Indian government is now looking to retrofit the existing national action plans on climate change while building new ones. On the date of signing of the historic Paris climate change agreement in April and its ratification to follow soon, that’s good to hear. But the entire process will require care, particularly the groundwork for integration with the world’s networked carbon market. It is felt that without the participation of the US, the largest emitter of GHGs, considerable reductions could not be achieved. On the other hand, the joining of US in emission reduction commitment though Kyoto protocol would definitely bring wings to carbon emission markets. Until then it would remain a million dollar question that why the US not giving green signal to the International green agenda, in spite of having the moral responsibility to clean up the environment.
In the battle with the nature (environmental degradation), history showed the defeat of human race (global warming and climate change) and any further attempt to beat the nature by strategies not in line with sustainability criteria would be a suicidal attempt for humanity.Amid this back ground, this paper endeavours to study the overview of the flexibility mechanism available for the developed world and an analysis of the activities in the carbon markets, the transaction in carbon credits and exercise done by the World Bank and the recent development and new market for carbon trading.
Keywords: Kyoto Protocol, Carbon markets, Emission allowances, Joint Implementation, Clean Development Mechanism, Certified Emission Reduction, Nationally Determined Contribution.
Introduction
India is acknowledged as one of the fastest growing economies in the world. At the same time emerging challenges related to environment and exploitation of resources are also increased and giving threats for the future generations. Development over the years has remained largely focused on increasing profitability, raising the growth of GDP, increasing the availability of goods and services to the consumers and moreover improving the living standards of people. Major current environmental issues may include climate change, pollution, environmental degradation, and resource depletion. Global Warming is the increase of Earth's average surface temperature due to effect of greenhouse gases, such as carbon dioxide emissions from burning fossil fuels or from deforestation, which trap heat that would otherwise escape from Earth. That is why United Nations has adopted the Kyoto protocol.
GLOBAL WARMING
Global Warming has the dooming effects of melting the polar ice caps, thermal expansion of water leading to an increase in the average sea levels, depletion of the ozone cover and natural calamities. Sea Levels have risen by 20 cm over the last 130 years and are expected to rise by 1ft to 5ft in the next 100 to 300 years, which could send parts of countries like Bangladesh, Maldives, Egypt, and Kiribati, Tulavu or even cities like Shanghai, Tokyo, Mumbai, London and New York under water. Scientists have identified the cause as increase in Green House Gas emissions, depletion of Forests, Fossil Fuel and Industrial Emission.
KYOTO PROTOCOL
In response to the threat of climate change, the UN passed the Kyoto Protocol in 1997, which was gradually ratified by 156 countries, and later infamously rejected by the world’s biggest polluters ‘ the US and Australia. The Protocol sets the target of reducing emissions by an average of 5.2 per cent below 1990 greenhouse gas levels by the year 2012. Emissions trading, the main mechanism for achieving this target was pushed by the US in response to heavy corporate lobbying. The arrangement partitions and privatises the atmosphere and institutes the buying and selling of ‘permits to pollute’ just as any other international commodity. Under the Kyoto Protocol the ‘polluters’ are countries that have agreed to targets for reducing their GHG emissions below their country-specific target in a pre-defined timeframe. These countries are the largest polluters, the ‘developed’ countries. The polluters are then given a number of ‘Emissions Permits’. The Protocol provided various mechanisms to control the climate changes, like the Clean Development Mechanism (CDM), Joint Implementation (JII), and International Emission Trading (IET). Companies that pollute less can sell their unused pollution rights to companies that pollute more. Putting a price on carbon and promoting low-carbon investment is fundamental policy for controlling carbon emissions.
CARBON CREDIT
A carbon credit is a type of a tradable greenhouse gas emission reduction unit issued to projects under the Kyoto Protocol. One carbon credit is equivalent to one tonne of carbon dioxide (CO2) mitigated. The setting up of CDM projects served the purpose of controlling the rise in global temperature resulting in global warming. However, following the economic downturn, CER prices fell unexpectedly and there are still several companies which have failed to monetize on these credits even when prices were ruling around euro 10 in 2011.
CARBON TRADE EXCHANGE
Carbon Trade Exchange (CTX) was founded in London in 2009 and now operates spot exchanges in multiple global environmental markets, including carbon, renewable energy certificates and water.
