Save the carbon bubble: India’s voluntary carbon market must be regulated and made to contribute to its climate goals

Governments world over continue to issue regulations to rein in the voluntary carbon market, hold it accountable for its acts and ensure sharing of the proceeds with communities. But these steps may not work without international rules to regulate the market. In India, the voluntary market must be regulated and made to contribute to the country's climate goals
Illustrations : Ritika Bohra and Yogendra Anand
Illustrations : Ritika Bohra and Yogendra Anand

The free run of the voluntary carbon market may just be over. Governments across the world are increasingly concerned about the nature of this unregulated market. In May this year, the Zimbabwe government declared all voluntary carbon credit schemes “null and void”, causing huge consternation to the developers of the projects. It said that the government would take 50 per cent of the revenue from the projects and 20 per cent would go to communities. This was clearly too much for the market to bear and finally in August 2023, the government of Zimbabwe announced that the project developers could keep 70 per cent of the project proceeds, with the government charging 30 per cent as an environmental cess. However, it added that if local communities are affected, project developers would need to provide a quarter of their share of the proceeds.

Rwanda has declared that it would put a floor price on carbon offset projects of US $30 (Rs 2,473)—which in turn would lead to better quality projects. In 2022, Papua New Guinea and Honduras issued a moratorium on voluntary carbon credit schemes. Indonesia, in June, issued regulations for carbon trading in the forestry sector, under which owners of the land would be allowed to trade in carbon credits. In August it announced the setting up of a national carbon exchange.

Then the Nigerian government has said that it is interested in linking emission reduction certificates from ongoing activities in the country to its Nationally Determined Certificates (NDCs). “We are entering a new phase of carbon markets,” Hugh Salway, head of markets at project certifier Gold Standard, told S&P Global, an American publicly traded corporation. “More governments may take steps that affect the voluntary market in the next months, some of which may present opportunities for investors and some may come with risks,” he added.

  • If not properly evaluated, projects under the carbon market can lead to more GHG emissions

  • The carbon market should be a real market, not a secret pact between a buyer and seller

  • Countries have sold off all cheap options of emission reductions. They would now be in the balance sheet of foreign entities and and will not be able to make investments in hard-to-abate options

India’s notification on carbon trade 

India is enacting legislations and policies by different ministries—and it is not clear how coordinated these actions are—to create and regulate a carbon credits market and to incentivise people to join a green credits programme.

 This article was originally published as part of Down To Earth’s special issue dated 1-15 October, 2023. 
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Discredited: The Voluntary Carbon Market in India

On June 28, 2023, the Union power ministry issued a notification on its Carbon Credit Trading Scheme. Under this, the government would constitute a National Steering Committee for the Indian carbon market. The committee would be tasked with the governance of the Indian carbon market and direct oversight of its functioning. The Bureau of Energy Efficiency, an agency under the power ministry would be the designated administrator of the Indian carbon market. It will also issue carbon credits based on the recommendations provided by the committee. The Grid Controller of India Limited shall act as the registry and the Central Electricity Regulatory Commission will be the regulator. The notification is silent on the voluntary carbon market or the issue of export of credits.

Simultaneously, the Union environment ministry in June 2023, notified the Draft Green Credit Programme Implementation Rules, 2023. The programme is a domestic voluntary market that incentivises voluntary environmental actions so that it promotes government’s Mission LiFE (Lifestyle for Environment). It has listed actions, including planting trees, which would get “green credits” and is described as “singular unit of an incentive provided for a specified activity delivering a positive impact on the environment”. It goes on to say that an activity generating green credits under the green credit programme may also acquire carbon credits for the same activity under the carbon market. These green credits will be traded on a domestic market platform.

The steering committee will be in charge of governance while the administrator will be responsible for implementing the programme, including its management, monitoring and operation. The Indian Council of Forestry Research and Education will be the administrator, who will create technical or sectoral committees to develop methodologies, standards and processes for registration of green credit activities and grant of green credits. The trading service provider, accredited by the administrator, will look after the trading aspect.

Perhaps the most important aspect of this scheme is that it opens the compensatory afforestation activities by private entities to incentives and participation in the domestic carbon market. It will be important to see how the government plans to ensure verification of these credits, being done on non-forest land by private and public agencies.

