Rise and Fall of Carbon Credits: Finding Solutions for Climate Crisis in Free Market
The plan to combine two seemingly opposing forces—a free market and the battle against human-induced climate change—was ambitious. But carbon credit trading, once seen as one of the most successful mechanisms to help developed countries and the private sector to continue with business while meeting their emission targets, is now on the brink of disappearing into oblivion.
How did this happen? Before we look into the decline of carbon credit trading, first let’s look at its origin and growth in the context of global climate change regulation, and what its fall could mean for India, the second-biggest carbon trading market in the world.
The Clean Development Mechanism (CDM), which was introduced in the mid-2000s as part of the Kyoto Protocol, attempted to incentivise companies and countries to reduce emissions by creating a market for the reduced emissions – which others could buy for a price.
The mechanism worked on the principle that the climate change, unlike other environmental problems, is not bound by geographical boundaries. During the pre-Paris Agreement days, the developing countries had little or no targets to reduce emissions, while industrialised countries were struggling to meet their targets. The idea was a simple one: help developing countries without achieve sustainable development, while also helping developed countries achieve their targets.
To be a part of this trade, countries and corporates need to accredit their projects under the CDM. The projects can vary from increasing industrial efficiency to developing renewable energy projects like wind-mills and solar parks. The emission offset of these projects are then calculated. For every tonne of carbon dioxide (CO2) reduction, a CER or Certified Emission Reductions certificate is issued to the project developer.
CERs can be bought and sold by industries and governments to meet their targets. Developed countries usually buy CERs from developing countries so that they can continue to expand industrial activity while offsetting carbon emissions in another part of the world through CDM-accredited projects. All the trading happens on an online registry developed and maintained by the CDM Executive Board.
Initial success in India
Experts say that this approach to mitigate carbon emissions did well initially, even in India, and was successful in the small and medium enterprise segment. India set up a National CDM Authority (NCDMA) in 2005, and has since then grown to be the country with the second-largest number of CDM projects – only behind China.
“CDM was able to mobilise Indian Micro, Small and Medium Enterprises (MSME) in a successful manner which otherwise is very hard to achieve,” says Chirag Gajjar, Senior Manager & Lead Mitigation, Climate at World Resources Institute (WRI). Adds Ashwini Hingne Manager, Climate, WRI India “CDM played a key role in building capacity amongst Indian industry, including MSMEs, on the working of a carbon market, and the potential opportunities offered by carbon markets.”
Since 2005, India has approved 3,028 projects, of which 1,667 have been registered by the United Nations Framework Convention on Climate Change (UNFCCC). This is around 21% of the 7807 projects registered globally. Indian projects amount to 11.6% of globally expected average annual certified emission reductions, according to the UNFCCC.
Emission reductions amounting to some 61 million tonnes of CO2 equivalent (tCO2e) are expected to be delivered by projects registered in India between 2010 and 2016, with an additional 7.4 million tonnes from voluntary markets. The voluntary market, which deals with voluntary carbon credits (VERs – as opposed to CERs) are usually purchased by private companies as part of their corporate social responsibilities and public relations. The parameters for issuing VERs are not as stringent as CERs, and this market has become important mostly for agricultural and forestry projects.
In all, CDM projects have mobilised investments of over INR 1,30,000 crore while reducing 170 million tCO2e in India, says Ashwini Hingne, quoting UNFCCC numbers.
Trapped by its own limitations
However, with decreasing global emissions and the cost of mitigation coming down, CDM projects lost their appeal globally over time. The downturn in global economies like Spain’s also resulted in industries shutting down there, and consequently, the demand for CERs from those countries also fell.
In 2005 – the year the mechanism was introduced, some 48,000 CERs were issued. From then on, the numbers increased dramatically. In 2011, 4.47 crore CERs were issued to various countries and companies for their efforts in reducing the carbon emissions.
However, since then there has been a general decline in both traded volumes and the price of CERs. In 2018, just over a crore CERs were issued world wide. This year, only around 16 lakh CERs were issued, says Jimmy Sah from Infinity Solutions, a consultant on CER trading. “The price of CERs peaked somewhere in 2009-10 and then there was a gradual decrease. Since 2012 the prices were around 1 USD and by 2015 when the validity of pre 2012 CERs expired, the prices crashed to 0.1 – 0.2 USD,” he adds.
The fall of carbon credits system has also hit the contribution of CDM projects in reducing the emissions from India. As part of a WRI study (not yet published), Gajjar has estimated a few indicators to assess this impact. He says that in 2010, CDM projects contributed to a reduction of an estimated 106 t CO2e of emissions per million US$ of India’s GDP, as against 74.6 t CO2 / Mn US$ in 2016 – a reduction of nearly 30 percent.
“While companies generating carbon credits might not necessarily be losing money, there is general dissent as they are not making as much money as they expected to when the mechanism was first introduced,” says Vaibhav Chaturvedi, research fellow at Council On Energy, Environment And Water (CEEW). He adds, “Banks, consultants and other intermediaries stand to lose the most.”
What next for CERs?
With prices of CERs falling down, some countries like Canada, China, Brazil, have set up independent carbon markets they can trade in, without the prices being influenced by global circumstances. This is in line with Article 6 of the Paris Agreement, that just acknowledges the trade instead approving projects and issuing CERs. “This reinforces the decentralized and bottom–up nature and ethos of the Paris Agreement governance,” said a 2018 report from the Asian Development Bank.
Hingne of WRI says India also plans to implement a carbon market pilot by 2020, with support from World Bank, with MSMEs being one of the two identified sectors. “This is key to the design, implementation, and effectiveness of a future domestic carbon market. It would also help Indian entities participate effectively in a potential future global carbon market under the Paris Agreement,” she adds.
These markets, voluntarily set up by major economies, might be the key to a cleaner future. It remains to be seen, though, whether they succeed where the earlier CDM mechanism did not.