After two years of research and development, Carbon Trade Exchange (CTX) was founded in London in 2009 and now operates spot exchanges in global environmental commodity markets, including carbon, renewable energy certificates and water. Wayne designed the technology and infrastructure and the development of the innovative platform, based on Microsoft Azure cloud technology, which included multiple interfaces with registries and banks, including Westpac in Australia. CTX was designed, developed and exists for the support of carbon pricing and is the only global exchange for major international voluntary carbon standards, including The Gold Standard, Verified Carbon Standard, Climate Action Reserve and American Carbon Registry. CTX provides a secure, trusted and transparent electronic marketplace for buying and selling carbon and ensures businesses can access offsets with confidence in the quality and when being sold.
Carbon trading business in the country is expected to be between RM3.2 billion and RM6.4 billion in the next five years, under pinned by companies’ increased participation in the environment.
CARBON TRADING IN INDIA
Indian industries were able to cash in on the boom in the carbon market making it a preferred location for carbon credit buyers. It is expected that India will gain at least $5 billion to $10 billion (Rs 22,500 crore to Rs 45,000 crore) over a period of time from carbon trading. Also India is one of the largest beneficiaries of the total world carbon trade through the Clean Development Mechanism of about 31 per cent (CDM).
India’s carbon market is one of the fastest growing markets in the world and has already generated around 30 million carbon credits, the second highest transacted volumes in the world. The carbon trading market in India is growing faster than information technology, bio technology and BPO sectors. Nearly 850 projects with an investment of Rs 650,000 million are in the way. Carbon is also being traded on India’s Multi Commodity Exchange. It is the first exchange in Asia to trade on carbon credits. Examples of Indian Carbon Trading companies are Jindal Vijaynagar Steel, Powerguda in Andhra Pradesh, Handia Forest in Madhya Pradesh, Emergent Ventures India’
The Multi Commodity exchange started future trading on January 2008 after Government of India recognized carbon credit as commodities on 4th January only. The National Commodity and Derivative Exchange by a notification and with due approval from Forward Market Commission (FMC) launched Carbon Credit future contact . It’s aim was to provide transparency to markets and help the producers to earn remuneration from the environment projects.
WORLD CARBON MARKET & SCHEMES
The World Carbon Market Database is a analytical tool, which includes information on the carbon trading schemes developed in the world.
It currently includes data on the following carbon trading schemes:
‘ EU emissions trading scheme (EU ETS) 28 countries, more than 14000 installations
‘ EEA countries emissions trading schemes, Norway, Iceland and Liechtenstein.
‘ Swiss emissions trading scheme,450 companies
‘ Kazakhstan cap-and-trade scheme, 178 companies, emitting 150 MtCO2
‘ South Korea cap-and-trade system, 525 companies, emitting around 550 MtCO2
‘ Regional Greenhouse Gas Initiative (RGGI),9 US States, about 200 installations (power plants).
‘ California's cap-and-trade scheme, more than 500 power plants and factories
‘ Quebec's cap-and-trade scheme, 80 industrial sites
‘ Australia's Carbon Pricing Mechanism, 350 companies, emitting a total of 285 million tCO2e
‘ New Zealand -emissions trading scheme
‘ Aviation emissions trading scheme (ETS), EU-run scheme including 1,300 aircraft operators originated from 100 states in the world.
‘ CDM-JI Project Database, information on about 12,000 CDM projects developed in more than 100 host countries, and 800 JI projects developed in 18 countries
‘ UK's CRC (Carbon Reduction Commitment) Energy Efficiency Scheme , more than 2,000 companies from all sectors of activity
NEW SCHEMES AND REFORMS
1.CAP and Trade ‘ Allowance based
This is a mechanism involving developed (Annex I) countries alone. Based on the accord Annexure I countries had been allowed an amount of carbon emissions beyond which they are not supposed to emit based on their production and emission reduction targets. In case any country exceed the carbon allowance limit, it may purchase carbon emission reduction achieved termed as Assigned Amount Units (AAUs) in any other developed country or countries (the same logic is applicable for companies within countries). The mechanism rewards countries to meet their targets and provides financial incentives to others to do so.
2. Joint Implementation ‘ Project based
It is also a mechanism involving annexure I countries only. A high emitting country can claim credit for emission reduction termed as Emission Reduction Units (ERUs) that arise from investment in other developed industrialized countries. The mechanism encourages de-carbonised investments in developed countries.
