Hanging in the balance: The fate of voluntary carbon trading could be the deciding factor in the success of any carbon trading mechanism that is developed in under the Paris Agreement | Photo: AgriLife Today

Voluntary carbon markets should continue post 2020. Here’s why

Jai Kumar Gaurav and Vijeta Rattani

The Paris Agreement becomes operational next year, yet there is still one major sticking point that has remained through discussions – the fate of the existing carbon credits earned under the Kyoto Protocol. Brazil, China and India – who together hold most of the credits – insist they must be able to bring forward old Clean Development Mechanism (CDM) credits into the new mechanism.   

So while the Paris climate agreement does herald a new climate architecture, it also creates uncertainty regarding the transition of carbon market mechanisms under the Kyoto Protocol to the new market mechanisms under the Paris Agreement. It also hasn’t set out a path for the future of the Voluntary Carbon Market (VCM).

This is largely because the Kyoto model had the clear distinction of awarding carbon credits to developed countries for emissions cuts in developing countries, but this is no longer the only tenable option. There is uncertainty regarding the state of negotiations on markets at the global level, while the wide ambit of climate action plans, in the form of Nationally Determined Contributions (NDC), can prove to be challenging.

Nevertheless, the importance of continuation of the voluntary carbon markets and recognition of the benefits that it accrues to non-state actors, including private companies, NGOs and individuals, cannot be overlooked in the formulation of a new carbon trading mechanism.

Voluntary carbon markets and their future in Paris agreement

Carbon markets have served as a useful tool to mitigate carbon emissions. Under the Kyoto Protocol, developed countries supported projects in developing countries through the Clean Development Mechanism (CDM). In return they could buy carbon emission offsets which went towards meeting a certain percentage of their emission reduction targets. Owing to a weaker currency, lower cost of labour and resources, the cost of reducing a tonne of Greenhouse Gas (GHG) emission in developing countries like India, Ethiopia, etc. is much lower than the cost of emission reduction in developed countries like USA, UK, Australia etc. Irrespective of the country of implementation, the emission reduction achieved provides global benefits. Although in the Paris Agreement, the nature of market approaches is fluid with no distinction between developed and developing countries, the fact that emission reductions can be achieved at lower costs in developing countries prevails nonetheless.

The legacy of voluntary carbon markets (VCM) is as long as that of government-supported carbon trading mechanisms. Under this, entities and individuals with no compliance obligations could offset their emissions, by paying for the emission reduction of an equivalent volume of CO2. In India, VCM started as an alternate carbon trading mechanism to CDM for projects were CDM compliance proved impractical due to high costs and rigid rules.

As a measure of success, the voluntary carbon markets globally have achieved the removal of 430 million tonnes of carbon from the atmosphere since 2005– equivalent to Australia’s 2016 energy sector emissions. Voluntary markets offer some clear advantages over CDM or other compliance-based mechanisms- lower transaction costs, reasonable flexibility in rules and methodologies, shorter time-frame for project approval, greater focus on co-benefits like achievement of Sustainable Development Goals (SDGs), etc. Additionally, stakeholders within the government-supported market approaches can also participate in voluntary markets.

Due to lack of demand for Certified Emission Reductions (CERs) under the CDM after the end of the first commitment period of the Kyoto Protocol, the cost of CERs crashed to less than US$1, which could hardly cover the transaction costs. In order to sustain operations, some countries like China developed domestic mechanisms to continue supporting CDM projects, while multilateral development banks (MDB) such as the Asian Development Bank (ADB) initiated programmes like the Future Carbon Fund (FCF) supporting selected CDM projects. In contrast, the VCMs have perhaps been the only steadfast buttress for the implementation of compliance-based mitigation activities at a global scale. In India, for instance, while CER prices have crashed, Voluntary Emission Reduction (VER) certificate have sustained high prices and demands. Ecosystem Marketplace, which tracks average prices of VERs, stated in its latest report that VER average price range is $3-$6/tCO2e, while actual prices range from under $0.1/tCO2e to just over $70/tCO2e.

