What can India’s bilateral carbon credit deals learn from the centralised global carbon market?

India has entered the global carbon trading arena, recently signing a Memorandum of Cooperation with Japan on the Joint Crediting Mechanism (JCM). The mechanism allows Japan to invest in greenhouse gas-reduction projects in partner countries like India and earn carbon credits in return—making it India’s first bilateral carbon market deal under Article 6.2 (A6.2) of the Paris Agreement. A decade since that landmark climate accord, this move signals how carbon markets are finally taking shape. 

It also comes just before COP30 kicks off in Brazil in a few days, where Article 6 rules are expected to feature in climate negotiations.

Given that India is exploring many similar opportunities with other countries, it is critical to ensure that projects that come to India under A6.2 are shielded against any controversies plaguing the offset carbon market. In this context, there are some important learnings from the progress related to Article 6.4 (A6.4) of the Paris Agreement, which deals with the centralised architecture for global carbon offset markets. Progress on A6.4 was one of the bigger successes of COP29 in Azerbaijan last year, even though the final outcome on climate finance was a big disappointment for the developing world.

Why are integrity and ambition important in Article 6?

To start with the fundamentals, the Article 6 debate hinges on two fundamental pillars: integrity and ambition. Many projects under the Clean Development Mechanism under the Kyoto Protocol, the precursor to Article 6, were later found to be overstating their emission mitigation benefits because of dubious practices such as inflated baselines. Consequently, the integrity issue has become fundamental to the Article 6 debate. 

The second issue of ambition was a new addition to the 2016 Paris Agreement. Under the earlier Kyoto Protocol, the developing world had no emission reduction targets, and there was no shared global temperature limit target. Under the Paris Agreement, however, each country has a nationally determined target — for instance, India plans to go net zero by 2070 — and must continuously raise ambition in order to “maximise efforts to limit temperature increase to 1.5°C.” In this context, Article 6.1 of the Paris Agreement clearly states “higher ambition in mitigation”, especially in the context of voluntary cooperation, i.e. A6.2.

So, how does the A6.4 address both these issues simultaneously? First, it has been decided that 2% of carbon credits will be retired at source. This automatically ensures that carbon markets will achieve a higher ambition, as no party will be able to claim these credits. 

But what if credits have been ‘over’ issued, to begin with, a practice that arguably was common with many of the earlier offset projects? To address this, there is now a concept of ‘crediting baseline’ versus ‘business-as-usual baseline.’  Essentially, the crediting baseline would be lower than the BAU baseline, automatically reducing carbon credit issuance.

Beyond continuously declining crediting baselines, there have been discussions related to many other technical aspects within A6.4. For instance, the agreement text on the carbon crediting mechanism explicitly states the Supervisory Body should “work on further standards, tools and guidelines relating to baselines, downward adjustment, standardised baselines, suppressed demand, additionality, and leakage, as well as non-permanence and reversals, including aspects of post-crediting period monitoring, reversal risk assessments, and remediation measures.” 

All of these collectively seek to enhance ambition and ensure integrity. Essentially, carbon credits generated through Article 6.4 would have to pass higher bars of additionality, conservativeness, and permanence, and the overall supply of credits would be reduced due to these measures.

Carbon credit transfer could impact India’s NDC target

Beyond these fundamentals, another big issue relates to the accounting and transfer of carbon credits and what it means for NDCs. For example, India’s economy-wide target is to reduce the emissions intensity of its GDP by 45% between 2005 and 2030. However, in case there are offset projects set up in India under Article 6 which sell the carbon credits to other nations, India will not be able to account for these reductions in its national emissions inventory. This could potentially lead to a situation where its own NDC targets are not met. It is obvious that no country wants to be in such a situation.

To address this, an ‘authorisation’ clause has been added. Essentially, this clause means that the host country would decide if the carbon credits generated are used for their own NDC or are internationally transferred. 

This, however, can also potentially create uncertainty in the market for project developers and investors. What if the host country authorises credits from a project now, but rescinds it in the future? The A6.4 text addresses this by limiting options for authorisation. Furthermore, it allays parties’ concerns related to their NDC achievements, which is critical for the success of A6.2 as well. Additionally, there is relevant learning from A6.4 related to the integrity of removals and emission reductions with reversal risks.

Undeniably, India’s deal with Japan on A6.2 is a great development that opens up significant opportunities, which can be beneficial for India and partner countries. Next steps would be developing specific methodologies within the list of technologies approved by the Indian government under A6.2. 

It is critical that learning from A6.4, especially on integrity and ambition, is reflected in the A6.2 methodologies. Even though bilateral in nature, relevant details of projects under A6.2 will have to be reported to the UN, and there will be a thorough review by independent experts.

There are many watchdogs now critically assessing each carbon market deal and project. Tough questions related to ambition and integrity would continue to be asked in the foreseeable future. Indian policymakers should begin working on these aspects to mobilise finance for potential sectors, and deliver on the twin goals of development along with climate change mitigation.

Dr Vaibhav Chaturvedi is Senior Fellow at the Council on Energy, Environment and Water (CEEW). Views are personal.

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Vaibhav Chaturvedi

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