Then, separately, as an implementation measure for the Paris Agreement, the government in February 2023, issued a list of activities that could be considered for trading of carbon credits under bilateral programmes under Article 6.2. This list includes renewable projects, including solar projects with storage, offshore wind, hydrogen and the best available technologies for the hard-to-abate sector. In this list, the government’s effort is to ensure that bilateral trading of carbon credits is in the high-end sectors, which would be expensive for India to undertake. It would work for transformative action and not utilise the low-hanging projects, which are cheaper.

Way ahead

At the next UN climate conference (COP28) in Dubai later this year, the issue of regulation of a carbon market will be discussed. World leaders need to learn from the mistakes of the voluntary carbon market so that this new market mechanism, which is designed for transformation in the world, does not repeat those. One of the fundamental flaws of the voluntary carbon market is that it has no basis of the price that it puts on the project; at times it is inflated and at times it is so low that the project becomes unviable. It seems that the entire purpose of this market is to serve the interest of the retinue of project developers, auditors and all the others who make a cut in this carbon business.

The current carbon markets could end up increasing emissions in the world. The buyers of the credit—say an airline company that has assured its customers to offset their carbon footprint or a food company that has declared itself net-zero—have continued to emit; they have even increased their emissions, saying that they have bought credits. But as these credits have been over-estimated or do not really exist, the reductions are notional. This is a double-jeopardy. This is what the climate-risked world does not need.

So, what should be done differently? Here’s five steps that can make this market effective.

Ensure transparency

The first, and the obvious step, is to ensure transparency in the market. The details of the projects should be listed. There should be information about the price that each credit has earned. DTE-CSE investigation into the workings of the big project developers, carbon registries and the big and small non-profits involved in this business showed there is no transparency; communities are unaware of carbon credits; there is over-estimation of carbon credits; ownership rights on trees of poor tribals have been transferred to private entities; and worse, there is no real sharing of benefits with the people who are required to change their behaviour. In this way, the gains of the project would be fictitious as the design is flawed. If governments want to design a mechanism that has credibility, it must be based on rules and transparency.

Pay for real change

The second step is to decide once and for all the objective of the market—voluntary, bilateral or multilateral—and design rules accordingly. If the purpose of the market is to invest in projects that will lead to reduction in emissions in different parts of the world, then the market must be based on paying for the real cost of the projects. Consider renewable energy projects, which are critical for making the transition to clean energy in countries of the South. The current voluntary carbon market pays a fraction of the capital cost of these projects in India. It is just a sprinkle of sugar on the already paid-for cake—paid, in many cases, through the scarce public finances. This is when the capital cost of these clean energy projects is still lower than if the investment was made in already industrialised countries, which need to offset emissions. So, the carbon markets could be made to pay for this in the countries of the South, at lower costs—but not dirty cheap. This is the real issue.

It is the same with biogas, which allows households to switch from burning polluting biomass in stoves to using clean energy. They could leapfrog to low-emission technologies. But currently, the voluntary market is farcical in its pricing of this community energy device. It pays anything between 2 and 7 per cent of the cost of building the device; in most cases, the rest is paid by the Indian government’s subsidy programme. In this immoral business, the rich who need their emissions offset, are being subsidised by the poor communities and governments.

In the case of nature-based solutions, the question again is the cost of planting trees, the cost of labour to take care of the trees and the opportunity cost of the land, which is being used for sequestering carbon.

The market has to be “real” and not based on the mechanisms of a non-transparent exchange between buyers and sellers. In the design of the voluntary or official carbon market, it would be important to put a floor price to carbon credit. The Rwandan government’s proposal of $30 (Rs 2,473) per credit would be a good starting point.

Share the proceeds

The third step to ponder on is who this market is meant for. Currently, the market only seems to work in the interest of the project developers and, of course, the paraphernalia of consultants and auditors. This also means that it is ineffective in terms of real emission reduction. The communities get virtually nothing from the proceeds and this means that they also have no stake in the emission reduction programme.

Take the issue of household devices, in this case, cooking stoves. This market segment is growing exponentially. Understandably so, as it is lucrative for the project developers. In this case, the cost of the stove, which is what is given to households in order for project developers to earn credits, is a small component of their overall earnings. The cost of the improved cookstove, which is all that households get in terms of carbon credit benefits, adds up to barely 20 per cent of what the developer would earn over the five to six years of lifespan of the project. In other words, 80 per cent of the carbon revenue is kept as profits and it is a handsome amount as each such project has thousands of devices to be distributed. And, this is assuming that the devices are supplied for free. At place, as we have found, poor households have actually paid for this cookstoves, against which the developer and its rich offset clients have made a killing.