Ironically, many CDM projects also sold credits under voluntary markets to sustain operations. It can be argued that the VCM proved to be a stabilizer in the overall collapse of global carbon markets, particularly for projects in developing countries dependent on CDM revenue. However, despite the continued existence of VCM, lower price of credits has been a persistent limiter to the scaling up of activities. Limited awareness and lack of consumer pressure on companies to reduce emissions or buy offsets are other factors that have kept the demand for voluntary credits subdued.

There is little clarity on the fate of voluntary carbon markets in the new Paris Agreement era of climate action. The final outcome of the negotiations around design and rules for New Market Mechanism (NMM) under Article 6 of the Paris Agreement would play a crucial role in deciding the viability of VCM 2020 onwards. The heterogeneous nature of NDCs of different countries as having economy wide targets or sectoral targets creates uncertainty regarding accounting of voluntary emission reduction projects interested in selling credits to buyers in other countries.

At the national level, inadequate and/or lack of robust reporting and monitoring structures in the form of national registries is a significant challenge. Many countries, such as the island states and some African countries, have asked for support from developed countries towards establishing their domestic inventories. For such countries, promoting voluntary carbon markets serves an even greater purpose – as a transition before they switch to compliance-based carbon markets at a later stage. Voluntary carbon standards like the Gold Standard and Verified Carbon Standard, among others, have developed registries, rules and regulations for validation, registration, verification and issuance of voluntary carbon credits, which can serve as a blueprint for designing domestic as well as international compliance-based carbon markets.

With the many challenges, there are also welcome steps enabling strengthening of voluntary carbon markets. For instance, in order to promote voluntary offsetting and providing support to CDM projects in the absence of a demand due to a change in regulations in Europe (the main buyer for CERs), the United Nations Framework Convention on Climate Change (UNFCCC) has established a platform “Carbon Neutral Now”. Big companies, which include Disney, Microsoft, Lyft, Apple, Aviva and Sony have continued to use offsets to become climate neutral.  Companies in India, namely Infosys and GMR consortium-AAI-run Delhi Airport, are a few examples of companies buying voluntary carbon credits to meet their neutrality goals.

The International Civil Aviation Organization (ICAO) has decided to implement a global Market Based Mechanism (MBM) scheme in the form of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to address any annual increase in total CO2 emissions from international civil aviation above the 2020 levels. The CORSIA mechanism is also expected to allow voluntary standards to supply credits.

International Carbon Reduction and Offset Alliance (ICROA) is an industry association that has proposed measures for continued existence of voluntary carbon markets as complementary to policy and regulation under the Paris Agreement and is focused on raising ambition. Such measures would enable reporting of voluntary emissions in a transparent manner to ensure the highest possible standards of integrity. For the purpose of accounting of voluntary emission reductions post 2020, ICROA and a few other private companies have proposed a model that could potentially apply to any NDC, and serve benefits to both the seller and buyer of credits. In this model, while the host country can use the credits towards their emission reduction targets as part of their NDC, the buyers of voluntary carbon credit can claim to have financed the emission reduction activity. In the absence of clarity on the transfer of voluntary carbon credits from one country to another, this could arguably be the best way forward.

VCM offers an additional, and complimentary, method of mitigating carbon emissions to regular carbon markets and other polices for achieving emission reductions.  At this pressing time, approaches such as VCM offer a flexible approach for emission reductions. As voluntary emission reductions would count towards emission reduction targets of the host country, it serves an important tool towards meeting a part of NDC and raising ambition without any government expenditure. However, it is important that the guidelines for Article 6 of Paris Agreement are robust, which would also reinforce the importance of markets in general involving compliance and voluntary markets as a critical tool towards meeting commitments and raising ambition.

Jai Kumar Gaurav and Vijeta Rattani work with the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) on issues of climate change and are based in New Delhi. Views expressed are personal.