Is a new centralised carbon market under the UN the real deal? 

Integrity of market restored

With the second edition of a global carbon market about to be a reality, how is it going to evolve and impact global climate action? A quick review of the built-in checks and balances in the mechanism reveals that it is designed to restore credibility in the carbon market by generating high integrity A6.4ERs. The standards and procedures created under the mechanism are quite robust.

For one, the host party approval (India already has a Designated National Authority or DNA under Article 6.4) for project activities in the beginning and the corresponding adjustment during the issuance and transfer of A6.4ERs will act as entry and exit checks. For the process in between, the mechanism will focus on the quality of emission reduction achieved by stressing on additionality, leakage, permanence, updated baselines, baseline shifts, and other aspects. The process of project validation, global stakeholder review, registration, monitoring, and verification also will regain their rigor.

Costs will go up with enhanced rigour

The extended procedures and rigour are likely to lead to many expected and unexpected outcomes. The obvious ones are the high cost of project registration and implementation as well as stretched timelines. Strict application of baseline and additionality criteria may significantly reduce the number of projects that qualify. The combined effect of low volume and high integrity of A6.4ERs will be high demand and significantly higher prices.

The disparity in volume, integrity, and prices of credits between the UN registry and other global registries is likely to persuade all serious players to switch to the UN registry. In the long run, removal projects are likely to dominate the new market mechanism.

Is this really a game changer?

A more fundamental question about the mechanism is whether the mechanism is fit-for-purpose to achieve global emission reduction while helping parties achieve their NDCs.

Will parties have surplus emission reduction under their NDCs to be sold internationally? As things stand (i) the NDCs submitted by countries/parties fall way short of the commitment required to meet the goals of the Paris Agreement and (ii) even with the below-par-NDCs, most parties are not taking mitigative actions to meet their committed NDCs. Under such a scenario, which party is going to have surplus emission reduction to be put up for sale?

Should any party whose annual emission reduction is way below its NDC target be allowed to offer for sale any A6.4ERs? Also, would it be meaningful to make corresponding adjustments in host party’s or buyer party’s NDC inventory if the transaction volume is smaller than the margin of error of their NDC reporting?

In the end, what the world needs is measurable emission reduction and/or removal at scale. In that respect, it remains to be seen whether this would turn out to be just a distraction or a game changer.

(Bose Varghese is Senior Director-ESG, Cyril Amarchand Mangaldas.)

Views are personal and do not represent the stand of this publication.