3. Clean Development Mechanism
The Clean Development Mechanism is a flexible mechanism to enable countries with GHG emission reduction commitments, i.e., Annex I countries to meet their commitments by paying for GHG emission reductions in developing countries (non- Annex I countries). Such CDM projects earn saleable Certified Emission Reduction (CER) units, each equal to one metric tonne of carbon di oxide equivalent, which can be counted towards meeting Kyoto targets (given Compendium of Guidance Notes ‘ Accounting 440 in Annexure B of Kyoto Protocol). This mechanism encourages the non-Annex I countries, i.e., developing and least developed countries which at present are not bound by Kyoto Protocol to reduce GHG emissions. India, being a non- Annex I country, has emerged to be a beneficiary as Indian entities can set up CDM projects which reduce GHG emissions and thereby generate CERs which can be sold to Annex I countries and used by the latter to meet their binding emission reductions.
4. VALUE ADDED TAX The government of Delhi in a recent notification has declared that the Certified Emission Reductions (or 'Carbon Credits' as we know) to be considered as goods and thus their sale is liable to value added tax in the State. The Commissioner of Trade and Taxes has declared that the nature and aspects of Carbon credits to be examined and tested against the definition of goods to arrive at the conclusion that carbon credit are in no way different from ordinary commodities bought and sold in the market and thus a sale transaction of carbon credit would attract value added tax on sale.
5. ETS
An ETS , sometimes referred to as a cap-and-trade system. It caps the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances to larger emitters. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions. The cap helps ensure that the required emission reductions will take place to keep the emitters within their pre-allocated carbon budget.
6. CARBON TAX
A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or more commonly on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is predetermined. The choice of the instrument will mainly depend on national and economic circumstances. There are also more indirect ways of more accurately pricing carbon, such as fuel taxes, the removal of fossil fuel subsidies, and regulations that may incorporate a ‘social cost of carbon.’ Greenhouse gas emissions can also be priced through payments for carbon emission reductions. Private entities or sovereigns can purchase emission reductions to compensate for their own emissions or to support mitigation activities through results based finance.
7. ASSIGNED AMOUNT UNITS
This is a necessary condition for getting adequate circulation of the new carbon currency founded in Paris. To de-jargonize, in a world carbon balance sheet with a fixed net carbon credit, countries will be allowed to trade their credits to other nations if they do not use up their Assigned Amount Units due to lower emissions. This might be due to adjustment of anthropogenic emissions at source and removal by sinks.
8. INDC
A third of the nations which announced their intended nationally determined contributions (INDC) before the Paris talks have already concurred on setting up carbon markets. But these are not the only available model. While they consist of governments determining the quantitative cap and markets determining price’allowing domestic trade in carbon credits, the alternative of carbon taxation has the government fixing the upstream price of fossil fuels, allowing markets to determine the optimal quantity of use. India’s participation in the PMR is an integral part of the country’s plan to meet its ambitious Nationally Determined Contribution, its climate change commitment made to the United Nations Framework Convention on Climate Change (UNFCCC). By 2030, it aims to reduce its emissions intensity per unit of gross domestic product (GDP) by 33 percent to 35 percent from 2005 levels. With international support, India has also pledged to install 40 percent of its power generation from non-fossil fuel based sources by 2030. Activities supported by the PMR will contribute to both components of India’s NDC.
9. PAT
Part of the funding from World Bank will help India to broaden and deepen the scope of its existing market-based approaches to increase energy efficiency and renewable energy, including through the Perform Achieve and Trade (PAT) Mechanism and the Renewable Energy Certificate (REC) .
Through PAT, mandatory energy consumption targets are placed on companies in energy intensive industries. Those with the more inefficiencies have the highest reduction targets. Companies that outperform their targets are awarded certificates that can be traded to weaker performers or banked for future use in the market.
10. REC SCHEME
The REC scheme awards renewable power producers with credits, which can be sold to entities that have a renewable purchase obligation in the market. Funding will also go to develop and pilot a new market based instrument that could improve either solid waste management or energy efficiency in many medium and small industries.
Part of the funding will be used to create systems to strengthen India’s existing registry for the PAT and REC schemes and to facilitate tracking greenhouse gas (GHG) emission reductions. The upgraded system will promote transparency, environmental integrity and will reduce the risk of double accounting as well as help prepare India to engage in the international transfer of mitigation outcomes. The grant was announced on March 22 during the PMR’s 16th assembly meeting in New Delhi,India.