The fact is that there is no incentive for these households to keep using the stoves. If they were receiving money annually, there would be some incentive for compliance. It is the same with all other such projects, from growing trees to installing biogas plants to abate and avoid emissions. If communities continue to earn and get a substantial share—not peanuts—of the proceeds of the carbon market they would be part of the project of change. In this way, they are just used and discarded.

So, the carbon market must be required to share the proceeds annually with communities and this should be verifiable and substantial. This is also what the original Zimbabwe proposal said. It is important we listen to this and not the profit motives of this creative carbon market accountants.

Keep it simple

The fourth is to accept that the voluntary carbon market also shows how the all the King’s smart men have fallen. Despite spending on verification, auditing and registration, these agencies seem to have got so much wrong. They cannot even calculate the emission reduction of one cookstove—Greenways says its stove reduces 2-4 tonnes of CO2e each year; EKI says the reduction is 5.7 tonnes. We know that this has to do with thermal dynamics of a small household device but there is no way it can be so different, especially as the fuel used is still wood. Then they cannot get the baseline right and assume that distributing an improved device will mean automatic emission reduction.

All this means over-estimation of emission reductions—we have literally fudged the data. One lesson that must be learnt is to keep the project design simple and not to trust the army of consultants and profiteers in this business. It means keeping their role minimal and to keep the control of projects with public institutions and people.

Countries must account 

The fifth and the most crucial lesson is that the ownership of trees grown on the land of the tribals in Araku valley has been transferred to a foreign entity. Let’s for a moment, forget that these lands are under Schedule V of the Indian Constitution, which prohibits any outsider from diverting the claim of tribals. The fact is that these trees are grown by people on their lands. Under which agreement can any agencies have the right to decide on how the tree will now be used—harvested or not. It is the same question when it comes to countries. Even more so.

Under the Paris Agreement all countries have taken on emission reduction targets. These are voluntary, but submitted to the UN Framework Convention on Climate Change and are expected to be complied with. This means India has a commitment as submitted to reduce emission intensity of its economy; to augment non-fossil energy so that it can meet 50 per cent of its electric power requirements by 2030 and to increase the “sink”—grow forests to sequester carbon. These are part of our nationally determined contributions (NDC) under the Paris Agreement. This is unlike the time of the Kyoto Protocol and its Clean Development Mechanism (CDM), when countries like India did not have nationally determined targets. Now, we have to reduce emissions.

The question is, in whose account should these carbon credits be listed? This is not a hypothetical question. But a real one. To achieve the target of 50 per cent of our electric power requirements from non-fossil fuel sources, every megawatt of renewable power, including hydroelectricity, will need to be counted and factored in. But 675 Indian renewable energy projects are registered under Verra and Gold Standard registries for 268 million carbon credits, of which 148 million have also retired (or claimed against offsets). So, how can these be accounted for in the Indian NDC? Or can they? Will this not lead to double accounting?

It is the same with nature-based solutions. India’s submission to UNFCCC is that it will “create an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent through additional forest and tree cover by 2030”. It is also known that the bulk of afforestation is happening in trees outside forests (TOFS, as they are known). So, who gets to account for these trees, which, in the case of Araku Valley, are now “owned” by Livelihoods Funds?

This is why the voluntary carbon market must work within the confines of the government’s NDC—it has to contribute to this. The only “exportable” credit has to be the one that is expensive for the country to do—where there is an advantage for the country as it can transform its emission trajectory.

The fact is that the current voluntary carbon market is based on cheap options and this means that countries have “sold” off the lowest-hanging fruit—the options of emission reductions that they could afford. They would now be in the balance sheet of foreign entities and governments. This will only mean that countries will not be able to afford to make the investments in the hard-to-abate options; and these will contribute to emissions and jeopardise our common future. Both the voluntary or official carbon markets must work within rules that are designed for integrity—not just for companies, but for communities and the planet.

Note: Reserve Bank of India’s exchange rate on June 1, 2023, has been used for all currency conversions. As per the rate, US $1 equals R82.45

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