechanism would be absorbed into whatever market mechanism that COP25 devises. But even otherwise, a vibrant carbon market is likely to help Indian companies.

The CDM started off with a big promise. Globally, some 8,100 projects in 111 countries earned over 2 billion CERs. But prices crashed because of lack of buyers.

In India, 2,195 projects have been registered and have so far been issued 255 million credits, according to EnKing International, a company based in Indore that assists companies to generate carbon credits and trade them. But about 85 per cent of the credits have not been traded as those holding on to the credits are waiting for the market to improve.

For example, wind energy company Indowind Energy was able to sell its first lot of CERs for $15 apiece in 2007-08. Today, the prices have crashed to a few cents (but there is a ‘voluntary’ market where a CER could be sold for a dollar.)

A Raja Sukumar, Indowind’s President, says that the company is still hoping for revival of a carbon market.

The best outcome of COP25 from India’s perspective could be the framing of rules for carbon trading — essentially filling the gap in the set of rules for implementing the Paris Agreement. While rules were framed for other aspects of the agreement at COP24 in Poland last year, Article 6 remained as unfinished agenda.

Carbon tax & carbon markets

Experts agree that the best way to discourage CO2 emissions is to tax carbon out of the market. The International Monetary Fund recently advised a carbon tax of $75 per tonne of CO2 to make it possible for the 2 degree target to be met. In India, there is no carbon tax, though there is a clean energy cess of ₹400 per tonne of coal mined or imported.

Governments are coaxed to bring in a carbon tax, mainly to make emissions costly but also as a source of funds — funds that could be used for climate action. But you can’t bring in a carbon tax without having a carbon market. Taxing emissions is politically challenging and can be done only if the tax entity could also be given the opportunity to earn money for emission reductions.

With this in mind, negotiators will sooner or later bring in a carbon market, which eventually would grow very big. The International Emissions Trading Association (IETA) estimates that by 2030, the global carbon market could be worth $167 billion a year, increasing to $347 billion by 2050 and $1.2 trillion by 2100. If the US doesn’t participate in this market, the numbers would be somewhat smaller.

Published on December 03, 2019
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