IETA Position Paper: Developing An Effective Carbon Market Framework Towards The Achievement Of Net-Zero In India

Suggested Citation: IETA, CEEW, FICCI, RENEW, and TERI. 2023. DEVELOPING AN EFFECTIVE CARBON MARKET FRAMEWORK TOWARDS THE ACHIEVEMENT OF NET-ZERO IN INDIA. Geneva: International Emissions Trading Association.

Overview

India has historically been a large supplier of carbon credits internationally to the Clean Development Mechanism (CDM) and the voluntary carbon markets. More recently, India has taken several steps towards the development of a domestic compliance market - the carbon credit trading system (CCTS) - as well as towards international cooperation under Article 6 of the Paris Agreement. To advance the development of a holistic and high-integrity carbon market framework in India, the International Emissions Trading Association (IETA) initiated the IETA India Scoping Group in May 2023. The Scoping Group comprises domestic and international private sector stakeholders and think tanks, including CEEW. This paper outlines how well-designed carbon markets, including the CCTS, international carbon markets under Article 6, and the voluntary carbon markets can play an important role in advancing India’s objectives on climate action. While the full paper may be accessed through the link provided above, the following is a summary of the content pertaining to international carbon markets under Article 6 of the Paris Agreement.

Key highlights

1.Given the considerable variations in marginal abatement costs between countries, some countries could find it cost effective to purchase internationally transferred mitigation outcomes (ITMOs) from those with lower abatement costs instead of relying solely on reducing their own emissions. Per a modelling exercise conducted by IETA and the Center for Global Sustainability (CGS) at the University of Maryland:

• International carbon markets under Article 6 may surpass a value of $100 billion by 2030, if all Parties choose to implement their NDCs cooperatively.
• In a 1.5-degree scenario, the market value of financial flows between countries could exceed $1 trillion per year in 2050 and reduce mitigation costs by $21 trillion between 2020 and 2050.
• If the savings from cooperative implementation of NDCs using Article 6 were reinvested in increased ambition, emissions mitigation could be more than doubled without additional cost.
• In a net-zero scenario with full international cooperation, India could realise up to $12.5 billion annually in international carbon market revenues by 2030. The cumulative financial flows from sales of carbon credits from 2025 to 2050 could amount to more than $200 billion, helping to facilitate important international financing towards additional mitigation activities in India.
• Article 6 cooperation can also help address other key obstacles to global climate action.
• One of these is overcoming physical constraints to decarbonisation, such as those pertaining to land that several countries could face. Countries with greater land relative to their own requirements could contribute to the global low-carbon transition by selling ITMOs and thereby enabling countries with physical constraints to decarbonise.
• Increased engagement with Article 6 markets could be a potential alternative for countries to pursue climate action during supply chain shocks typified by elevated prices of energy transition raw materials and equipment.
• It could facilitate the introduction of negative emissions technologies (also known as carbon dioxide removals).
• The share of proceeds provisions associated with the trading of Article 6.4 credits can help generate resources to support adaptation efforts in climate-vulnerable countries. Vibrant Article 6 markets can thus also become an avenue for mobilising much-needed finance towards adaptation measures in developing countries, including India.

2. In selecting sectors and eligible activities for Article 6, each country must make a strategic choice in terms of authorising activities that can maximise benefits whilst simultaneously not compromising on the achievement of their own NDC by overselling ITMOs. In this regard, the following are examples of strategic activities that could benefit from linking with Article 6 markets:

• Activities with high abatement costs: Countries could view Article 6 cooperation as an avenue for mobilising capital specifically for activities which represent expensive decarbonisation alternatives. For the same, designated agencies in each country could consider developing marginal abatement cost curves (MACC) for their respective jurisdictions. Activities located towards the right side (higher cost) of the curve, which may include activities such as offshore wind, and carbon capture, utilisation, and storage (CCUS), could be prioritised for selection.
• Activities that are financially underserved: Countries could view Article 6 markets as a channel to direct capital towards activities that are financially underserved as the result of limited track records of business models, technologies, or the inferior creditworthiness of asset owners. Green hydrogen and distributed renewable energy powered livelihood applications could be two examples of such activities. The former represents a $100 billion opportunity for India, while the latter represents a $50 billion opportunity in rural India.
• Activities that advance sustainable development co-benefits: Besides focussing on emissions mitigation, countries could also utilise Article 6 market participation to prioritise activities that advance sustainable development co-benefits. For example, the deployment of clean cookstoves can deliver gains across several SDGs, including climate action.

Recommendations

1. While the overall rulebook for Article 6 was adopted at COP26, leading up to COP28 greater clarity or elaboration is necessary on some issues to advance full-scale implementation.

