Failure at Madrid, a setback for Indian renewable energy

The failure of the COP25 climate talks in Madrid to frame rules for evolving a market for trading in carbon credits is a bit of a setback for the Indian renewable energy industry — even if it is true that expectations were not great to start with.

A proper framework for emissions trading, particularly as envisaged under Article 6.4 of the Paris Agreement — which essentially gives the private sector a play in the carbon markets — could help wind, solar, biomass and hydro energy companies in India (and elsewhere) pick up some money by selling off the credit for saving carbon dioxide emissions.

By undergirding the economics of renewable energy projects, a vibrant carbon market system could provide some pep to the industry, while at the same time fighting global warming.

So the world will have to wait for at least a year more, hoping that when they all meet at Glasgow in December 2020, something will be worked out.

Given that most countries believe that carbon markets are an important element of fighting climate change, it appears inevitable that the rules for carbon trading will be established sooner or later. A positive development is, 31 countries led by Costa Rica have signed up for a set of principles to maintain the integrity of carbon markets. Known as ‘San Jose principles’, after the Costa Rican city in which they were first mooted, these principles are of little practical value but they help keep the spark alive. In sum, while the establishment of a framework for trading in saved emissions has slipped on time, and to that extent it is a setback for the Indian renewable energy industry, there is still hope for the medium and long term.

But what are carbon markets and why is a consensus on the rules for them so complex?

All countries need to do their bit in reducing greenhouse gas emissions, which form a shield in the upper atmosphere, prevent earth’s heat from being radiated out into space and cause global warming, with catastrophic consequences. Some (countries or companies) find it cheaper to enable others to bring down emissions, compared with doing it themselves. One of the ways of such ‘enabling’ is through the mechanism of carbon trading.

Understanding carbon markets

A company, say, in India, that does something that has the effect of bringing down emissions — a solar power plant — gets a ‘good boy certificate’, which it can sell to a gas-spewing ‘bad boy’, say, in Europe, for instance.

The good boy sells his carbon credits to the bad boy, who offsets his liabilities to the world by buying the credits.

The Kyoto Protocol, the first collective climate action by the world, first envisaged carbon trading under a ‘clean development mechanism’, or CDM. The Protocol divided the world into ‘developed countries’ and the rest. The US opted out of the Protocol and hence was not part of the ‘developed countries’ list; Canada and Australia dropped off later. These developed countries undertook emission reduction commitments, the rest of the world was exempt from making commitments, though they were encouraged to do their bit. Under CDM, a company which put up a, say, wind project in India, could get instruments called ‘certified emission reductions’, or CERs — which would be given to them by agencies authorised to verify how much carbon dioxide emissions the wind project saved. The wind developer, (it was believed), could sell the CERs to companies in the developed world, say, a German coal power plant.

The CDM spawned two kinds of markets — the ‘compliance market’, where the buyers were under obligation to bring down emissions, and the ‘voluntary market’, where the buyers volunteered to buy CERs, in order to do good.

Alongside the CDM, there came into being an Emissions Trading System in Europe, which followed a ‘cap and trade’ method of calculating credits. A company, for example, a steel manufacturer, would be given a limit of ‘cap’ of allowable emissions; if it emits less than the cap, it would get trade-able credits. (This is similar to the ‘perform, achieve, trade’ (PAT) scheme of the Bureau of Energy Efficiency.) And there emerged a concept called ‘reduced emissions from deforestation and degradation’, or REDD and an extension of it, REDD+, which included forest conservation and sustainable forest management practices. Here again, the emission savers could get trade-able credits — though the credits issued under these were negligible.

All this is carbon trading under the ‘Kyoto regime’. That didn’t quite work as planned, because the buyers didn’t buy enough of the credits. Carbon prices plummeted from a peak of $25, to nearly zero now. Today, an estimated 4 billion CERs are in the market, awaiting buyers, over 300 million of which belong to Indian companies.

Paris regime

In December 2015, the Paris Agreement came into being. Article 6 of the agreement pertains to carbon markets. Article 6.2 speaks of trading between countries; 6.4 — the only place where private sector is mentioned — deals with engaging private entities; and 6.8, which is about non-market mechanisms, such as financial grant or technology transfer.

Unlike under the Kyoto regime, there is no distinction between developed countries and the rest. Each country strives to fulfil the commitments it made on its own at Paris, called ‘Nationally Determined Contributions’ (NDC). And the trading instruments are not specified — they are simply called ‘internationally transferred mitigation outcomes’.

While rules for carbon markets are not yet ready, some progress was made at COP25. There is little negotiation left on the point of ‘double counting’— carbon credits sold will not be available to the seller country to meet its NDC.

As things stand under negotiations, some of the CERs issued under Kyoto might survive the transition to the Paris era. According to the ‘near-final draft’, CERs issued after a cut-off date, which is yet to be decided, might be still valid for sales. Projects registered under the CDM might still be able to get trade-able carbon instruments in future; they will be CERs till December 31, 2023, and whatever new instruments come up, in the period after.

The cut-off registration of such projects will be decided by the new regulatory body that will come up; but the host government can decide which projects to migrate to the Paris Regime. India has 1,669 projects registered under CDM. The progress made gives scope for hope that things could settle in COP26.

Do carbon markets work? Jairam Ramesh, Congress leader and former climate negotiator for India, calls carbon markets “ethically suspect” because there is “too much room for misuse and abuse, and helps emitters evade responsibilities.” Some others have voiced similar views noting that in the past, carbon markets have been gamed and developing countries cheated.

Others, such as Dirk Forrister, CEO of International Emissions Trading Association, say gaming the markets can be avoided if the UN regulatory body “has safeguards in place to ensure that reductions were real, measurable and additional.”

IETA estimates that carbon markets can save $320 billion a year by 2030 in countries meeting their NDCs, compared with a scenario of no carbon markets. With so much at stake, something good is bound to come up.

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