Background
In order to incentivize reduction in carbon emissions, ‘Carbon Trading’ was evolved as an acceptable mechanism in the ‘Kyoto Protocol’ signed in Japan in 1997. However its execution remained halfhearted. In the recently concluded Climate Change talks at Madrid one of the big things that remain to be resolved are the disagreements over the setting up a new carbon market.
The Market Mechanism for Carbon Trading
Under the Paris agreement, every country has to take action to fight climate change. These actions need not necessarily be in the form of reduction of greenhouse gas emissions especially for developing countries since it can constrain economic development. Only the developed countries have included absolute cuts in their action plans. Yet a developing country like India has scope for absolute emission reductions. For example a brick kiln in India can upgrade its technology and reduce emissions, but it may not do so, since there are no incentives for the brick kiln owner.
It is deal with situations like these, that a market mechanism is conceived. Therefore a country which cannot meet its emission targets can provide money or technology to the brick kiln in India and then claim the reduction in emissions as its own. Alternatively the brick kiln can make the investment and offer on sale the emission reduction, called carbon credits. Another party struggling to meet its emission targets can purchase these credits and show as their own.
Carbon markets which existed under the Kyoto Protocol have not fructified because there were no effective checks and balances. The market mechanism being proposed under the Paris agreement, which is to be operationalized in 2020 seeks to usher in better checks and balances.
Blue print of a Carbon Trading Market
The provisions of setting up of a market are given out in Article 6 of the Paris Agreement. These are enabling provisions that allow for two different approaches as given above. Major parts of the provisions are as under:
- Article 6.2- Enables bilateral agreements for transfer of emissions reductions, while ensuring that the emission reductions are not double counted.
- Article 6.4- this talks of wider carbon market in which reductions can be bought and sold by anyone.
- Article 6.8- this talks of making non-market approaches available to countries to achieve targets. It is not very clear as to what these approaches would be, but could include any cooperative action, like collaboration on climate policy or common taxation, that are not market based.
The Contentious Issues
A few ambiguities emerging in the present regime are as under:
- How to settle the fate of Carbon credits earned during Kyoto regime, but not yet sold, e.g. developing countries have several million unsold CERs (certifies emission reductions). Each CER is equivalent to one ton of carbon dioxide reduction under the Kyoto regime. India has some 700 million unsold CERs.
- What counts for double counting has not been clearly enunciated. The new mechanism envisages carbon credits that can be traded multiple times among countries or private players. In this case the party who sells credits should also simultaneously claim these as emission reductions.
- Transparency mechanisms being put in place.
Effectiveness of Carbon Markets
Carbon markets are not essential to the implementation of Paris Agreement. But with the world doing much less than what is required to prevent catastrophic impacts of climate change; the markets can be an important tool to close the gap. Developed countries and many civil society organizations say that they would rather have no deal with Article 6 of Paris Agreement than have a bad deal that will allow transition of CERs during the Kyoto regime or any kind of double counting. Developing countries, on the other hand prefer to have an agreement finalized in Madrid.