• Authorisation: The current text does not clearly define the process for authorisation and possible changes and/or revocations to authorised ITMOs. If rules eventually allow for arbitrary and/or unlimited changes or revocations to authorisation, it could severely undermine confidence and affect private sector participation. Negotiators must avoid opening such avenues for revocations and narrowly define the scope and circumstances for possible changes to ensure greater predictability for market participants.
• Eligibility of avoidance and conservation enhancement activities: The discourse on conferring eligibility on emissions avoidance and conservation enhancement activities is largely driven by a small number of Parties that wish to seek eligibility for crediting avoided use of fossil fuel resources. Other negotiators see forestry as part of this terminology. Thus, there is a need to agree on a common definition of such activities before deciding on their eligibility.
• Confidentiality provisions: Article 6.2 provisions offer Parties the option of designating information provided to the technical expert review team as confidential, which would preclude it from being publicly available on the Centralised Accounting and Reporting Platform (CARP). While Parties are required to provide a basis for requesting confidentiality, existing provisions do not specify grounds under which information may be designated as confidential in the first instance. This leaves the door open to potential abuse of the confidentiality provision. To prevent misuse, negotiators should consider defining special circumstances under which this clause may be invoked.
• Set up of the international registry and the Article 6.4 mechanism registry: Further clarity is necessary on the set up of the international registry, the Article 6.4 mechanism registry, their interoperability, functions, and connections to Parties’ national registries.

2. Beyond UNFCCC guidance, complementary actions are also necessary at the country level to operationalise Article 6 markets. For India, the IETA Scoping group recommends the following:

• Communicate a clear strategy for authorisation, volumes and how these relate to long-term strategy: India’s intention to participate in the Article 6.2 mechanism has already been declared. The stated objectives of transfer of emerging technologies and mobilisation of international finance indicate that India’s immediate preference is to operate as a seller of credits. The NDAIAPA should further clarify the volumes of credits that India intends to authorise for sale towards other Parties’ NDC achievement and other international mitigation purposes. The NDAIAPA should also clarify how Article 6 participation would support India’s long-term low emission development strategy.
• Clarify interconnections with voluntary carbon markets and the issuance of Article 6.4 MCUs: Besides developing a clear strategy for authorised credits which require corresponding adjustments, the NDAIAPA should also clear a pathway for the issuance of Article 6.4 mitigation contribution units (MCUs) and their interactions with the voluntary carbon markets, which could help attract financing for the achievement of India’s NDC without the application of corresponding adjustments.
• Utilisation of CERs and the transition of CDM activities: Noting the large amount of certified emission reductions (CERs) eligible for use towards the fulfilment of the first NDC, and the vast number of active clean development mechanism (CDM) projects in India, facilitating the utilisation of these CERs towards India’s NDC and the transition of CDM projects to the Article 6.4 mechanism will be important to instil trust in the market and facilitate recovery of sunk costs for project developers.
• Consider initiating a consultative process to identify areas where capacity building is needed: This consultative process may encompass relevant government agencies, industry and think tanks. Indian negotiators could consider highlighting the areas thus identified during upcoming UNFCCC climate negotiations.
• Facilitate private sector participation: Initiate capacity building programmes for local actors to equip them to participate in Article 6 markets. Further, engage proactively with the private sector to seek inputs in the design of key features (e.g., crediting periods). The NDAIAPA should publish model letters of authorisation to streamline the process – for all kind of uses and timelines. In addition, developing a platform to facilitate Article 6 participation at GIFT IFSC, India’s international facing financial services centre, might be an interesting opportunity to attract investors. The government should also clearly define a dispute resolution process for private investors engaged in Article 6 activities.
• Set up of registry and fungibility of credits: As various agencies under the supervision of the National Steering Committee for Indian Carbon Market (NSCICM) are setting up the registry and exchange for the evolving carbon credit trading scheme (CCTS), the government should over time consider the interoperability and strive towards fungibility between the CCTS and Article 6 credits. This would facilitate the linking of the CCTS with international markets and the flow of new sources of capital into India. Further, the registry should be set up in such as a way that interoperability with the 6.4 mechanism registry and international registry is facilitated, and that potential buyer countries can easily interact with the process. For this purpose, the NDAIAPA should coordinate closely with the NSCICM.
• Engage proactively with buyer countries through small-scale pilot projects: Whilst India improves its readiness for Article 6 activities, it should also take a proactive stance and engage with international partners where possible. Small-scale pilot projects can serve as a means to gain valuable experience pertaining to cooperative approaches and refine engagement strategies.