THE ROLE OF WORLD BANK
The World Bank Prototype Carbon Fund (PCF), which was launched in 2000, invests money from companies and governments in projects designed to reduce the emission of greenhouse gases and generate credits that can then be sold in the carbon market. The bank has become the largest public broker of carbon purchases, and makes a substantial profit from the commission that it received from the sale of the credits generated by the projects. In 2002 the World Bank entered an agreement to purchase emissions reductions from the plantar project.
WORLD BANK REPORT 2017
Countries may choose different instruments to implement their climate policies, depending on national and local circumstances. Based on industry and policy experience, and the literature reviewed, the respective strengths and limitations of these information sources, this Commission concludes that the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40’80/tCO2 by 2020 and US$50’100/tCO2 by 2030, The World Bank’s Partnership for Market Readiness (PMR) has announced an $8 million grant for India to prepare the use of carbon pricing instruments to help reduce to greenhouse gas (GHG) emissions.
INDIA’S CARBON STRATEGY TO COUNTER CLIMATE CHANGE
Low oil prices make it the right time to introduce a variable stabilizing carbon tax.
The environment ministry’s special secretary, Susheel Kumar, said earlier this week that the Indian government is now looking to retrofit existing national action plans on climate change by building new ones. With the date of signing of the historic Paris climate change agreement in April approaching fast, and its ratification to follow soon, that’s good news to hear. But the entire process will require care and finesse , particularly the groundwork for integration with the world’s networked carbon market.
The latter Pigouvian tax (named after English economist Arthur Pigou) to mould optimal social outcomes and choices is the well suited option for the Indian scenario. The average Indian’s carbon footprint is below the average per capita emission of many countries. Indian techniques are still struggling to keep pace with the decarbonizing rates of the developed world. Capping carbon without alternatives can thus compromise development. The right carbon tax levels, meanwhile, can internalize the social externality of emissions and make it part of an individual’s choice. But this point to the core problem. India and developing countries in general got the raw end of the deal at Paris with an entirely disproportionate burden in the context of historical emission trends and development needs. Not acting is not an option either; various studies have shown that the long-term costs of climate change in developing economies outweigh the short-term costs of climate change mitigation efforts. The trick, then, is to find the correct balance that does not impose disproportionately heavy costs in the near future.
The commodities crash has presented the government with that sort of opportunity. The current tax levels in India has a de facto carbon tax on its petroleum and oil products and a green tax on coal that do not adequately consider the intensity of emissions in the country. The prevailing low oil prices make it the right time to remedy this by introducing a variable stabilizing carbon tax, one which rises when fuel prices fall and falls when fuel prices rise. This can ensure that the polluter will pay, keep emissions in check and incentivize the right innovation and the right kind of energy , all without hitting the pace of development too hard. This alone will not suffice. Fuel is less price elastic and more income elastic in a country like India. This implies increasing carbon taxes alone will be insufficient to reduce emissions as income rise. The price inelasticity is mainly due to the absence of alternative energy sources and,fuel subsidies. The International Solar Alliance and Make in India for low-cost renewable technologies are good policy initiatives in the right direction that they must be given greater impetus.
There are a host of complementary measures to consider as well from decarbonizing production of electricity to research and development aimed at improving energy and resource efficiency, from reducing waste to preserving and increasing carbon sinks.
Conclusion
Even though India is the largest beneficiary of carbon trading and carbon credits that are traded on the MCX, it still does not have a proper policy for trading of carbons in the market. As a result the Centre has been asked by The National Commodity and Derivatives Exchange Limited (NCDEX) to put in place a proper policy framework for allowing trading of certified emission reductions carbon credit, in the market. However, to unleash the true potential of carbon trading, it is important that a special statue be created for this purpose as the current Act is not enough to govern the contractual issues relating to carbon credits and sustainable projects. Many countries have a rich tradition and history of excellent organic farming practices that have focussed on enriching the soil continuously, but all this knowledge was lost to the green revolution. It is time to bring back these practices, and combine them with the modern knowledge and techniques of carbon farming capture the twin benefits of chemical free agriculture, a cleaner atmosphere that is to get rid of more Co2. If a country wishes to achieve its INDC target reduction by 33-35% of the 2005 levels by 2030 and hook itself into the international carbon market, a long-term strategy with the variable carbon tax at its core is a must.
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